R E S P A

Regulatory Impact Analysis and Regulatory Impact Analysis and

Initial Regulatory Flexibility Analysis Initial Regulatory Flexibility Analysis

FR-5180-F-02

Final Rule to Final Rule to

Improve the Process of Obtaining Improve the Process of Obtaining 

Mortgages and Reduce Consumer Costs Mortgages and Reduce Consumer Costs

Office of Policy

Development

and Research
TABLE OF CONTENTS 

EXECUTIVE SUMMARY 

I. Overview...................................................................................................................................... i 

I. Overview of the Final Rule....................................................................................................... ii 

III. Problems with the Mortgage Shopping Process and the Current GFE...........................iii 

IV. Approach of the Final Rule ................................................................................................... v 

IV.A. Main Components of the New GFE and HUD-1.............................................................. v 

IV.B. Estimates and Sources of Consumer Savings from the Final Rule................................. vii 

IV.C. Savings and Transfers, Efficiencies, and Costs ................................................................ x 

IV.D. Alternatives Considered to Make the GFE More Workable for Small Businesses....... xiv 

IV.E. Market and Competitive Impacts on Small Businesses from the Final Rule.................. xv 

V. Statement of Need for and Objectives of the Rule .............................................................. xx 

CHAPTER 1: Introduction 

I. Main Components of the Rule.................................................................................................. 1 

II. Need for Final Rule.................................................................................................................. 3 

III. Regulatory Impact Analysis and Regulatory Flexibility Analysis..................................... 6 

III.A. Requirement for an Regulatory Impact Analysis under E.O. 12866 ................................ 6 

III.B. Small Business Analysis Requirements under the Regulatory Flexibility Act (RFA) ..... 7 

IV. Nature of the Economic Impacts........................................................................................... 8 

V. Organization of the the Regulatory Impact Analysis ........................................................... 9 

CHAPTER 2: An Overview of the Mortgage Origination Market and an Analysis of 

Special RESPA-Related Topics 

I. Introduction ............................................................................................................................... 1 

I.A. Chapter Summary and Main Findings................................................................................. 2 

I.B. Chapter Organization........................................................................................................... 4 

II. Mortgage Market Volume....................................................................................................... 5 

III. Developments and Main Actors in the Mortgage Origination Market............................. 7 

III.A. Jacobides’ Paper................................................................................................................ 7 

III.B. Morgan Stanley Report and Technological Advances in Mortgage Lending................... 9 

III.C. Joint Center Study of the Evolving Financial Services System...................................... 11 

III.D. LaMalfa’s Reports on Wholesale Lending ..................................................................... 12 

III.E. Analysis of the Broker Industry ...................................................................................... 14 

IV. Information on Yield Spread Premiums and Consumer Shopping................................. 20 

IV.A. Definition and Role of Yield Spread Premiums ............................................................. 20 

IV.B. Concerns About Yield Spread Premiums ....................................................................... 21 

IV.C. Some Basic Facts About Yield Spread Premiums.......................................................... 23 

IV.D. Studies of Yield Spread Premiums and Shopping for Mortgages .................................. 25 

IV.E. A Study of Closing Costs for FHA Mortgages - Urban Institute (2008) ........................ 46 

V. Title and Settlement Services: Background Analysis and New Studies........................... 60 

V.A. Literature Review of Market Issues in the Title Industry ................................................ 63 

V.B. Title and Settlement Fees -- Can They Be Reduced?....................................................... 76 

V.C. Will Savings in Third-Party Costs Be Passed Through to Consumers?........................... 93 

VI. Subprime Market ................................................................................................................. 95 

VII. Comments by the NAMB Relating to Literature Review ............................................. 103 

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CHAPTER 3: The Economic Effects of the Proposed Rule 

I. Introduction and Main Findings.............................................................................................. 2 

I.A. Main Findings: Benefits of the Final Rule .......................................................................... 3 

I.B. Main Findings: Estimates and Sources of Consumer Savings.......................................... 10 

I.C. Main Findings: Market and Competitive Impacts on Small Businesses .......................... 15 

II. The GFE Form....................................................................................................................... 20 

II.A. The GFE Form in the Final rule ....................................................................................... 21 

II.B. Consolidating Categories on Page 2 of the GFE .............................................................. 27 

II.C. Trade-off of Interest Rate and Loan Charges ................................................................... 28 

II.D. Consumer Testing of the GFE Form ................................................................................ 30 

II.E. Shopping Benefits from the New Good Faith Estimate – A Summary............................ 51 

II.F. Comparing new GFE with the new HUD-1...................................................................... 52 

III. Treatment of Premiums and Discounts.............................................................................. 56 

III.A. Background Discussion of Premiums and Discounts ..................................................... 56 

III.B. The 2002 Proposed Rule ................................................................................................. 58 

III.C. Summary of YSP Issue and Treatment in the Final rule................................................. 61 

IV. Permissibility of Average Cost Pricing and Negotiated Discounts .................................. 64 

V. Tolerances on Settlement Costs ............................................................................................ 66 

V.A. Zero and 10 Percent Tolerances....................................................................................... 66 

V.B. Tolerances: More Detailed Analysis ................................................................................ 67 

V.C. Impact of Tolerances........................................................................................................ 69 

V.D. Tolerances: Comments and Further Discussion.............................................................. 70 

V.E. Changed Circumstances ................................................................................................... 73

VI. Additional Topics ................................................................................................................. 76 

VI.A. Definition of an Application........................................................................................... 76 

VI.B. Trade Off Chart for Interest Rates and Costs.................................................................. 81 

VI.C. Opportunity to Cure ........................................................................................................ 81 

VI.D. Delaying Implementation of the New GFE .................................................................... 82 

VI.E. Other GFE Topics ........................................................................................................... 83 

VI.F. Required Use ................................................................................................................... 84 

VII. Market Effects: Consumer Shopping and Benefits ......................................................... 92 

VII.A. Consumer Shopping: Problems and Issues.................................................................... 92 

VII.B. The New GFE: Improved Ability to Shop..................................................................... 93 

VII.C. The New GFE: Benefits from Tolerances .................................................................... 95 

VII.D. Obtaining the Benefits through Shopping in a Competitive Mortgage Market ............ 96 

VII.E. Estimation of Consumer Benefits from the Rule........................................................... 98 

VII.F. Additional Shopping Benefits From the GFE and Other Market Impacts................... 128 

VIII. Loan Originators and Third-Party Providers: Small Business Impacts.................... 132 

VIII.A. Mortgage Brokers: Small Business Impacts and Competitive Issues........................ 132 

VIII.B. Lenders: Small Business Impacts and Competitive Issues ........................................ 136 

VIII.C. Title and Settlement Industry: Small Business Impacts and Competitive Issues....... 140 

VIII.D Other Third-Party Providers : Small Business Impacts and Competitive Issues....... 147 

IX. Summary of Transfers, Benefits, Efficiency Gains, and Costs....................................... 153 

IX.A. Transfers ....................................................................................................................... 153 

IX.B. Efficiencies.................................................................................................................... 154 

IX.C. Costs of the Rule........................................................................................................... 154 

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CHAPTER 4: Alternatives to the Proposed Rule 

I. Introduction ............................................................................................................................... 1 

II. Status Quo ................................................................................................................................ 1 

III. Alternative Manners of Implementing the New GFE......................................................... 2 

III.A. Do Not Include the Yield Spread Premium Calculation in the New GFE........................ 3 

III.B. Trade-off Table ................................................................................................................. 6 

III.C. Tolerances ......................................................................................................................... 6 

III.D. Opportunity to Cure .......................................................................................................... 7 

III.E. Definition of Application .................................................................................................. 7 

III.F. Other Changes to the GFE................................................................................................. 7 

III.G. Alternative Methods of Implementing the GFE ............................................................... 7 

III.H. Other Proposed Forms .................................................................................................... 11 

III.I. Comparing the GFE with the HUD-1............................................................................... 11 

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CHAPTER 5: Industry Sector Data Analysis 

I. Introduction ............................................................................................................................... 3

II. Mortgage Brokers.................................................................................................................... 5

II.A. Overview of Industry.......................................................................................................... 6 

II.B. Description of Economic Data ......................................................................................... 10 

III. Mortgage Lending................................................................................................................ 18

III.A. Overview of Industry ...................................................................................................... 18 

III.B. Description of Economic Data ........................................................................................ 22 

IV. Settlement and Title Services .............................................................................................. 67

IV.A. Overview of Industry...................................................................................................... 67 

IV.B. Description of Economic Data........................................................................................ 78 

V. Other Third Party Settlement Services................................................................................ 97

V.A. Appraisers ........................................................................................................................ 97 

V.B. Surveyors........................................................................................................................ 103 

V.C. Pest Inspectors................................................................................................................ 107 

V.D. Credit Bureaus................................................................................................................ 110 

VI. Office of Real Estate Agents and Brokers Industry........................................................ 113

VI.A. Overview of Industry.................................................................................................... 113 

VI.B. Description of Economic Data...................................................................................... 114 

VII. Miscellaneous Services...................................................................................................... 116

VII.A. New Single-Family General Contractors .................................................................... 116 

VII.B. New Housing Operative Builders................................................................................ 118 

Technical and Data Appendix for Chapter 5 ......................................................................... 121

I. Description of Data Sets........................................................................................................ 121

I.A. Employer Firms ............................................................................................................... 121 

I.B. Description of Basic Terms ............................................................................................. 123 

I.C. Size Standards.................................................................................................................. 125 

II. Description of Methodology................................................................................................ 126

II.A. Estimating Nonemployer Statistics for Sub-industries .................................................. 126 

II.B. Estimating Revenue of Employer Firms for 2004.......................................................... 127 

II.C. Miscellaneous ................................................................................................................. 127 

III. Description of NAICS (North American Industry Classification System) Industries. 128

III.A. Mortgage Lending......................................................................................................... 128 

III.B. Settlement Services ....................................................................................................... 128 

III.C. Miscellaneous Services ................................................................................................. 130 

IV. Data Appendix .................................................................................................................... 131

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5

CHAPTER 6: Regulatory Flexibility Analysis 

I. Introduction ............................................................................................................................... 2 

II. Summary of the Regulatory Impact Analysis ....................................................................... 3 

II.A. Overview of Final Rule ...................................................................................................... 4 

II.B. Problems with the Mortgage Shopping Process and the Current GFE............................... 5 

II.C. Approach of the Final Rule ................................................................................................ 7 

III. Statement of Need for and Objectives of the Rule ............................................................ 22 

IV. Issues Raised in Comments on the 2008 Initial Regulatory Flexibility Analysis............ 27 

IV.A. Comments Concerning the Initial Regulatory Flexibility Analysis................................ 27 

IV.B. Alternatives Considered to Minimize Impact on Small Businesses ............................... 30 

IV.C. Comments and Responses to Other Issues...................................................................... 30 

V. Description and Estimate of the Number of Small Entities ............................................... 31 

VI. Alternatives Which Minimize Impact on Small Businesses ............................................. 32 

VII. Compliance Costs and Regulatory Burden: New GFE .................................................. 33 

VII.A. Data Used in Compliance Cost Estimates..................................................................... 34 

VII.B. Compliance and Regulatory Burden: One-Time Costs ................................................. 36 

VII.C. Compliance and Regulatory Burden: Recurring Costs of the GFE............................... 44 

VII.D. Detailed Response to the NAR’s Analysis of the 2008 IRFA....................................... 48 

VII.E. Tolerances on Third-Party Fees..................................................................................... 53 

VII.F. Changes in the Final Rule to Reduce the Regulatory Burden of the GFE..................... 56 

VIII. Costs Associated with Changes to the HUD-1 ................................................................ 57 

VIII.A. Data on Settlement Service Providers.......................................................................... 57 

VIII.B. One-Time Costs of the New HUD-1............................................................................ 63 

VIII.C. Recurring Costs of the New HUD-1 ............................................................................ 65 

VIII.D. Changes in the Final Rule to Reduce the Regulatory Barrier of the HUD-1............... 66 

IX. Efficiencies and Reductions in Regulatory and Compliance Burden.............................. 68 

IX.A. Shopping Time Saved by Borrowers.............................................................................. 69 

IX.B. Time Saved by Originators and Third-Party Service Providers ..................................... 71 

IX.C. Time Saved from Average Cost Pricing ......................................................................... 71 

IX.D. Social Efficiencies .......................................................................................................... 71 

REFERENCES
 

EXECUTIVE SUMMARY 

I. Introduction 

This chapter of the Regulatory Impact Analysis is the Final Regulatory Flexibility 

Analysis (FRFA) of the final rule as described under Section 604 of the Regulatory Flexibility 

Act. The requirements of the FRFA are listed below along with references to where the 

requirements are covered in the FRFA and where more detailed discussion can be found in other 

chapters of the Regulatory Impact Analysis (RIA). 

A description of the reasons why action by the agency is being considered can be found 

in Section III of this chapter, in Section II of Chapter 1 of the RIA, and in greater 

detail in the first sections of Chapters 3 and 4 of the RIA. 

A succinct statement of the objectives of, and legal basis for, the final rule is provided in 

Section III of this chapter. This is also discussed in Section II of Chapter 1 of the 

RIA and in greater detail in the first sections of Chapters 3 and 4 of the RIA. 

A description and an estimate of the number of small entities to which the rule will apply 

or an explanation of why no such estimate is available. Section V provides data on 

small businesses that may be affected by the rule. As explained in Section V, Chapter 

5 of the RIA also provides extensive documentation of the characteristics of the 

industries directly affected by the rule, including various estimates of the numbers of 

small entities, reasons why various data elements are not reliable or unavailable, and 

descriptions of methodologies used to estimate (if possible) necessary data elements 

that were not readily available. The industries discussed in Chapter 5 of the RIA 

included the following (with section reference): mortgage brokers (Section II); 

lenders including commercial banks, thrifts, mortgage banks, credit unions (Section 

III); settlement and title services including direct title insurance carriers, title agents, 

escrow firms, and lawyers (Section IV); and other third-party settlement providers 

including appraisers, surveyors, pest inspectors, and credit bureaus (Section V); and 

real estate agents (Section VI). As explained in Section V of this chapter, Appendix 

A includes estimates of revenue impacts for the new Good Faith Estimate (GFE). 

A description of the projected reporting, record keeping, and other compliance 

requirements of the rule, including an estimate of the classes of small entities that will 

be subject to the requirement and the types of professional skills necessary for 

preparation of the report or record. Compliance requirements and costs are discussed 

in Sections VII through IX of this chapter. In no case are any professional skills 

required for reporting, record keeping, and other compliance requirements of this rule 

that are not otherwise required in the ordinary course of business of firms affected by 

the rule. As noted above, Chapter 5 of the RIA includes estimates of the small 

entities that may be affected by the rule. 

 i
 

An identification, to the extent practicable, of all relevant Federal rules which may 

duplicate, overlap or conflict with the final rule. The final rule provisions for 

describing loan terms in the new GFE and the HUD-1 are similar to the Truth in 

Lending Act (TILA) regulations; however the differences in approach between the 

TILA regulations and HUD’s RESPA rule make them more complementary than 

duplicative.. Overlaps are discussed further in this chapter. 

In addition, this Chapter contains (c) a description of any significant alternatives to the 

final rule which accomplish the stated objectives of applicable statutes and which minimize any 

significant impact of the final rule on small entities. The FRFA also describes comments dealing 

with compliance and regulatory burden in the 2008 proposed rule. Some of the comments were 

on provisions of the 2008 proposed rule that have been dropped. Other comments were on 

impacts that the Department believes will be small or non-existent. Some of the compliance and 

regulatory burden comments concerned costs that are only felt during the start-up period and are 

one-time costs. These are discussed in Section VII.B, while comments on recurring costs of 

implementing the new GFE form are addressed in Section VII.C. Section VII.D discusses GFErelated changes in the final rule that reduce regulatory burden. Section VII.E discusses 

compliance issues related to GFE tolerances on settlement party costs, while Section VII.F 

discusses efficiencies associated with the new GFE. 

Before proceeding further, Section II provides a brief summary of the main findings from 

the Regulatory Impact Analysis that relate to the final rule. 

II. Overview of Final Rule 

The Department of Housing and Urban Development has issued a final rule under the 

Real Estate Settlement Procedures Act (RESPA) to simplify and improve the process of 

obtaining home mortgages and to reduce settlement costs for consumers. This Regulatory Impact 

Analysis and Regulatory Flexibility Analysis examine the economic effects of that rule. As this 

Regulatory Impact Analysis demonstrates, the final rule is expected to improve consumer 

shopping for mortgages and to reduce the costs of closing a mortgage transaction for the 

consumer. Consumer savings were estimated under a variety of scenarios about originator and 

settlement costs. In the base case, the estimated price reduction to borrowers comes to $8.35 

billion or $668 per loan. This represents the substantial savings that can be achieved with the 

final rule. 

The final RESPA rule includes a new, simplified Good Faith Estimate (GFE) that 

includes tolerances on final settlement costs and a new method for reporting wholesale lender 

payments in broker transactions. The final rule allows service providers to use prices based on 

the average charges for the third-party services they purchase, making their business operations 

simpler and less costly. Competition among loan originators will put pressure for these cost 

savings to be passed on to borrowers. The new GFE will produce substantial shopping and 

price-reduction benefits for both origination and third-party settlement services. 

Because the final rule calls for significant changes in the process of originating a 

mortgage, this Regulatory Impact Analysis identifies a wide range of benefits, costs, efficiencies, 

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transfers, and market impacts. The effects on consumers from improved borrower shopping will 

be substantial under this rule. Similarly, the use of tolerances will place needed controls on 

origination and third-party fees. Ensuring that yield spread premiums are credited to borrowers 

in brokered transactions could cause significant transfers to consumers. The increased 

competition associated with RESPA reform will reduce settlement service costs and result in 

transfers to consumers from service providers. Entities that will suffer revenue losses under the 

final rule are usually those who are charging prices higher than necessary or are benefiting from 

the current system's market failure. 

Note to Reader: A comprehensive summary of the problems with the current mortgage 

shopping system and the benefits and market impacts of the final rule is provided in Section I of 

Chapter 3. 

III. Problems with the Mortgage Shopping Process and the Current GFE 

The current system for originating and closing mortgages is highly complex and suffers 

from several problems that have resulted in high prices for borrowers. Studies indicate that 

consumers are often charged high fees and can face wide variations in prices, both for origination 

and third-party settlement services. The main points are as follows: 

• There are many barriers to effective shopping for mortgages in today’s market. The 

process can be complex and can involve rather complicated financial trade-offs, which 

are often not fully and clearly explained to borrowers. 

• Consumers often pay non-competitive fees for originating mortgages. Most observers 

believe that the market breakdown occurs in the relationship between the consumer and 

the loan originator -- the ability of the loan originator to price discriminate among 

different types of consumers leads to some consumers paying more than other 

consumers.1

• There is convincing statistical evidence that yield spread premiums are not always used 

to offset the origination and settlement costs of the consumer. Studies, including a recent 

HUD-sponsored study of FHA closing costs by the Urban Institute, find that yield spread 

premiums are often used for the originator’s benefit, rather than for the consumer’s 

benefit.2

• Borrowers can be confused about the trade-off between interest rates and closing costs. It 

may be difficult for borrowers (even sophisticated ones but surely unsophisticated ones) 

 

1

 One could see price discrimination in a competitive market that was the result of different costs associated with 

originating loans for different applicants. For example, those who required more work by the originator to obtain 

loan approval might be charged more than those whose applications required little work in order to obtain an 

approval. The price discrimination we refer to in this paragraph and elsewhere in this analysis is not cost-based. It 

is the result of market imperfections, such as poor borrower information on alternatives that leads borrowers to 

accept loans at higher cost than the competitive level. 

2

 See Section IV.D of Chapter 2 for a discussion of these studies. 

 iii
 

to understand the financial trade-offs associated with discount points, yield spread 

premiums, and upfront settlement costs. While many originators explain this to their 

borrowers, giving them an array of choices to meet their needs, some originators may 

only show borrowers a limited number of options. 

• There is also evidence that prices paid for third-party services are highly variable, 

indicating that there is much potential to reduce title, closing, and other settlement costs. 

For example, a recent analysis of FHA closing costs by the Urban Institute shows wide 

variation in title and settlement costs. There is not always an incentive in today’s market 

for originators to control these costs. Too often, high third-party costs are simply passed 

through to the consumer. And consumers may not be the best shoppers for third-party 

service providers due to their lack of expertise and to the infrequency with which they 

shop for these services. Consumers often rely on recommendations from the real estate 

agent (in the case of a home purchase) or from the loan originator (in the case of a 

refinance as well as a home purchase). 

Today’s GFE. Today’s GFE does not help the above situations, as it is not an effective 

tool for facilitating borrower shopping nor for controlling third-party settlement costs. The 

current GFE is typically comprised of a long list of charges, as today’s rules do not prescribe a 

standard form or consolidated categories. Such a long list of individual charges can be 

overwhelming, often confuses consumers, and seems to provide little useful information for 

consumer shopping. The current GFE certainly does not inform consumers what the major costs 

are so that they can effectively shop and compare mortgage offers among different loan 

originators. The current GFE does not explain how the borrower can use the document to shop 

and compare loans. Also, the GFE fails to make clear the relationship between the closing costs 

and the interest rate on a loan, notwithstanding that many mortgage loans originated today adjust 

up-front closing costs due at settlement, either up or down, depending on whether the interest 

rate on the loan is below or above “par.” Finally, current rules do not assure that the “good 

faith estimate” is a reliable estimate of final settlement costs. As a result, under today’s rules, the 

estimated costs on GFEs may be unreliable or incomplete, and final charges at settlement may 

include significant increases in items that were estimated on the GFE, as well as additional fees, 

which can add to the consumer’s ultimate closing costs. 

Thus, today’s GFE is not an effective tool for facilitating borrower shopping or for 

controlling origination and third-party settlement costs. There is enormous potential for cost 

reductions in today’s market, which is too often characterized by relatively high and highly 

variable charges for both origination and third-party services. 

In addition, today's RESPA rules hold back efficiency and competition by acting as a 

barrier to innovative cost-reduction arrangements. While today's mortgage market is 

characterized by increased efficiencies and lower prices due to technological advances and other 

innovations, that is not the case in the settlement area where aggressive competition among 

settlement service providers simply does not always take place. Existing RESPA regulations 

inhibit average cost pricing,3

 which is an example of a cost reduction technique. Thus, a 

 

3

 The charges reported on the HUD-1 are required to be the specific charge paid in connection with the specific loan 

for which the HUD-1 is filled out. Pricing based on average charges is the practice of charging all borrowers the 

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framework is needed that would encourage competitive negotiations and other arrangements that 

would lead to lower settlement prices. The new GFE will provide such a framework. 

IV. Approach of the Final Rule 

There is strong evidence of information asymmetry between mortgage originators and 

settlement service providers and consumers, allowing loan originators to capture much of the 

consumer surplus in this market through price discrimination. The RESPA disclosure statute is 

meant to address this information asymmetry, but the evidence shows that the current RESPA 

regulations are not effective. The final rule will create a more level-playing field through a more 

transparent and standard disclosure of loan details and settlement costs; tolerances on settlement 

charges leading to prices that consumers can rely on; and a comparison page on the HUD-1 that 

allows the consumer to compare the amounts listed for particular settlement costs on the GFE 

with the total costs listed for those charges on the HUD-1, and to double check the loan details at 

settlement double check the loan details at settlement. These changes will encourage comparison 

shopping by informed consumers, which will place a competitive pressure on market prices, and 

enable consumers to retain more consumer surplus. 

IV.A. Main Components of the New GFE and HUD-1 

The GFE format simplifies the process of originating mortgages by consolidating costs 

into a few major cost categories.4

 The GFE ensures that in brokered transactions, borrowers 

receive the full benefit of the higher price paid by wholesale lenders for a loan with a high 

interest rate; that is, so-called yield spread premiums. On both the GFE and HUD-1, the portion 

of any wholesale lender payments that arise because a loan has an above-par interest rate is 

passed through to borrowers as a credit against other costs. Thus, there is assurance that 

borrowers who take on an above-par loan receive funds to offset their settlement costs. The new 

GFE also includes a trade-off table that will assist consumers in understanding the relationship 

between higher interest rates and lower settlement costs. 

HUD conducted consumer tests to further improve the GFE form in the 2002 proposed 

rule. Numerous changes were made to make the GFE more user-friendly. The GFE form in the 

final rule includes a summary page containing the key information for shopping; during the tests, 

consumers reported that the summary page was a useful addition to the GFE. The trade-off 

table, another component of the GFE that consumers found useful, is also included in the final 

GFE. The final GFE is a form that consumers find to be clear and well written and, according 

the tests conducted, one that they can use to determine the least expensive loan. In other words, 

it is a shopping tool that is a vast improvement over today’s GFE with its long list of fees that 

can change (i.e., increase) at settlement. 

 same average charge for a group of similar loans. Average cost pricing requires less record keeping and tracking for 

any individual loan since the numbers reported to the settlement agent need not be transaction specific. Average 

cost pricing is not permissible under RESPA because loan-specific prices are required. 

4

 See the proposed GFE in Exhibit 3-B of Chapter 3. 

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The final GFE includes a set of tolerances on originator and third-party costs: originators 

must adhere to their own origination fees, and give estimates subject to a 10 percent upper limit 

on the sum of certain third-party fees. The tolerances on originator and third-party costs will 

encourage originators not only to lower their own costs but also to seek lower costs for thirdparty services. 

The final rule would allow service providers to use pricing based on average charges for 

third-party services they purchase so long as the average is calculated using a documented 

method and the charge on the HUD-1 is no greater than the average paid for that service. This 

will make internal operations for the loan originator simpler and less costly and competition 

among lenders will put pressure for these cost savings to be passed on to borrowers as well. The 

end result of all these changes should be lower third-party fees for consumers. 

To increase the value of the new GFE as a shopping document, HUD is proposing 

revisions to the HUD-1 Settlement Statement form that will make the GFE and HUD-1 easier to 

compare. The revised HUD-1 uses the same language to describe categories of charges as the 

GFE, and orders the categories of charges in the same way. This makes it much simpler to 

compare the two documents and confirm whether the tolerances required in the new GFE have 

been met or exceeded. In addition, the final rule introduces a comparison in the revised HUD-1 

that would: (1) compare the GFE estimates to the HUD-1 charges and advise borrowers whether 

tolerances have been met or exceeded; (2) verify that the loan terms summarized on the GFE 

match those in the loan documents, including the mortgage note; and (3) provide additional 

information on the terms and conditions of the mortgage. These components of the rule are 

required together to fully realize the consumer saving on mortgage closing cost estimated here. 

Given that there has been no significant change in the basic HUD-1 structure and layout, 

besides the addition of a comparison page, generating this new HUD-1 should not pose any 

problem for firms closing loans -- in fact, the closing process will be much simpler given that 

borrowers and closing agents can precisely link the information on the initial GFE to the 

information on the final HUD-1.The HUD-1 has also been adjusted to ensure that the new GFE 

(a shopping document issued early in the process) and the HUD-1 (a final settlement document 

issued at closing) work well together. The layout of the revised HUD-1 has new labeling of 

some lines so that each entry from the GFE can be found on the revised HUD-1 with the exact 

wording as on the GFE. This will make it much easier to determine if the fees actually paid at 

settlement are consistent with the GFE, whether the borrower does it alone or with the assistance 

of the settlement agent. The reduced number of HUD-1 entries that should result, as well as use 

of the same terminology on both forms should reduce the time spent by the borrower and 

settlement agents comparing and checking the numbers. 

The significant changes made to the final rule from the March 2008 proposed rule are: 

• A GFE form that is a shorter form than had been proposed. 

• Allowing originators the option not to fill out the tradeoff table on the GFE form. 

• A revised definition of application to eliminate the separate GFE application 

process. 

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• Adoption of requirements for the GFE that are similar to recently revised Federal 

Reserve Board Truth-in-Lending regulations which limit fees charged in 

connection with early disclosures and defining timely provision of the disclosures. 

• Clarification of terminology that describes the process applicable to, and the terms 

of, an applicant's particular loan. 

• Inclusion of a provision to allow lenders a short period of time in which to correct 

certain violations of the new disclosure requirements. 

• A revised HUD-1/1A settlement statement form that includes a summary page of 

information that provides a comparison of the GFE and HUD-1/1A list of charges 

and a listing of final loan terms as a substitute for the proposed closing script 

addition. 

• Elimination of the requirement for a closing script to be completed and read by 

the closing agent. 

• A simplified process for utilizing an average charge mechanism. 

• No regulatory change in this rulemaking regarding negotiated discounts, including 

volume based discounts. 

IV.B. Estimates and Sources of Consumer Savings from the Final Rule 

Overall Savings. Chapter 3 discusses the consumer benefits associated with the new 

GFE form and provides dollar estimates of consumer savings due to improved shopping for both 

originator and third-party services. Consumer savings were estimated under a variety of 

scenarios about originator and settlement costs.5

 In the base case, the estimated price reduction 

to borrowers comes to $8.35 billion annually, or 12.5 percent of the $66.7 billion in total charges 

(i.e., origination fees, appraisal, credit report, tax service and flood certificate and title insurance 

and settlement agent charges).6

 Thus, there is an estimated $8.35 billion in transfers from firms 

to borrowers from the improved disclosures and tolerances of the new GFE. This would 

represent savings of $668 per loan. Sensitivity analysis was conducted with respect to the 

savings projection in order to provide a range of estimates. Because title fees account for over 

70 percent of third-party fees and because there is widespread evidence of lack of competition 

and overcharging in the title and settlement closing industry, one approach projected third-party 

savings only in that industry. This approach (called the “title approach”) projected savings of 

$200 per loan in title and settlement fees. In this case, the estimated price reduction to borrowers 

comes to $8.38 billion ($670 per loan), or 12.6 percent of the $66.7 billion in total charges – 

 

5

 Throughout this Economic Analysis, the terms “borrowers” and “consumers” are often used interchangeably. 

6

 Government fees and taxes and escrow items are not included in this analysis, as they are not subject to 

competitive market pressures.

 vii
 

savings figures that are practically identical to the base case mentioned above.7 Other 

projections also showed substantial savings for consumers. As explained in Chapter 3, estimated 

consumer savings under a more conservative projection totaled $6.48 billion ($518 per loan), or 

9.7 percent of total settlement charges. Thus, while consumer savings are expected to be $8.35 

billion (or 12.5 percent of total charges) in the base case or $8.38 billion (12.6 percent of total 

charges) in the title approach, they were $6.48 billion (or 9.7 percent of total charges) in a more 

conservative sensitivity analysis. This $6.48-$8.38 billion ($518 - $670 per loan) represents the 

substantial savings that can be achieved with the new GFE. 

Industry Breakdown of Savings. Chapter 3 also disaggregates the sources of consumer 

savings into the following major categories: originators with a breakdown for brokers and 

lenders, and third-party providers with a breakdown for the title and settlement industry and 

other third-party providers.8

 In the base case, originators (brokers and lenders) contribute $5.88 

billion, or 70 percent of the $8.35 billion in consumer savings. This $5.88 billion in savings 

represents 14.0 percent of the total revenue of originators, which is projected to be $42.0 billion.9

 

The $5.88 billion is divided between brokers, which contribute $3.53 billion, and lenders (banks, 

thrifts, and mortgage banks), which contribute the remaining $2.35 billion. The shares for 

brokers (60 percent) and lenders (40 percent) represent their respective shares of mortgage 

originations. 

In the base case, third-party settlement service providers contribute $2.47 billion, or 30 

percent of the $8.35 billion in consumer savings. This $2.47 billion in savings represents 10.0 

percent of the total revenue of third-party providers, which is projected to be $24.738 billion.10 

The $2.47 billion is divided between title and settlement agents, which contribute $1.79 billion, 

and other third-party providers (appraisers, surveyors, pest inspectors, etc.), which contribute 

$0.68 billion. Title and settlement agents contribute a large share because they account for 72.5 

percent of the third-party services included in this analysis. In the title approach, title and 

settlement agents account for all third-party savings, which total $2.5 billion if per loan savings 

are $200 and $1.88 billion if per loan savings are $150. 

 

7

 If the savings in title and settlement closing fees due to RESPA reform were only $150, then the estimated price 

reduction to borrowers comes to $7.76 billion, or 11.6 percent of the $66.7 billion in total charges. 

8

 Readers are referred to Chapter 5 for a more detailed examination of the various component industries (e.g., title 

services, appraisal, etc.) as well as for the derivations of many of the estimates presented in this chapter. 

9

 This assumes a 1.75 percent origination fee for brokers and lenders, which, when applied to projected originations 

of $2.4 trillion, yields $42.0 billion in total revenues from origination fees (both direct and indirect). See Steps (3)-

(5) of Section VII.E.1 of Chapter 3 for the explanation of origination costs. Sensitivity analyses are conducted for 

smaller origination fees of 1.5 percent and larger fees of 2.0 percent; see Step (21) in Section VII.E.4 of Chapter 3. 

10 See Step (7) of Section VII.E.1 of Chapter 3 for the derivation of the $24.738 billion. 

 viii
 

Table 1. Industry Breakdown of Consumer Savings 

Source of Savings Transfers 

(billions) 

Savings per loan 

(12.5 million loans) 

Percentage of Total 

Savings 

Loan Origination $5.88 $470 70%

 Lenders $2.35 $470 or 28% 

 Brokers $3.53 $470 42% 

Third-Party Services $2.47 $198 30% 

 Title/Settlement $1.79 $143 22% 

 Other $0.68 $54 8% 

Total* $8.35 $668 100% 

*Savings are 12.5% of $66.7 billion revenue in charges.

Section III.D of this executive summary presents the revenue impacts on small originators and 

small third-party providers. 

Sources of Savings: Lower Origination and Third-Party Fees. The Regulatory 

Impact Analysis presents evidence that some consumers are paying higher prices for origination 

and third-party services. The new GFE format in the final rule will improve consumer shopping 

for mortgages, which will result in better mortgage products, lower interest rates, and lower 

origination and third-party costs for borrowers. 

• The final rule simplifies the process of originating mortgages by consolidating costs into 

a few major cost categories. This is a substantial improvement over today’s GFE that is 

not standardized and can contain a long list of individual charges that encourages fee 

proliferation. This makes it easier for the consumer to become overwhelmed and 

confused. The consistent and simpler presentation of the GFE will improve the ability of 

the consumer to shop. 

• A GFE with a summary page, which includes the terms of the loan, will make it clear to 

the consumer whether they are comparing similar loans. 

• A GFE with a summary page will make it simpler for borrowers to shop. The higher 

reward for shopping, along with the increased ease with which borrowers can compare 

loans, should lead to more effective shopping, more competition, and lower prices for 

borrowers. 

• The GFE makes cost estimates more reliable by applying tolerances to the figures 

reported. This will reduce the all too frequent problem of borrowers being surprised by 

additional costs at settlement. With fees firmer under the GFE, shopping is more likely to 

result in borrowers saving money when they shop. 

• The new GFE will disclose yield spread premiums and discount points in brokered loans 

prominently, accurately, and in a way that should inform borrowers how they may be 

used to their advantage. Both values will have to be calculated as the difference between 

the wholesale price of the loan and its par value. Their placement in the calculations that 

lead to net settlement costs will make them very difficult to miss. That placement should 

also enhance borrower comprehension of how yield spread premiums can be used to 

 ix
 

reduce up-front settlement costs. Tests of the form indicate that consumers can determine 

the cheaper loan when comparing a broker loan with a lender loan. 

• The new GFE will better inform consumers about their financing choices by including a 

tradeoff table on page 3 where originators can present the different interest rate and 

closing cost options available to borrowers. For example, consumers will better 

understand the trade-offs between reducing their closing costs and increasing the interest 

rate on the mortgage.

• The final rule allows settlement service providers to use prices based on average charges 

for the third-party services they purchase.

• The above changes and the imposition of tolerances on fees will encourage originators to 

seek lower settlement service prices. The tolerances will lead to well-informed market 

professionals either arranging for the purchase of the settlement services or at least 

establishing a benchmark that borrowers can use to start their own search. Under either 

set of circumstances, this should lead to lower prices for borrowers than if the borrowers 

shopped on their own, since the typical borrower’s knowledge of the settlement service 

market is limited, at best. 

IV.C. Savings and Transfers, Efficiencies, and Costs 

As explained above, it is estimated that borrowers would save $8.35 billion in origination 

and settlement charges. This $8.35 billion represents transfers to borrowers from high priced 

producers, with $5.88 billion coming from originators and $2.47 billion from third-party 

settlement service providers. In addition to the transfers, there are efficiencies associated with the 

rule as well as costs. 

Mortgage applicants and borrowers realize $1,169 million savings in time spent shopping 

for loans and third-party services. Loan originators save $975 million in time spent with shoppers 

and from average cost pricing. Third-party settlement service providers save $191 million in time 

spent with shoppers. Some or all of industry’s total of $1,166 million in efficiency gains have the 

potential to be passed through to borrowers through competition. There are additional social 

efficiencies such as the reduction of non-productive behavior and positive externalities of 

preventing foreclosures (see Section X.D.). 

The total one-time compliance costs to the lending and settlement industry of the GFE 

and HUD-1 are estimated to be $571 million, $407 million of which is borne by small business. 

These costs are summarized below. Total recurring costs are estimated to be $918 million 

annually or $73.40 per loan. The share of the recurring costs on small business is $471 million. 

This Chapter 6 examines in greater detail the compliance and other costs associated with the 

GFE and HUD-1 forms and its tolerances. 

The new GFE in the final rule has some features that would increase the cost of providing 

it and some that would decrease the cost. Practically all of the information required on the GFE 

is readily available to originators, suggesting no additional costs. The fact that there are fewer 

 x
 

numbers and less itemization of individual fees suggests reduced costs. On the other hand, there 

could be a small amount of additional costs associated with the optional trade-off table but that is 

not clear. Thus, while it is difficult to estimate, it appears that there could be a net of zero 

additional costs. However, if the GFE added 10 minutes per application to the time it takes to 

handle the forms today; annual costs would rise by $255 million at 1.7 application per loan or 

($12 per application or $20 per loan) or $405 million at 2.7 applications per loan ($32 per loan). 

We assume the high-cost scenario for summary table 5.

The presence of tolerances will lead to some additional costs to originators of making 

additional arrangements for third parties to provide settlement services. If the average loan 

originator incurs an average of 10 minutes per loan of effort making third-party arrangements to 

meet the tolerances, then the total cost to originators of making third-party arrangements to meet 

the tolerance requirements comes to $150 million ($12 per loan). (See Section VII.E.2 of this 

chapter.) 

There is the potential of additional underwriting costs if the number of applications 

requiring a credit check rise beyond the current ratio of 1.7 applications per loan. Thus, if this 

ratio remains constant, there will be no recurring compliance costs from additional underwriting. 

If, however, the demand for preliminary GFEs increases to 2.7 applications per loan, then the 

total costs for originators will be $138 million or $11 per loan (See Section VII.C.). 

In addition to the recurring costs of the GFE, there will be one-time adjustment costs of 

$383 million in switching to the new form. Loan originators will have to upgrade their software 

and train staff in its use in order to accommodate the requirements of the new rule. It is 

estimated that the software cost will be $33 million and the training cost will be $58 million, for 

a total of $91 million (see Section VII.B.1 of this chapter). We assume that, of the loan 

originators’ software and training costs, $73 million is attributable to the new GFE and $18 

million to the new HUD-1. Once the new software is functioning, the recurring costs of training 

new employees in its use and the costs associated with periodic upgrades simply replace those 

costs that would have been incurred doing the same thing with software for the old rule. They 

represent no additional costs of the new rule. 

Similarly, there will be a one-time adjustment cost for legal advice on how to deal with 

the changes related to the new GFE. The one-time adjustment cost for legal fees is estimated to 

be $116 million (see Section VII.B.2 of this chapter). Once the adjustment has been made, the 

ongoing legal costs are a substitute for the ongoing legal costs that would have been incurred 

under the old rule and do not represent any additional burden. 

Finally with respect to the GFE, employees will have to be trained in the new GFE 

beyond the software and legal training already mentioned. This one time adjustment cost is 

estimated to be $194 million (see section VII.B.3). Again, once the transition expenses have 

been incurred, any ongoing training costs are a substitute for the training costs that would have 

been incurred anyway and do not represent an additional burden. 

There are few recurring costs associated with the revised HUD-1. For originators the 

burden could be very small: loan originators will not have to collect additional data beyond what 

is required for the GFE. In certain cases, the burden may be noticeable so we assume that the 

 xi
 

average burden is ten minutes per loan for loan originators. Settlement agents may face a 

recurring cost, although this is not likely either since loan originators are responsible for 

providing the data. The settlement agent will have to add final charges not known by the 

originator, and may have to fill out the entire form if the lender does not transmit the information 

on an already completed HUD-1 page 3. The settlement agent may also want to check the 

information concerning settlement costs, tolerances, and loan terms to make sure they agree with 

the GFE. In some cases, the settlement agent will have to calculate the tolerances. We assume 

that it will add five minutes on average to the time it takes to prepare a settlement. The actual 

distribution of the total additional time burden will differ by transaction depending on how much 

of the work is done by the lender. Taking loan originators into account, the total time burden is 

15 minutes per loan, for a cost of $18 per loan. The recurring compliance cost to the industry 

would be $225 million annually, of which small business would bear $107 million annually. 

During a high-volume year (15.5 million loans annually), the annual recurring compliance cost 

of the HUD-1 would be $279 million annually (see Section VIII.C. of Chapter 6) 

There will be one-time adjustment costs of $188 million in switching to the new HUD-1 

form. Settlement firms will have to upgrade their software and train staff in its use in order to 

accommodate the requirements of the new rule. It is estimated that the software and training cost 

will be $80 million (see Section VIII.B. of Chapter 6). Once the new software is functioning, the 

recurring costs of training new employees in its use and the costs associated with periodic 

upgrades simply replace those costs that would have been incurred doing the same thing with 

software for the old rule. They represent no additional costs of the new rule. 

Table 2. Summary of One-Time Adjustment Costs (in millions) 

GFE HUD-1 Total 

Source of Cost All 

Firms 

Small 

Firms 

All 

Firms 

Small 

Firms 

All 

Firms 

Small 

Firms 

Software and training $73 $52 $80 $59 $153 $111 

Legal consultation $116 $70 $37 $18 $153 $88 

Training on rule $194 $146 $71 $62 $265 $208 

Total $383 $268 $188 $139 $571 $407 

 Similarly, there will be a one-time adjustment cost for legal advice on how to deal with 

the changes related to the new HUD-1. The one-time adjustment cost for legal fees is estimated 

to be $37 million (see Section VIII.B. of Chapter 6). Once the adjustment has been made, the 

ongoing legal costs are a substitute for the ongoing legal costs that would have been incurred 

under the old rule and do not represent any additional burden. 

Finally, employees will have to be trained in the new HUD-1 beyond the software and 

legal training already mentioned. This one time adjustment cost is estimated to be $71 million 

(see Section VIII.B. of Chapter 6). Again, once the transition expenses have been incurred, any 

ongoing training costs are a substitute for the training costs that would have been incurred 

anyway and do not represent an additional burden. 

The consumer savings, efficiencies and costs associated with the GFE are discussed 

further in Chapter 6 and in Chapters 3. A summary of the compliance costs for the base case of 

12.5 million loans annually is presented in Table 1. 

 xii
 

Table 3. Compliance Costs of the Final Rule (if 12.5 million loans annually) 

One-time Compliance Costs 

incurred during the first year

Recurring Compliance Costs 

(in millions) (in millions annually)

All Firms Small Firms All Firms Small Firms 

$ cost per 

loan

GFE $383 $268 $693 $364 $55.40 

HUD-1 $188 $139 $225 $107 $18.00 

Total $571 $407 $918 $471 $73.40 

A natural question to raise is whether the costs of the rule will overwhelm the benefits of 

the rule. The assumption that consumers will benefit by a reduction of settlement costs of at 

least $668 per loan has not been forcefully challenged. Indeed, results from a recent statistical 

analysis of FHA data imply that the savings to consumers may be as much as $1,200 per loan. 

To accomplish this, however, industry will incur both adjustment and recurring costs. Suppose 

firms impose these additional costs on consumers by raising prices. It is likely that the 

adjustment costs will be spread out over many years, just as the cost of an investment would be. 

Suppose, for the sake of illustration, that all adjustment costs are all imposed on first-year 

borrowers only. In a normal year of 12.5 million loans, this cost would $46 per loan. The 

recurring compliance costs of the rule is $73.40 per loan regardless of the year. In such a 

scenario, the total compliance cost is $120 per loan in the first year as compared to $74 for later 

years. If all compliance costs were passed onto consumers then the net consumer savings is 

$548 the first year and $594 in subsequent years (see Table 4 for a summary). Note that this 

assumes that all costs are borne by borrowers and not at all by the applicants who do not get a 

loan. It would be reasonable to assume that in the high-application scenario, where there is an 

increase in preliminary underwriting costs, that the cost of an initial credit report would be 

passed on to all applicants. 

Table 4. Predicted Reductions in the Cost of a Loan 

(if firms impose all first-year adjustment costs on first-year borrowers) 

Source of Gain or Loss First Year Afterwards

Average Consumer Savings $668 $668 

 One-time Adjustment Costs -$46 -$0 

 Recurring Compliance Costs -$74 -$74

Net Consumer Savings $548 $594 

 Firms' Efficiencies +$93 +$93 

 Borrowers' Efficiencies +$55 +$55

Net Benefits to Consumer $696 $742 

There are other potential benefits to the consumer besides savings on settlement costs. There are 

aspects of this rule that will save time for industry. The value of these efficiencies could be 

$1,166 million for loan originators and settlement agents, for a per loan efficiency of $93. In a 

competitive industry, firms would pass these gains along to borrowers in the form of lower costs, 

a consumer benefit. Borrowers themselves will save time through the new GFE. These time 

savings are estimated at $1,169 million but are derived from a time savings worth $55 per 

applicant (seventy-five minutes at $44 per hour). In the summary of net benefits, we only 

include the per applicant time savings for borrowers. We make the cautious assumption that 

 xiii
 

successful borrowers have submitted only one application. A fraction of the additional 8.25 

million applications (in excess of 12.5 million loans) consist of: applications approved but not 

accepted; applications denied by the financial institution; and applications withdrawn by the 

applicant. Although these individuals also realize time savings, it would be misleading to 

include them in a “per loan” figure in that the time savings of rejected applicant would not 

benefit the borrower. Adding the firms’ and borrowers’ value of time efficiencies to the net of 

compliance cost consumer savings gives us an estimate of the potential consumer benefits per 

loan: $696 in the first year and $742 afterwards. 

IV.D. Alternatives Considered to Make the GFE More Workable for Small Businesses 

Chapter 3 discusses the many comments that HUD received on the GFE in the 2002 and 

2008 proposed rules and the 2005 RESPA Reform Roundtables. Chapter 4 discusses 

alternatives. The most basic alternative was to make no change in the current GFE. The final 

rule allows both the current GFE and the new GFE to be used for one year after the GFE is 

introduced, but requires the new GFE and HUD-1 to be used beginning January 1, 2010. This 

approximately one-year adjustment period responds to lenders’ comments that there would be 

significant implementation issues with switching to a new GFE. 

The main alternative concerning small businesses considered the brokers’ argument that 

they were disadvantaged by the reporting of yield spread premiums. The new GFE was designed 

to ensure that there will not be any anti-competitive impacts on the broker industry. A summary 

page is included that presents the key cost figures for borrower shopping, that does not report 

yield spread premiums, and that provides identical treatment for brokers and lenders. The final 

GFE includes language that clarifies how yield spread premiums reduce the upfront charge that 

borrowers pay. Section III.E of this Executive Summary discusses this in more detail. 

HUD designed the GFE to make it workable for small lenders and brokers. Some 

examples of the changes are the following: 

• In response to concerns expressed by lenders and brokers about their ability to control 

third-party costs and meet the specified tolerances in the 2008 proposed rule, HUD raised 

the tolerance on government recording charges from zero to ten percent. 

• Consistent with the above, the rule creates a new definition of “changed circumstances” 

that clarifies and expands on the definition of “changed circumstances” in the proposed 

rule. For example, material information that was either not known at the time the original 

GFE was provided or not relied on in providing the original GFE, or information that has 

changed in a material way since application, may be the basis for providing a modified 

GFE. For example, if the actual loan amount turns out to be higher than the loan amount 

indicated by the borrower at the time the GFE was provided, and certain settlement 

charges that are based on the loan amount increase as a result, the loan originator may 

provide a revised GFE reflecting those higher amounts. Compliance with the tolerance 

provisions would be evaluated by comparing the revised GFE with the actual amounts 

charged at settlement. 

 xiv
 

• HUD has adopted a streamlined single application process for the final rule. The new 

definition will allow loan originators more flexibility in determining the information they 

need to underwrite a GFE. 

• The reading at settlement of a closing script is no longer required. Much of the same 

information will be transmitted to the borrower via a new page 3 of the HUD-1. 

Alternatives. This chapter and Chapter 4 and Chapter 6 discuss other major alternatives 

that HUD considered in developing the final rule from the 2008 proposed rule. These chapters 

discuss the pros and cons of these alternatives and why HUD decided not to include them in this 

final rule. 

IV.E. Market and Competitive Impacts on Small Businesses from the Final Rule 

Transfers from Small Businesses. It is estimated that $4.13 billion, or 49.5 percent of 

the $8.35 billion in consumer savings comes from small businesses, with small originators 

contributing $3.01 billion and small third-party firms, $1.13 billion.11 Within the small 

originator group, most of the transfers to consumers come from small brokers ($2.47 billion, or 

82 percent of the $3.01 billion); this is because small firms account for most of broker revenues 

but a small percentage of lender revenues. Within the small third-party group, most of the 

transfers come from the title and closing industry ($0.68 billion, or 60 percent of the $1.13 

billion), mainly because this industry accounts for most third-party fees. In the title approach, 

small title and settlement closing companies account for $0.95 billion of the $2.5 billion in 

savings. Section VII.E.2 of Chapter 3 explains the steps in deriving these revenue impacts on 

small businesses, and Section VII.E.4 of Chapter 3 reports several sensitivity analyses around the 

estimates. In addition, Chapter 5 provides more detailed revenue impacts for the various 

component industries.12

The summary bullets highlight the mechanisms through which these transfers are 

expected to happen. Improved understanding of yield spread premiums, discount points, and the 

trade-off between interest rates and settlement costs; improved consumer shopping among 

originators; more aggressive competition by originators for settlement services; and increased 

competition associated with discounting -- all will lead to reductions in both originator and thirdparty fees. As noted earlier, there is substantial evidence of non-competitive prices charged to 

some in the origination and settlement of mortgages due to information asymmetry between 

originators and borrowers. Originators (both small and large) and settlement service providers 

(both small and large) that have been charging high prices will experience reductions in their 

revenues as a result of the new GFE. There is no evidence that small businesses have been 

 

11 In the more conservative scenario of $6.48 billion in consumer savings, small businesses would account for $3.21 

billion of the transfers to consumers, with small originators accounting for $2.36 billion, and small third-party 

providers, $0.84 billion. 

12 In Chapter 5, see Section II for brokers, Section III for the four lender groups (commercial banks, thrifts, 

mortgage banks, and credit unions), Section IV for the various title and settlement groups (large insurers, title and 

settlement agents, lawyers, and escrow firms), Section V.A for appraisers, Section V.B for surveyors, Section V.C 

for pest inspectors, and Section V.D for credit bureaus. 

 xv
 

disproportionately charging high prices; for this reason, there is no expectation of any 

disproportionate impact on small businesses from the new GFE. The revenue reductions will be 

distributed across firms based on their non-competitive price behavior. 

Small Brokers.13 The main issue raised by the brokers concerned the treatment in the 

2008 proposed rule of yield spread premiums on the proposed Good Faith Estimate. Mortgage 

Broker representatives asserted that the proposed mortgage broker disclosure would achieve the 

opposite result and would detract from the consumer’s ability to understand and comparison 

shop. They recommended that lenders should be treated similarly to facilitate shopping and 

promote consumer understanding. The current final rule addresses the concern expressed by 

brokers that the reporting of yield spread premiums in the 2008 proposed rule would 

disadvantage them relative to lenders. 

The Department hired forms development specialists, the Kleimann Communication 

Group, to analyze, test, and improve the forms. Starting with the GFE form proposed in 2002, 

they reworked the language and presentation of the yield spread premium to emphasize that it 

offsets other charges to reduce settlement charges, the cash needed to close the loan. The 

subjects tested seemed to like the trade-off table that shows the trade-off between the interest rate 

and up-front charges. It illustrates how yield spread premiums can reduce upfront charges. 

There is the summary page designed to simplify the digestion of the information on the form by 

including only the total estimated settlement charges from page two. This is the first page any 

potential borrower would see. It contains only the essentials for comparison-shopping and is 

simple: a standard set of yes-no questions describing the loan and a very simple summary of 

costs and the bottom line. Yield spread premiums are never mentioned here. Lender and broker 

loans get identical treatment on page 1. A mortgage shopping chart is included on page 3 of the 

GFE, to help borrowers comparison shop. Arrows were added to focus the borrower on overall 

charges, rather than one component. All of these features work against the borrower 

misinterpreting the different presentation of loan fees required of brokers vis-à-vis lenders. 

HUD has designed the GFE form to focus borrowers on the right numbers so that 

competition is maintained between brokers and lenders. The forms adopted in the final rule were 

tested on hundreds of subjects. The tests indicate that borrowers who comparison shop will have 

little difficulty identifying the cheapest loan offered in the market whether from a broker or a 

lender. 

We do not believe that the customer outreach function that brokers perform for wholesale 

lenders is going to change with RESPA reform. Wholesale lending, which has fueled the rise in 

mortgage originations over the past ten years, will continue to depend on brokers reaching out to 

consumer customers and supplying them with loans. Brokers play the key role in the upfront 

part of the mortgage process and this will continue with the final GFE. 

RESPA reform is also not going to change the basic cost and efficiency advantages of 

brokers. Brokers have grown in market share and numbers because they can originate mortgages 

at lower costs than others. There is no indication that their cost competitiveness is going to 

 

13 Practically all (98.9%) of the 30,000-44,000 brokers qualify as a small business. The Bureau of Census reports 

that small brokers account for 70% of industry revenue. 

 xvi
 

change in the near future. Thus, brokers, as a group, will remain highly competitive actors in the 

mortgage market, as they have been in the past. 

While there is no evidence to suggest any anti-competitive impact, there will be an 

impact on those brokers who are charging non-competitive prices. And there is convincing 

evidence that some brokers (as well as some lenders) overcharge consumers (see studies 

reviewed in Chapter 2). As emphasized throughout the Regulatory Impact Analysis, the new 

GFE will lead to improved and more effective consumer shopping, for many reasons -- the new 

GFE is simple and easy to understand, it includes reliable cost estimates, it effectively discloses 

yield spread premiums and discounts in brokered loans without disadvantaging brokers, it 

provides a vehicle to show consumers options, and it explains the trade-off between closing costs 

and interests rates to aid in understanding of yield spread premiums. This increased shopping by 

consumers will reduce the revenues of those brokers who are charging non-competitive prices. 

Thus, the main impact on brokers (both small and large) of the final rule will be on those brokers 

(as well as other originators) who have been overcharging uninformed consumers, through the 

combination of high origination fees and yield spread premiums.14 As noted above, small 

brokers are expected to experience $2.47 billion in reduced fees. 

Small Lenders. Lenders include mortgage banks, commercial banks, credit unions, and 

thrift institutions.15 There are over 10,000 lenders that would be affected by the RESPA rule, as 

well as almost 4,000 credit unions that originate mortgages. While two-thirds of the lenders 

qualify as a small business (as do four-fifths of the credit unions), these small originators account 

for only 23 percent of industry revenues. Thus, small lenders (including credit unions) account 

for only $540 million of the projected $2.35 billion in transfers from lenders.16 

In general, there was less concern expressed by lenders (as compared with brokers) about 

potential anti-competitive impacts of the GFE on small businesses. Small lenders -- relative to 

both brokers and large lenders -- will remain highly competitive actors in the mortgage market, 

as they are today. Small mortgage banks, community banks and local savings institutions benefit 

from their knowledge of local settlement service providers and of the local mortgage market. 

Nothing in the final GFE rule changes that. Generally, lenders and their associations opposed 

the proposed GFE on the grounds that in their opinion the form is too lengthy and would only 

confuse borrowers. 

 

14 As explained throughout this chapter, it is anticipated that market competition, under this proposed GFE approach, 

will have a similar impact on those lenders (non-brokers) who have been overcharging consumers through a 

combination of high origination costs and yield spread premiums. 

15 While it is recognized that the business operations and objectives of these lender groups can differ – not only 

between the groups (a mortgage banker versus a portfolio lender) but even within a single group (a small community 

bank versus a large national bank) – they raised so many of the same issues that it is more useful to address them in 

one place. 

16 Section III of Chapter 5 describes the characteristics of these component industries (number of employees, size of 

firms, etc.), their mortgage origination activity, and the allocation of revenue impacts between large and small 

lenders. That section also explains that the small business share of revenue could vary from 20 percent to 26 percent 

 xvii
 

Lenders had numerous comments on most aspects of the 2008 proposed GFE form – 

some of them dealing with major issues such as the difficulty in predicting costs within a three 

day period and many dealing with practical and more technical issues. HUD responded to many 

of the issues and concerns raised by lenders; Sections V, VI, and VIII of Chapter 3 discuss 

lenders' comments and HUD's response. 

Some lenders were concerned about their ability to produce firm cost estimates (even of 

their own fees) within a three-day period, given the complexity of the mortgage process. 

Lenders wanted clarification on their ability to make cost adjustments as a result of information 

they gain during the full underwriting process. The tolerances in the final rule require that 

lenders play a more active role in controlling third-party costs than they have in the past. 

However, some lenders emphasized that they have little control over fees of third-party 

settlement providers, while others seem to not anticipate problems in this regard. As explained 

in I.B above, the final rule made several adjustments to the tolerance rules, which should make 

them workable for lenders. In addition, the final rule allows average cost pricing, which should 

help lenders reduce their costs. Practically all lenders wanted clarification on the definition of 

application, and HUD did that. 

There will be an impact on those lenders (both large and small) who are charging noncompetitive prices. Improved consumer shopping with the new GFE will reduce the revenues of 

those lenders who are charging non-competitive prices. Thus, as with brokers, the main negative 

impact on lenders (both small and large) of the new GFE will be on those lenders who have been 

overcharging uninformed consumers.

Small Title and Settlement Firms. The title and settlement industry -- which consists of 

large title insurers, title agents, escrow firms, lawyers, and others involved in the settlement 

process -- is expected to account for $1.79 billion of the $2.47 billion in third-party transfers 

under the GFE in the final rule. Within the title and settlement group, small firms are expected 

to account for 38.1 percent ($0.68 billion) of the transfers, although there is some uncertainty 

with this estimate.17 Step (8) of Section VII.E of Chapter 3 conducts an analysis that projects all 

of the consumer savings in third-party costs coming from the title industry; evidence suggests 

there are more opportunities for price reductions in the title industry, as compared with other 

third-party industries. In this case, consumer savings in title costs ($150-$200 per loan) ranged 

from $1.88 billion to $2.50 billion. To a large extent, the title and closing industry is 

characterized by local firms providing services at constant returns to scale. The demand for the 

services of these local firms will continue under the final GFE. 

Section VIII.C of Chapter 3 summarizes the key competitive issues for this industry with 

respect to the final rule. As noted there, the overall competitiveness of the title and closing 

industry should be enhanced by the RESPA rule. Chapters 2 and 5 provide evidence that title 

and closing fees are too high and that there is much potential for price reductions in this industry. 

Increased shopping by consumers, as well as increased shopping by loan originators to stay 

within their tolerances, will reduce the revenues of those title and closing companies that have 

 

17 Section IV of Chapter 5 describes the component industries and estimates the share of overall industry revenue 

going to small businesses. 

 xviii
 

been charging non-competitive prices.18 Excess charges will be reduced and competition will 

ensure that reduced costs are passed through to consumers. 

The title industry argued that greater itemization was needed in order for consumers to be 

able to adequately comparison shop among estimates. HUD’s view is that the consolidated 

categories on the new GFE form provide consumers with the essential information needed for 

comparison-shopping. Itemization encourages long lists of fees that confuse borrowers. 

It is important to keep in mind the local nature of the title industry when considering the 

impacts of the final RESPA reform (new GFE, tolerances, etc.) on the title industry. The title 

industry demonstrates a high degree of geographic specialization. Although title insurance 

companies do not need to be close to the properties insured, until there is widespread use of 

standardized electronic land record keeping accessible by the Internet,19 the informationgathering service the industry provides will require proximity to land title records (or the 

establishment of “title plants,” i.e., duplicates of local records, the maintenance of which requires 

proximity to local government records). Even if a provider is efficient and charges low prices, it 

will not be able to compete against title and closing firms who are located sufficiently closer to 

the site in question. Thus, title and closing companies are by economic necessity provided by 

local firms. Reinforcing the local orientation are the value of local expertise and the importance 

of personal networks in receiving referrals. 

The local orientation of the title industry could change over time. However, it is unlikely 

that RESPA reform would be the catalyst. The advances in technology that would change 

business practices are independent of what HUD does about RESPA. The only change that the 

final rule will introduce is that title and closing services may occur at lower prices negotiated 

between providers and lender originators. There will be no significant change in the local 

provision of title and closing work. Nor will there be a reduction of the number of these services 

purchased since this reform will not result in a drop in the number of mortgages that require 

these services. Large lenders will have to deal with multiple settlement services providers in 

order to ensure complete geographic coverage, and large multi-jurisdictional title firms have no 

apparent cost advantages over smaller title firms. In fact, large multi-jurisdictional title firms 

may have location-related cost disadvantages. There is no reason to believe that small title firms 

charging competitive prices will be adversely impacted by the changes in this rule. The demand 

for the services of these local firms will continue under the final GFE. 

Appraisers. Like surveys and pest inspections, traditional appraisals are provided on-site 

at the mortgaged property. The transportation cost of visiting individual sites, especially the 

opportunity cost of the time spent in transit, adds substantially to the cost of providing the 

service. The transportation costs counterbalance, or overwhelm, any scale economies that may 

otherwise exist in the production of these services. The countervailing transportation cost 

 

18 The reasons why the proposed GFE and its tolerances will lead to improved and more effective shopping for thirdparty services by consumers and loan originators has already been discussed, and need not be repeated here. 

19 The proposed rule does nothing to advance or retard this fundamental change in the nature of the business. It is 

possible that governments responsible for maintaining title records could advance to the level demonstrated in 

British Columbia (Canada), where even title insurance is not part of real estate transactions. 

 xix
 

pressures creates an effective constant returns to scale production function for this industry and 

can serve to explain the wide range of firm size as well as the continued success of small 

businesses in the appraisal industry. This explains why approximately 99.8 percent of traditional 

appraisal firms qualify as small businesses. 

Even if large appraisal firms are efficient and charges low prices, they will not have the 

same advantage as providers who are located sufficiently closer to the site in question. Thus, 

traditional appraisals are by economic necessity provided by local firms. Reinforcing the local 

orientation of the appraisal industry is the value of local expertise. A profound understanding of 

the characteristics of the local real estate market is essential for a successful appraisal. In 

addition, local appraisal firms maintain local networks of customers and clients, based on their 

established track records, which should give them a solid business advantage. 

The local orientation of the appraisal industry could change over time. There has been a 

trend towards the increasing use of automated valuation appraisals, particularly for appraising 

properties that are being refinanced and properties that are being used as collateral for home 

equity loans. The necessity for appraisers to visit all homes in need of an appraisal could be 

rendered less by the automated value model (AVM), but it is also the case that the databases used 

to create AVMs tend not to have data on whether or not there is water in the basement of the 

subject property. It is unlikely that RESPA reform would be the catalyst for increases in AMVs, 

as the technological advances are already taking place. While RESPA reform could accelerate 

the use of AVMs, it will not likely have an impact as to whether AVMs are eventually accepted 

more broadly by the lending industry. The adoption of AVMs will depend on the accuracy of 

these estimation models, their appropriateness for different types of properties, and their 

performance in mitigating the risk of default losses. 

V. Statement of Need for and Objectives of the Rule 

Chapter 1 is an introductory chapter that explains the requirements for this economic 

and small business analysis, discusses the need for the proposed rule, gives an overview of the 

main components of the proposed rule, and summarizes the topics covered in Chapters 2-6. 

Chapter 2 is a technical background chapter that supports the discussion of the GFE in Chapters 

3 and 4, respectively. Chapter 2 provides a brief overview of the mortgage market and discusses 

several topics (e.g., yield spread premiums) related to the RESPA regulation. Mortgage pricing 

studies are reviewed here, particularly recent work by the Urban Institute that suggests 

substantial overcharging of fees by originators and third-party providers. Chapter 3 explains in 

detail the proposed GFE including: the proposed GFE form; treatment of yield spread premiums 

and discount points; average cost pricing; tolerances in settlement costs; additional topics and 

alternatives related to the GFE, including changes that HUD made to improve the GFE and the 

HUD-1; consumer benefits and estimates of industry and small business transfers; and 

competitive impacts, with a focus on the market effects on small businesses. Chapter 4

discusses alternatives that HUD considered including packaging. Chapter 5 supports Chapters 

3, 4, and 6 by providing basic mortgage-related descriptive data on each origination and thirdparty industry and by explaining the various methodologies for estimating the share of each 

industry’s revenue accounted for small businesses. Chapter 6 examines compliance and 

regulatory costs and demonstrates how this document meets the requirements of a Regulatory 

 xx
 

 xxi

Flexibility Analysis under Section 604 of the Regulatory Flexibility Act (RFA). The 

requirements of the RFA are stated along with references to where in this document the 

requirements are covered. 
CHAPTER 1 

INTRODUCTION 

I. Main Components of the Rule..................................................................................................... 1 

II. Need for Final Rule.................................................................................................................... 3 

III. Regulatory Impact Analysis and Regulatory Flexibility Analysis ........................................... 6 

III.A. Requirement for an Regulatory Impact Analysis under E.O. 12866 ................................ 6 

III.B. Small Business Analysis Requirements under the Regulatory Flexibility Act (RFA) ..... 7 

IV. Nature of the Economic Impacts .............................................................................................. 8 

V. Organization of the the Regulatory Impact Analysis................................................................. 9 

The Department of Housing and Urban Development issued a final rule under the Real 

Estate Settlement Procedures Act (RESPA) to simplify and improve the process of obtaining 

home mortgages and to reduce settlement costs for consumers. This Regulatory Impact Analysis 

and Final Regulatory Flexibility Analysis examine the economic effects of that rule. As this 

Regulatory Impact Analysis demonstrates, the final rule is expected to improve consumer 

shopping for mortgages and to reduce the costs of closing a mortgage transaction. A number of 

benefits, costs, transfers, efficiencies, and market impacts are identified in this Regulatory 

Impact Analysis. 

Section I of this chapter briefly summarizes the rule and Section II explains the need for 

the rule. Section III discusses the objectives of a Regulatory Impact Analysis and discusses the 

need for a small business analysis, since many of the provisions of the rule cover industries 

composed predominantly of small businesses such as mortgage brokers. Section IV discusses 

the scope of the analyses covered in this Regulatory Impact Analysis. Section V describes the 

remaining chapters in this Regulatory Impact Analysis. 

Readers are referred to the Executive Summary for an overview of the main findings of 

this Regulatory Impact Analysis and to Section I of Chapter 3 for a detailed summary of all 

findings related to the Good Faith Estimate. 

I. Main Components of the Rule 

The GFE format simplifies the process of originating mortgages by consolidating costs 

into a few major cost categories.1

 The GFE ensures that in brokered transactions, borrowers 

receive the full benefit of the higher price paid by wholesale lenders for a loan with a high 

interest rate; that is, so-called yield spread premiums. On both the GFE and HUD-1, the yield 

spread premium, which is the portion of any wholesale lender payments that arise because a loan 

has an above-par interest rate, is passed through to borrowers as a credit against other costs. 

Thus, there is assurance that borrowers who take on an above-par loan receive funds to offset 

 

1

 See the proposed GFE in Exhibit 3-B of Chapter 3. 

 1-1 
their settlement costs. The new GFE also includes a trade-off table that will assist consumers in 

understanding the relationship between higher interest rates and lower settlement costs. 

HUD conducted consumer tests to further improve the GFE form in the 2002 proposed 

rule. Numerous changes were made to make the GFE more user-friendly. The GFE form in the 

final rule includes a summary page containing the key information for shopping; during the tests, 

consumers reported that the summary page was a useful addition to the GFE. The trade-off 

table, another component of the GFE that consumers found useful, is also included in the final 

GFE. The final GFE is a form that consumers find to be clear and well written and, according 

the tests conducted, one that they can use to determine the least expensive loan. In other words, 

it is a shopping tool that is a vast improvement over today’s GFE with its long list of fees that 

can change (i.e., increase) at settlement. 

The final GFE includes a set of tolerances on originator and third-party costs: originators 

must adhere to their own origination fees, and give estimates subject to a 10 percent upper limit 

on the sum of certain third-party fees. The tolerances on originator and third-party costs will 

encourage originators not only to lower their own costs but also to seek lower costs for thirdparty services. 

The final rule would allow service providers to use pricing based on average charges for 

third-party services they purchase so long as the average is calculated using a documented 

method and the charge on the HUD-1 is no greater than the average paid for that service. This 

will make internal operations for the loan originator simpler and less costly and competition 

among lenders will put pressure for these cost savings to be passed on to borrowers as well. The 

end result of all these changes should be lower third-party fees for consumers. 

To increase the value of the new GFE as a shopping document, HUD is proposing 

revisions to the HUD-1 Settlement Statement form that will make the GFE and HUD-1 easier to 

compare. The revised HUD-1 uses the same language to describe categories of charges as the 

GFE, and orders the categories of charges in the same way. This makes it much simpler to 

compare the two documents and confirm whether the tolerances required in the new GFE have 

been met or exceeded. In addition, the final rule introduces a comparison in the revised HUD-1 

that would: (1) compare the GFE estimates to the HUD-1 charges and advise borrowers whether 

tolerances have been met or exceeded; (2) verify that the loan terms summarized on the GFE 

match those in the loan documents, including the mortgage note; and (3) provide additional 

information on the terms and conditions of the mortgage. These components of the rule are 

required together to fully realize the consumer saving on mortgage closing cost estimated here. 

Given that there has been no significant change in the basic HUD-1 structure and layout, 

besides the addition of a comparison page, generating this new HUD-1 should not pose any 

problem for firms closing loans -- in fact, the closing process will be much simpler given that 

borrowers and closing agents can precisely link the information on the initial GFE to the 

information on the final HUD-1.The HUD-1 has also been adjusted to ensure that the new GFE 

(a shopping document issued early in the process) and the HUD-1 (a final settlement document 

issued at closing) work well together. The layout of the revised HUD-1 has new labeling of 

some lines so that each entry from the GFE can be found on the revised HUD-1 with the exact 

wording as on the GFE. This will make it much easier to determine if the fees actually paid at 

 1-2 
settlement are consistent with the GFE, whether the borrower does it alone or with the assistance 

of the settlement agent. The reduced number of HUD-1 entries that should result, as well as use 

of the same terminology on both forms should reduce the time spent by the borrower and 

settlement agents comparing and checking the numbers. 

The significant changes made to the final rule from the March 2008 proposed rule are: 

• A GFE form that is a shorter form than had been proposed. 

• Allowing originators the option not to fill out the tradeoff table on the GFE form. 

• A revised definition of application to eliminate the separate GFE application 

process. 

• Adoption of requirements for the GFE that are similar to recently revised Federal 

Reserve Board Truth-in-Lending regulations which limit fees charged in 

connection with early disclosures and defining timely provision of the disclosures. 

• Clarification of terminology that describes the process applicable to, and the terms 

of, an applicant's particular loan. 

• Inclusion of a provision to allow lenders a short period of time in which to correct 

certain violations of the new disclosure requirements. 

• A revised HUD-1/1A settlement statement form that includes a summary page of 

information that provides a comparison of the GFE and HUD-1/1A list of charges 

and a listing of final loan terms as a substitute for the proposed closing script 

addition. 

• Elimination of the requirement for a closing script to be completed and read by 

the closing agent. 

• A simplified process for utilizing an average charge mechanism. 

• No regulatory change in this rulemaking regarding negotiated discounts, including 

volume based discounts. 

II. Need for Final Rule2

The current GFE format contains a long list of individual charges that can be 

overwhelming, often confusing to consumers, and that provide little useful information for 

consumer shopping. Current RESPA regulations have led to a proliferation of charges that makes 

 

2

 For a detailed discussion of problems with the current system, and thus the need for this proposed rule, see 

Sections IV and V of Chapter 2 and Sections I and VII of Chapter 3. 

 1-3 
consumer shopping and the mortgage settlement process both difficult and confusing, even for 

the most informed shoppers. Long lists of charges certainly do not highlight the bottom-line 

costs so consumers can shop and compare mortgage offers among different originators. In 

addition, under today’s rules, the estimated costs on GFEs may be unreliable or incomplete, or 

both, and final charges at settlement may include significant increases in items that were 

estimated on the GFE, as well as additional unexpected fees, which can add substantially to the 

consumer’s ultimate closing costs. The process of shopping for a mortgage can also involve 

complicated financial trade-offs, which are not always clearly explained to borrowers. Today’s 

GFE is not an effective tool for facilitating borrower shopping nor for controlling origination and 

third-party settlement costs. 

Studies indicate that consumers are often charged relatively high fees and can face wide 

variations in settlement prices, both for origination and third-party settlement services. Chapter 

2 offers convincing evidence that not only do borrowers find it difficult to comparison shop in 

today's mortgage market, but that they are sometimes charged relatively high prices in today's 

mortgage market. The enormous potential for cost reductions in today’s market is indicated by 

studies showing that yield spread premiums do not always offset consumers’ origination costs. 

Studies show that consumers are, in effect, charged relatively high prices in some transactions 

involving yield-spread premiums, and that the mortgage market is characterized by “price 

dispersion.” In other words, some borrowers get market price deals, but other borrowers do not. 

Studies show that less informed and unsuspecting borrowers are particularly vulnerable in this 

market. But given the fact that a borrower may be more interested in the main transaction (the 

home purchase), even more sophisticated borrowers may not shop aggressively for the mortgage 

or may not monitor the lending transaction very closely. 

The potential for cost reductions in today’s market is also indicated by studies showing 

relatively high and highly variable charges for third-party services, particularly for title and 

closing services that account for the major portion of third-party fees. There is not enough 

incentive in today’s market for loan originators to control settlement costs by negotiating lower 

costs from third-party providers; rather, they too often simply pass through increases in thirdparty costs to consumers. Because of their lack of expertise, consumers may not be the best 

shoppers for third-party services providers, leaving them to rely on recommendations from real 

estate agents and lenders. Thus, increasing borrowers’ understanding of settlement costs would 

encourage competitive arrangements that would lead to lower third-party settlement prices. 

Current RESPA regulations are acting as a major barrier to competition and lower 

settlement costs. Today's mortgage market is increasingly characterized by the introduction of 

efficiency enhancing improvements such as automated underwriting systems and, through 

competition, these improvements are leading to lower prices for consumers. But the one area 

where efficiencies and competition are being held back is the production and pricing of 

settlement services. Under current law, average cost pricing (another cost reduction technique) 

is inhibited by existing RESPA regulations. 

GFE Example. As explained throughout this Regulatory Impact Analysis, the 

complexity of the origination process, combined with the fact that consumers have limited 

experience taking out mortgages, places a premium on having a process that is simple, easy to 

understand, and clear about the various mortgage options available to the consumer. The new 

 1-4 
GFE is an important step in that direction, and its many benefits are described in Chapter 3. 

Therefore, it is useful to briefly outline the benefits of the new GFE, in terms of the issues 

discussed above concerning (1) high origination costs and (2) high third-party fees. 

Under the new GFE, consumers will save $6.48 billion to $8.38 billion, or approximately 

10% to 13% of the $66.7 billion in total origination and settlement charges. The consumer 

savings comes from two sources: (1) lower origination costs due to improved consumer 

shopping; and (2) lower settlement fees due to lenders negotiating down third-party fees. 

(1) Sources of Savings: Lower Origination Costs. As noted above, studies indicate 

that some borrowers pay relatively high origination fees. In addition, there is evidence that many 

if not most consumers are poor shoppers for mortgages. For these reasons, the shopping benefits 

of the new GFE-- its simplified form and its guaranteed pricing concept -- should lead to reduced 

origination fees for a substantial number of borrowers. 

• The new GFE simplifies the process of comparing loan offers. Many categories of fees 

are combined into major categories of fees. 

• Thus, the new GFE does away with the proliferation of fees that borrowers are often 

charged in today’s market. 

• With the new GFE, yield spread premiums will directly offset the borrowers’ closing 

costs. The new GFE ensures that brokers explicitly disclose the full amount received for 

originating the loan and that borrowers receive the full credit towards closing costs for 

any yield spread premium. 

• The origination charge cannot change, that is, it is subject to zero tolerance. This will 

increase the certainty of the shopping process for borrowers. 

(2) Sources of Savings: Lower Third-Party Prices. As also noted above, there is 

substantial evidence that consumers pay high prices for third-party services, particularly for title 

and settlement services. All too often, high third-party costs are simply passed through to the 

consumers, with little effort by originators to negotiate lower prices for consumers. Thus, 

reductions in third-party fees are an important source of potential consumer savings under the 

final GFE. 

• The new GFE includes tolerances on third-party costs that will encourage originators to 

seek lower costs for third-party services. A better shopper -- the originator -- is 

substituted for the borrower as the searcher for third-party settlement services. 

• Originators and third party service providers would be allowed to use average cost 

pricing for third-party services, which would reduce their costs. 

Essentially, innovative vendor arrangements, average cost pricing, and a host of business 

techniques will be used to reduce high third-party fees to competitive levels. 

 1-5 
This example illustrates how the new GFE responds to the current problems with 

mortgage shopping. These benefits of the new GFE are detailed throughout this Regulatory 

Impact Analysis. 

III. Regulatory Impact Analysis and Regulatory Flexibility Analysis 

III.A. Requirement for an Regulatory Impact Analysis under E.O. 12866 

Under Executive Order 12866 (October 4, 1993), federal agencies are required to 

determine whether a regulatory action is economically “significant” and therefore subject to 

review by the Office of Management and Budget (OMB). The executive order defines an 

economically significant regulatory action as one that is likely to result in a rule that may have an 

annual effect on the economy of $100 million or more; it is estimated that this rule meets this 

threshold and thus qualifies as economically significant. 

The primary objectives of the executive order are to encourage the cost-effectiveness of 

regulatory actions and to make the regulatory process transparent to the public. Thus, an 

economic analysis of a regulation must provide adequate information indicating the need for and 

consequences of the action; a demonstration that the potential benefits to society of the rule 

justify the potential costs; a discussion and analysis of alternative actions; and evidence that 

agency decisions are based on the best reasonably obtainable information. 

Specifically, the executive order requires the rulemaking agency to provide the following 

additional information developed as part of the agency's decision-making process (unless 

prohibited by law): 

1. An assessment, including the underlying analysis, of benefits anticipated from the 

regulatory action (such as, but not limited to, the promotion of the efficient 

functioning of the economy and private markets,...) together with, to the extent 

feasible, a quantification of those benefits; 

2. An assessment, including the underlying analysis, of costs anticipated from the 

regulatory action (such as, but not limited to, the direct cost both to the 

government in administering the regulation and to businesses and others in 

complying with the regulation, and any adverse effects on the efficient 

functioning of the economy, private markets including productivity, employment, 

and competitiveness...), together with, to the extent feasible, a quantification of 

those costs; and 

3. An assessment, including the underlying analysis, of costs and benefits of 

potentially effective and reasonably feasible alternatives to the planned regulation, 

identified by the agencies or the public (including improving the current 

regulation and reasonably viable non-regulatory actions), and an explanation why 

the planned regulatory action is preferable to the identified potential alternatives. 

 1-6 
This document is provided to meet the requirements for a Regulatory Impact Analysis of 

the final rule under Executive Order 12866. Sections IV and V of Chapter 2 and Sections I and 

VII of Chapter 3 provide information indicating the need for the action. Chapters 3 and 6 

demonstrate the potential benefits to society of the rule and describe how the rule will promote 

the efficient functioning of the mortgage and settlement services markets (E.O. requirement 1 

above). Chapters 3 and 6 also discuss the costs of the rule including the costs to businesses and 

others in complying with the regulation (E.O. requirement 2). Alternative actions considered by 

HUD are described throughout chapters 3, 4, and 6 (E.O. requirement 3). Extensive 

documentation of sources of data and analysis are included in Chapters 2 and 5, and in Section 

VII.E of Chapter 3, to provide evidence that HUD’s decisions in establishing the final rule were 

based on the best reasonably obtainable information. 

III.B. Small Business Analysis Requirements under the Regulatory Flexibility Act (RFA) 

The Regulatory Flexibility Act (5 U.S. 603) requires a Final Regulatory Flexibility 

Analysis examining the effects on small businesses of major regulations. Each Final Regulatory 

Flexibility Analysis is required to contain: 

1. A description of the reasons why action by the agency is being considered. 

2. A succinct statement of the objectives of, and legal basis for, the final rule. 

3. A description of and, where feasible, an estimate of the number of small entities 

to which the final rule will apply. 

4. A description of the projected reporting, recordkeeping and other compliance 

requirements of the final rule, including an estimate of the classes of small entities 

which will be subject to the requirement and the type of professional skills 

necessary for preparation of the report or record. 

5. An identification, to the extent practicable, of all relevant Federal rules which 

may duplicate, overlap or conflict with the final rule. 

This Final Regulatory Flexibility Analysis accomplishes the above steps.

In addition to the requirements for a Regulatory Impact Analysis under E.O.12866, this 

document also meets the requirements of the Final Regulatory Flexibility Analysis (FRFA). The 

parts of this Regulatory Impact Analysis that satisfy the requirements of the FRFA are indicated 

here. As explained in Chapter 3, the final rule includes provisions that apply to small businesses 

such as brokers, small lenders, and small settlement service providers. Chapter 3 discusses: the 

reasons for and objectives of the rule (requirement 1 above); the significant issues raised in 

public comments on the 2008 proposed rule and on the IRFA of the 2008 proposed rule and 

HUD’s response to those comments (requirement 2); and the steps taken to minimize the 

significant economic impact on small entities in selecting the alternatives adopted and rejected in 

this final rule (requirement 5). Chapter 5 describes and estimates the number of small entities to 

which the rule will apply (requirement 3). Chapter 6 describes the projected reporting, 

recordkeeping, and other compliance requirements of the rule, the classes of small entities that 

 1-7 
will be subject to the requirement, and the types of professional skills necessary for preparation 

of the report or record (requirement 4). 

IV. Nature of the Economic Impacts 

Because the final rule calls for significant changes in the process of originating a 

mortgage, this Regulatory Impact Analysis identifies a wide range of benefits, costs, efficiencies, 

transfers, and market impacts. The first sections of Chapter 3 provide detailed summaries of the 

anticipated benefits and efficiencies from improved borrower shopping that will result from the 

rule. Improved borrower shopping using simplified forms will result in transfers from firms 

currently charging non-competitive prices to borrowers whose shopping ability has been 

enhanced by the new GFE. Ensuring that yield spread premiums are properly credited to 

borrowers in brokered transactions will cause transfers to borrowers, as it will be more difficult 

for brokers to be able to use yield spread premiums to charge high prices to borrowers. 

Similarly, increased competition associated with the new GFE could result in large reductions in 

settlement service costs, and associated income transfers from service providers who are earning 

“economic rents” in today’s system, to borrowers who would most likely be the ultimate 

beneficiaries of more competition among settlement service providers. As these examples 

suggest, entities that experience reductions in revenues under the final rule are usually those who 

are charging non-competitive prices, who are relatively high-cost producers, or who are 

benefiting from the current system’s restrictions on competition. As explained in Chapters 2-3, 

there is substantial evidence that some originators and settlement service providers are charging 

consumers non-competitive prices in today’s market. 

This Regulatory Impact Analysis not only identifies the numerous anticipated benefits of 

the GFE, it also quantifies the major ones, showing that there are large and significant financial 

benefits for consumers. Still, in some cases, it is difficult to quantify and provide precise 

estimates of these benefits. For example, it is difficult to quantify the extent to which the 

simplicity and user-friendliness of the new GFE will increase the market participation of certain 

low-income, minority, and immigrant families who in the past have not shopped for mortgages 

because of a “fear of the mortgage shopping process.” However, as is shown in Chapter 3, the 

fact that it is not always possible to report the exact size of the benefits of the rule does not 

undermine the desirability of the rule, as it is fairly convincing that the benefits of better 

disclosure, improved shopping, and increased competition among settlement service providers 

far outweigh any costs and negative effects associated with the rule. Chapter 3 provides 

estimates demonstrating the potential magnitude of the benefits3

 to consumers of this rule; the 

substantial estimates of consumer benefits obtained derive mainly from applying the effects of 

improved borrower shopping and a more competitive third party settlement service industry to 

the sheer magnitude of mortgage transactions that take place each year. Improvements to the 

mortgage origination process are important because of the substantial size of the mortgage 

market. 

Chapter 3, supported by analyses conducted in Chapter 5, estimates anticipated revenue 

impacts of the final rule on different industry segments. Analysis of revenue transfers is 

 

3

 The term “consumer benefits” includes savings realized by consumers from either transfers or efficiencies. 

 1-8 
particularly important given concerns about small business. The estimates reported in this 

Regulatory Impact Analysis of industry and small business revenue transfers are based on solid 

analytical techniques and the best available data. This Regulatory Impact Analysis pulls together 

substantial data from the Bureau of the Census and industry sources to provide estimates of 

revenue transfers for different industries and for small businesses within those industries. In 

some cases (e.g., determining the share of all lawyers who work on real estate settlements), the 

data are not as complete as desired; in these cases, the approach is to make reasonable 

assumptions based on the limited data that are available, and then conduct sensitivity analyses to 

gauge the effects of alternative assumptions on the transfer estimates. Chapter 5 provides a full 

technical review of the data used and the various methodologies for estimating the small business 

share of industry revenues. Chapter 3 includes the step-by-step process for estimating the 

consumer savings and industry revenue transfers, the distribution of revenue transfers among 

major industry sectors, and the small business share of each industry’s transfers. 

Chapter 3 also examines the anticipated effects of the final rule on the nature of the 

mortgage origination and settlement industry, and on the key actors (emphasizing small 

businesses) within that industry. It is not always easy to reach firm conclusions about the precise 

nature of future market changes resulting from this rule. Still, there is available information on 

which to draw some conclusions. The discussion in Chapter 3 examines likely market effects 

based on changes already taking place in the market, statements about anticipated outcomes by 

industry actors, and the past roles that the various industry sectors have played in the market. 

The discussion emphasizes factors that are likely to be important determinants of final outcomes. 

A number of possible market scenarios are examined which highlight the fact that there should 

be ample market opportunities in the more competitive environment associated with the new 

RESPA rule. While much of this analysis is justifiably based on basic tenets of competitive 

market behavior, it is also necessary to consider market changes in the context of less 

competitive conditions, such as uninformed consumers and subprime markets.4

Chapters 3, 4, and 6 include extensive analyses of alternatives considered with respect to 

the GFE. HUD received numerous comments on the 2002 and 2008 proposed rules, which led to 

many alternatives being considered. The chapters highlight the many changes that HUD made 

so that small firms could more easily implement the new GFE. 

V. Organization of the the Regulatory Impact Analysis 

Chapter 2 is a technical background chapter that supports the discussion of the economic 

effects of the rule in Chapter 3. Chapter 2 provides a brief overview of the mortgage market and 

several background analyses of topics related to the RESPA regulation. Important topics are 

discussed such as: major trends in the mortgage market over the past 15 years, with an emphasis 

on the growing origination share of brokers and the related growth of large wholesale lenders; 

the level of competition in the mortgage market; the complexity of the mortgage process; barriers 

 

4

 Few, if any, markets fully meet all the requirements for perfect competition. Competition, in practice, is a matter 

of degree. While mortgage markets exhibit many of the characteristics that promote competition; many borrowers, 

many originators, and ease of entry; some of the characteristics are missing, such as perfect information. A goal of 

this rule is to make the mortgage market more competitive. 

 1-9 
to consumer shopping; dispersion among mortgage prices and price discrimination (charging 

borrowers different prices) by lenders; and the growth of yield spread premiums, which have 

been increasingly used over the past few years (ideally, as a mechanism for reducing upfront 

closing costs). Chapter 2 addresses issues and questions that deal not only with yield spread 

premiums and origination fees charged by lenders but also with fees charged by third-party 

providers. Examples of questions addressed include: What are the main barriers hindering 

effective consumer shopping for home loans? How can consumers be charged high prices in a 

market characterized by over 40,000 brokers and lenders vigorously competing with each other? 

To what extent do consumers understand yield spread premiums and to what extent are yield 

spread premiums used to offset consumer settlement costs (versus increasing broker or lender 

compensation)? Are there potential gains from better shopping for third-party settlement 

services? Are title and settlement fees too high in some cases? Are small third-party firms 

disadvantaged by RESPA reform? Will any third-party cost savings be passed on to consumers 

or retained by lenders? These issues are discussed mainly in the context of the prime mortgage 

market. Mortgage pricing and other issues are then discussed with respect to the subprime 

market. 

Chapter 3 discusses the new Good Faith Estimate (GFE) and revised HUD-1 settlement 

statement, including improvements that have been made to the GFE and HUD-1 in the final rule. 

Chapter 3 explains in detail the new Good Faith Estimate including: the new GFE form; 

treatment of yield spread premiums and discount points; tolerances in settlement costs; average 

cost pricing; additional topics and alternatives related to the GFE; consumer benefits, market 

effects, and estimates of industry and small business transfers; and competitive impacts, with a 

focus on the market effects on small businesses. Section I of Chapter 3 provides a detailed 

summary of the chapter’s findings. The topics covered in Section I serve as a good overview of 

the entire chapter. They include: problems with the mortgage shopping process and the current 

GFE; components and benefits of the new GFE; alternatives considered to make the new GFE 

more workable for small businesses; estimates of consumers savings; lower origination fees as a 

source of consumer savings; lower settlement service fees as a source of consumer savings; 

summary of savings, transfers, efficiencies, and costs associated with the new GFE; and 

competitive and market impacts of the new GFE on small businesses (e.g., brokers, lenders, and 

title companies). The impacts of the new GFE on small businesses are highlighted throughout 

Chapter 3. The steps for estimating the consumer savings and the revenue transfers for small 

businesses are outlined in Chapter 3. 

Chapter 4 discusses major alternatives considered by HUD in developing the final rule 

from the 2008 proposed rule such as the clarification of volume discounts and removing the 

requirement for a settlement script to be read at closing. 

Chapter 5 supports Chapters 3 and 6 by providing basic data on each mortgage-related 

industry and by explaining the various methodologies for estimating the share of industry 

revenue accounted by the different component industries and by small businesses within each 

component industry. Chapter 5 presents an overview of the industries involved in the origination 

and settlement of mortgage loans: mortgage brokers, mortgage lenders, settlement and title 

services as well as other third-party settlement services. Industry trends are briefly summarized 

and special issues related to RESPA are noted. There is also a description of the economic 

statistics for each industry, with an emphasis on each industry’s share of small business activity. 

 1-10 
 1-11 

Both the estimation of the revenue share for various industry sub-sectors (e.g., large title 

insurers’ share of total revenue in the title and settlement industry) and the estimation of the 

small business share of mortgage-related revenue within the industry, often involve several 

technical analyses that pull together data from a variety of sources, in addition to Census Bureau 

data. This leads to several sensitivity analyses to show the effects of alternative estimation 

methods and assumptions. This chapter also reports the revenue transfers from the RESPA rule 

for the specific industry sectors; these transfers are reported in dollar terms and, where possible, 

as a percentage of industry revenue. Finally, a number of technical issues and special topics, 

such as techniques for estimating the number of commercial bank employees engaged in 

mortgage origination activities, are discussed. Chapter 5 provides extensive discussion on each 

of the following industries in turn: brokers; lenders, including commercial banks, thrift 

institutions, mortgage banks, and credit unions; title and settlement industry, including large title 

insurers, title and settlement agents, lawyers, and escrow firms; appraisers; surveyors; pest 

inspectors; credit bureaus; and real estate agents. A technical appendix provides relevant 

definitions and explains the methodology associated with the economic data obtained from the 

Census Bureau. A data appendix includes tables with the economic data (number of firms, 

employment, revenue, etc.) for each industry sector. 

Chapter 6 examines compliance and regulatory costs and demonstrates how this 

document meets the requirements of a Final Regulatory Flexibility Analysis under Section 604 

of the Regulatory Flexibility Act. The requirements of the flexibility analysis are listed along 

with references to the sections in this document where the requirements are covered. Chapter 6 

provides a complete summary of alternatives considered in the RESPA rulemaking process with 

specific references to the sections where the alternatives are fully discussed elsewhere in the text. 

Chapter 6 discusses comments received on the 2008 proposed rule dealing with compliance and 

regulatory burden and HUD’s responses to those comments. Chapter 6 also contains detailed 

discussions of regulatory burden and compliance costs for the new GFE. These include: onetime compliance costs that are only felt during the start-up period; recurring compliance costs; 

changes in the final rule that reduce regulatory burden; and compliance issues related to the 

tolerances on third-party settlement costs. 
Chapter 2 

OVERVIEW OF THE MORTGAGE ORIGINATION MARKET AND AN ANALYSIS 

OF SPECIAL RESPA-RELATED TOPICS 

I. Introduction ................................................................................................................................. 1 

I.A. Chapter Summary and Main Findings................................................................................. 2 

I.B. Chapter Organization........................................................................................................... 4 

II. Mortgage Market Volume.......................................................................................................... 5 

III. Developments and Main Actors in the Mortgage Origination Market..................................... 7 

III.A. Jacobides’ Paper................................................................................................................ 7 

III.B. Morgan Stanley Report and Technological Advances in Mortgage Lending................... 9 

III.C. Joint Center Study of the Evolving Financial Services System...................................... 11 

III.D. LaMalfa’s Reports on Wholesale Lending ..................................................................... 12 

III.E. Analysis of the Broker Industry ...................................................................................... 14 

IV. Information on Yield Spread Premiums and Consumer Shopping ........................................ 20 

IV.A. Definition and Role of Yield Spread Premiums ............................................................. 20 

IV.B. Concerns About Yield Spread Premiums ....................................................................... 21 

IV.C. Some Basic Facts About Yield Spread Premiums.......................................................... 23 

IV.D. Studies of Yield Spread Premiums and Shopping for Mortgages .................................. 25 

IV.E. A Study of Closing Costs for FHA Mortgages - Urban Institute (2008) ........................ 46 

V. Title and Settlement Services: Background Analysis and New Studies................................. 60 

V.A. Literature Review of Market Issues in the Title Industry ................................................ 63 

V.B. Title and Settlement Fees -- Can They Be Reduced?....................................................... 76 

V.C. Will Savings in Third-Party Costs Be Passed Through to Consumers?........................... 93 

VI. Subprime Market .................................................................................................................... 95 

VII. Comments by the NAMB Relating to Literature Review ................................................... 103 

I. Introduction 

This chapter provides an overview of the mortgage market and several background 

analyses of topics related to the RESPA regulation. In addition, it reports the results of recent 

empirical analyses of broker fees and title and settlement fees. Important topics are covered such 

as: the level of competition in the mortgage market; the complexity of the mortgage process; 

barriers to consumer shopping; dispersion among mortgage prices; price discrimination1

 by 

lenders; yield spread premiums, which have been increasingly used over the past few years as a 

mechanism for reducing upfront closing costs; and title and settlement closing fees. While much 

of the analysis in this chapter focuses on consumer and lender issues, there is also a discussion of 

several issues related to the market for third-party settlement services. 

 

1

 As explained in Section IV, price discrimination involves a provider charging different prices to different buyers. 

When different prices reflect different costs associated with different buyers, there is no breakdown in competition 

and efficiency. There is a breakdown in competition when the price differences do not reflect cost differences. 

 2-1
This chapter addresses issues such as: What are the main barriers hindering effective 

consumer shopping for home loans? How can consumers be overcharged in a market 

characterized by over 40,000 brokers and lenders vigorously competing with each other? To 

what extent do consumers understand yield spread premiums and to what extent are yield spread 

premiums used to offset consumer settlement costs (versus increasing broker or lender 

compensation)? How much do title and settlement fees vary? Are there potential gains from 

better shopping for third-party settlement services? Will any third-party cost savings from 

RESPA reform be passed on to consumers or retained by lenders? 

Note: This chapter includes new empirical analyses of both broker and title fees. The chapter 

also includes an academic review of market conditions in the title industry as well as first-ever 

analyses of title costs from a large sample of HUD-1 closing statements. This material therefore 

complements recent work on the title industry by the GAO and others.

I.A. Chapter Summary and Main Findings 

This chapter first reviews the growth of the market mortgage market, noting the overall 

efficiency and competitive nature of today's mortgage market. There are more than 40,000 

brokers and lenders competing to offer consumers loans in this market. Even among the socalled "mega" wholesale lenders there is vigorous price competition driven by the desire for 

market share. This discussion suggests that, in general, the nation's mortgage market is efficient 

and competitive. Combined with the growth in the secondary market, technological 

improvements and other advances in the primary origination market have allowed homeowners 

to quickly obtain financing at reasonable interest rates that reflect the unique risks (e.g., credit 

and prepayment risk) of mortgages relative to benchmark Treasury securities. The ability of the 

mortgage market to deliver was readily apparent during 2002-2004, which were record years of 

refinancing. 

But the chapter emphasizes that this does not mean that everyone has ready access to 

mortgage credit or that all aspects of the mortgage market operate in an efficient and costminimizing manner. There are two convincing conclusions: (1) borrowers can find it difficult to 

comparison shop in today's mortgage market; and (2) borrowers are often overcharged in today's 

mortgage market. The chapter summarizes evidence on overcharging, price dispersion, and 

problems that consumers face shopping in today's mortgage market. 

Evidence of Overcharging. Until recently, there have been few statistical studies of 

overcharging in the mortgage market. However, recent studies arising from court cases 

involving yield spread premiums and from analysis of FHA data have empirically documented 

overcharging of borrowers and, in general, a wide dispersion in mortgage fees. The chapter 

reviews these studies as well as more limited anecdotal and industry analyses that have looked at 

overcharging in the mortgage market. Together, these analyses provide the most convincing 

evidence to date that some consumers are overcharged in today's mortgage market. The three 

main findings are: 

• Studies show that some consumers are overcharged in transactions involving yield 

spread premiums. The yield-spread premium that a borrower pays (through a higher 

 2-2
interest rate) is not always used to fully offset that borrower's closing costs. Or stated 

differently, brokers receive more compensation in transactions involving yield spread 

premiums than they receive in other transactions (all other things equal). 

• The chapter also finds that the mortgage market is characterized by "price 

dispersion", that is, originators charge consumers different prices (fees, yield spread 

premiums, etc.). There is also evidence that originators make varying levels of profits 

on their loans. Findings of overcharging and price dispersion, combined with 

characteristics of the mortgage shopping process (see below), suggest that originators 

engage in "price discrimination" among borrowers: charging certain types of 

borrowers (less sophisticated or less informed) more than other types of borrowers 

(more sophisticated or more informed). 

• The chapter summarizes findings on title and settlement fees from analyses by the 

Urban Institute of a large data base on FHA closed loans. The Urban Institute finds 

there is substantial variation in title and settlement fees even after controlling for loan 

amount. Other studies, such as the recent one by the GAO, finds that the title 

industry is non-competitive. 

Consumer Shopping for Mortgages. In all, there are several features of the mortgage 

market that make overcharging possible. The evidence suggests the following with respect to 

why consumers are poor shoppers for mortgages and why they are overcharged in today's 

mortgage market: 

• Consumers are in general not familiar with the complicated real estate and mortgage 

settlement process. Many consumers deal only infrequently with the mortgage 

process. Many borrowers do not take the time to educate themselves on this 

inherently complex process. 

• While most consumers shop extensively, there is evidence that a substantial minority 

contact only one lender. There is also evidence that those who do little shopping end 

up paying more. 

• The complex, multi-faceted nature of real estate settlement transactions further 

complicates the operation of market forces. The real estate transaction itself (i.e., the 

home purchase) represents a huge sum of money and will appear more significant to 

the consumer than any one of the many settlement services. In other words, 

consumers might focus on the home purchase, rather than closely monitoring the 

"second-order" mortgage costs. 

• One specific area where consumers may become confused concerns the various 

financial trade-offs among mortgages. Distinguishing the present value differences 

between a "par-value" loan with a lower interest rate and an "above par" loan with a 

higher interest rate can be a daunting task. There is more opportunity for originators 

to take advantage of borrowers in cases where a mortgage involves complicated 

financing techniques such as yield spread premiums. 

 2-3
To summarize, the chapter finds that there are many barriers to effective shopping for 

mortgages. The process can be complex and can involve rather complicated financial trade-offs, 

which are often not fully and clearly explained to borrowers. Less informed and unsuspecting 

borrowers are particularly vulnerable in this market. But given the fact that a borrower may be 

more interested in the main transaction (the home purchase), even more sophisticated borrowers 

may not shop aggressively for the mortgage or may not monitor the transaction very closely. 

Price dispersion and price discrimination characterize the mortgage market, which is surprising 

given that there are more than 40,000 brokers and lenders supplying mortgages in this market 

(suggesting that a competitive market outcome should be obtained). Most observers believe that 

the market breakdown occurs in the relationship between the consumer and the loan originator -- 

the ability of the loan originator to price discriminate among different types of consumers leads 

to some paying more than others, and to excessive fees being charged to originate a loan. 

Consumer Shopping for Third-Party Services. The chapter also finds that consumers 

may not be the best shoppers of third-party providers. In addition to the lack of consumer 

expertise, there are other problems with today's methods for delivering third-party services. 

Consumers may directly shop for settlement services or may rely on recommendations from the 

real estate broker (in the case of a home purchase) or the broker/lender (in the case of a refinance 

as well as a home purchase). One concern is that there may not be any incentive for the referring 

party (e.g., the loan originator) to direct the consumer to the lowest cost provider, and because 

settlement services may be a secondary consideration to the consumer (rather than the primary 

one of buying a home), the consumer may not closely monitor settlement costs, much less 

engage in some intensive search for them. 

Title and Settlement Fees. The chapter reviews evidence on the potential for reducing 

third-party fees, particularly title and settlement fees. In general, anecdotal evidence and 

statistical evidence suggest that the title and settlement industry is characterized by a wide 

variability of prices and that there is much potential for reducing title and settlement fees in 

today’s market. As noted above, recent work by the Urban Institute has highlighted the 

substantial variation in title fees even for similar loan amounts. There appears to be no 

reasonable explanation for such wide distributions of title charges. Consistent with the data 

analyses, industry studies also highlight the non-competitive conditions in the title industry. At 

the same time, court cases and investigations by HUD and State Attorney Generals point to an 

industry characterized by consumer abuse. 

The chapter also examines several other topics related to the proposed new GFE. For 

example, there is substantial evidence that competition among originators will ensure that any 

cost reductions under RESPA reform will be passed through to consumers, rather than retained 

by lenders. 

I.B. Chapter Organization 

The chapter is organized as follows. Mortgage origination trends are examined in 

Section II. The industry has shown a remarkable ability to handle substantial numbers of 

mortgage transactions over the past few years. Section III summarizes major developments in 

the mortgage market and highlights the role of key industry actors (such as brokers and 

 2-4
wholesale lenders). Section IV reviews several studies that address issues related to the process 

of obtaining a mortgage; the issues and topics discussed are those listed in the above paragraph 

(e.g., yield spread premiums). Section V examines shopping and other issues related to the 

market for third-party settlement providers with a particular focus on title and settlement fees. 

New data on title and settlement fees are presented. Section IV and V provide new studies on 

YSPs and title fees by the Urban Institute. Section VI summaries the recent growth of the 

subprime market, where concerns about shopping and pricing are more serious than in the prime 

market. Section VII summarizes criticisms by the National Association of Mortgage Brokers of 

the literature review in the RIA of the 2008 proposed rule as well as responses by HUD. 

II. Mortgage Market Volume 

This rule will impact each mortgage transaction, including applications (which are the 

basis for a Good Faith Estimate) as well as originations (which are the basis for a HUD-1). The 

following data indicate the volume of business that will be impacted by the rule. 

Single-family mortgage originations doubled during the 1990s, rising from $458 billion 

in 1990 to $1,048 billion in 2000, then doubling during the refinancing wave of 2001 to $2,215 

billion, before rising further during the continued refinancing waves of 2002 and 2003 to $2,885 

billion and $3,945 billion, respectively. According to OFHEO, originations were approximately 

$3 trillion during 2004 ($2,920 billion), 2005 ($3,120 billion) and 2006 ($$2,980 billion).2

 

Originations are highest during years of refinancing; for example, the refinance share was onehalf or more during the origination years of 2001 (57 percent), 2002 (59 percent), and 2003 (70 

percent). In their March 2007 forecasts, Freddie Mac, Fannie Mae, and the Mortgage Bankers 

Association of America projected a normal home purchase environment during 2008, as the 

average projected mortgage origination volume (over the three organizations) was almost $2.4 

trillion. This serves as the basis for the baseline projection of $2,400 billion used in this 

economic analysis3

. The analyses of consumer savings in Chapters 3 and 4 will examine 

alternative, higher-volume projections. 

In terms of number of transactions, mortgage volume increased from over 7 million 

single-family loans in 1997 to 8-9 million in 2000 before jumping to 15-17 million in 2001-02 

and over 24 million in 2003. Loan origination transactions then dropped to approximately 15-16 

million during 2004and 2005. There is a slight decrease in 2006 to approximately 14 million 

transactions. The 2007 HMDA count shows a drop to 10 million. However, this figure is 

certainly an undercount as many of the subprime originators that went out of business would not 

have reported.

 

2

 Mortgage origination estimates do vary. For example, Freddie Mac estimated $2.9 trillion in 2004, $3.3 trillion in 

2005, and $3.0 trillion in 2006; Fannie Mae estimated $2.8, $3.0, and $2.5 trillion, respectively; and the Mortgage 

Bankers Association of America (MBAA) estimated $2.6, $3.0, and $2.5 trillion, respectively. The average 2004-

2006 origination estimates of these three organizations were $2,762 billion in 2004, $3,088 billion in 2005, and 

$2,671 billion in 2006. 

3

 The term “Economic Analysis” is used throughout this document to refer to the Regulatory Impact Analysis amd 

Initial Regulatory Flexibility Analysis together. 

 2-5
While the above data focuses on mortgages that are actually originated, it is also 

important to look at loan applications, as a Good Faith Estimate is required for each loan 

application. Unfortunately, the industry sources that provided the origination data do not provide 

corresponding estimates of mortgage applications. To obtain application data, one must rely on 

data reported by lenders under the requirements of the Home Mortgage Disclosure Act (HMDA). 

While HMDA data underreport overall mortgage volume,4 the data can be used to show the 

relationship between applications and originations. Table 2.1 reports application and origination 

data as reported by lenders under HMDA. In 2000, for example, lenders reported $1,455 billion 

in mortgage applications, compared with $861 billion in originations, for a dollar-based 

applications-to-originations ratio of 1.69. Over the 1997-2005 period, the dollar-based 

applications-to-originations ratio averaged 1.61 while the transactions-based applications-tooriginations ratio averaged 1.70. These ratios can be applied to the industry origination 

estimates. If the rule were in effect during the year 2008 and if mortgage originations were equal 

to the $2,400 billion projection (the average projection of Freddie Mac, Fannie Mae, and the 

MBAA), then the rule would impact $3.9 billion in applications (covering 21,250,000 loans) and 

$2,400 billion in originations (covering 12,500,000 loans).5

 This number of loans is somewhat 

higher than the number of mortgages used in the 2002 Economic Analysis (11,111,111). 

Assuming a loan volume of $2,400 billion instead of $1,700 billion, and using an average loan 

amount of $192,000 instead of $153,000, the number of loans is 12,500,00 instead of 

11,111,111. Thus, this economic analysis uses a higher number of projected loans in its baseline 

than the earlier 2002 economic analysis. As noted above, the $2,400 billion projection used here 

is consistent with those estimates that project a return to a more normal “home purchase” 

environment. Of course, the number of loans and applications would be much larger in a 

refinancing environment. Sensitivity analyses in Chapters 3 and 4 will show the effects on 

projected consumer savings of larger volumes of mortgage activity. 

The application figures reported above are based on data that lenders report to HMDA. 

There are rules governing the conditions under which lenders are to report loans as formal 

applications under HMDA. These HMDA-reported applications, of course, do not include either 

“pre-qualifications” or simple “inquiries” (e.g., when a consumer calls several lenders to obtain 

current rates and points and projected settlement costs). Chapters 3 and 4 discuss several issues 

related to defining an application, particularly the distinction between a “shopping application” 

and an application that would be reported to HMDA (e.g., a written application after a potential 

borrower accepts a lender’s Good Faith Estimate or Mortgage Package Offer). An important 

 

4

 HMDA’s underestimation of mortgage originations can be seen by comparing industry origination estimates with 

HMDA data. For example, industry estimates place year 2005 mortgage volume at $3,120 (based on OFHEO, see 

text) or $3,088 billion (based on averaging estimates by Freddie Mac, Fannie Mae, and the MBAA, as explained in 

previous footnote). HMDA places 2005 originations at $2,715 billion, or 87-88% of industry origination estimates. 

For a discussion of the reasons (e.g., certain small lenders are not required to report, loans in non-metropolitan are 

not fully reported, etc.) for HMDA’s under coverage of mortgage originations, see Randall M. Scheessele, HMDA 

Coverage of the Mortgage Market, Working Paper No. HF-009, Office of Policy Development and Researcxh, U.S. 

Department of Housing and urban Development, 1998. 

5

 In 2005, the average loan amount based on HMDA data was $187,000; to obtain an estimate for 2008, this 2005 

HMDA number was increased to $192,000 based on the projected percentage growth in median house prices from 

2005 to 2008. Dividing the $2,400 billion origination projection by the $192,000 average loan amount produces the 

projected number of loans --12,500,000. 

 2-6
issue concerns whether there will be an increase in the number of “shopping applications” 

(which are similar to “pre-qualifications” in today’s market) and HMDA-reported applications as 

a result of the changes in this rule. Under this rule, the Good Faith Estimate (GFE) and the 

Mortgage Package Offer (MPO) will be better shopping documents, so one would expect an 

increase in borrower shopping as well as a more efficient borrower shopping process. The 

implications of this for the number of shopping applications and HMDA-reported applications 

are discussed in Chapters 3 and 4. 

III. Developments and Main Actors in the Mortgage Origination Market 

This section summarizes developments overt the past 10-15 years in the mortgage 

origination market, focusing on the major actors such as brokers. The discussion is primarily 

derived from five papers: 

A. Michael G. Jacobides, “Mortgage Banking Unbundling: Structure, Automation, 

and Profit,” Mortgage Banking, January 2001, pages 28-40. 

B. Morgan Stanley, “U.S. Mortgage Finance: The American Dream Industry, 2002-

2020,” (An industry analysis written by Kenneth A. Posner and Mita Nambiar), 

February 5, 2002. 

C. Joint Center for Housing Studies, Harvard University, The 25th Anniversary of the 

Community Reinvestment Act: Access to Capital in an Evolving Financial 

Services System, March 2002. 

D. Tom LaMalfa, “Who’s Who in Wholesale 2005” Mortgage Banking, August 

2006, pp. 74-83; Tom LaMalfa, “Who’s Who in Wholesale 2004” Mortgage 

Banking, June 2005, pp. 49-59; Tom LaMalfa, “Who’s Who in Wholesale 2001” 

Mortgage Banking, February 2002, pp. 48-59. 

E. Wholesale Access. “Mortgage Brokers 2004”, July 2005. 

Related research by others is also included in the discussion of these papers. 

III.A. Jacobides’ Paper 

Jacobides documents the so-called “unbundling” of mortgage lending over the past 15 

years. During the 1980s and 1990s, mortgage lending has evolved from the traditional portfolio 

lender model where single companies (bank and thrift depositories) performed all steps in the 

mortgage process -- making, closing, funding, servicing, and holding the loan – to a new 

atomized, more specialized industry of originators, funding lenders, warehouse lenders, separate 

secondary market buyers of loans, and servicers. A major driving force behind this unbundling 

of the mortgage functions was the rise and eventual dominance of mortgage securitization (led 

by Ginnie Mae, Fannie Mae, and Freddie Mac), which separated the provision of capital from 

loan origination and servicing. Increasing technical sophistication and information technology 

were also important factors in the restructuring of the mortgage finance system and the rise of 

 2-7
mortgage securitization. Jacobides also notes that the traditional mortgage banking function 

(defined by independent mortgage bankers that sell their originations in the secondary market but 

retain servicing) has recently also been disintegrating into component service industries, 

highlighted by the birth of the mortgage brokerage function and the corresponding development 

of the wholesale segment:6

“Now front-end loan origination is increasingly in the hands of mortgage brokers 

rather than mortgage bankers;.....specialized subservicers and focused wholesalers 

now mediate activities that used to be internalized within firms’ 

boundaries.......Mortgage origination, in particular, has seen significant 

change....Mortgage brokers, for instance, who hardly existed before 1980, reportedly 

increased their origination volumes to as much as 65 percent of total originations over 

a few year’s time span. Some mortgage bankers have shed their origination branch 

networks and have instead focused on wholesaling loans or restricted themselves to 

building networks of correspondent lenders. Still other mortgage banks focused on 

servicing...” (Jacobides, page 30) 

As a result of the unbundling trend, the mortgage production process takes place in three 

different channels. LaMalfa (2006) estimates that in 2005 (2004), the retail channel accounted 

for 43 percent (43 percent) of total originations, the correspondent channel, 26 percent (27 

percent), and the brokerage channel, 31 percent (30 percent).7

 LaMalfa (2001) notes that during 

the 1990s, each production channel accounted for approximately one-third of total production. 

LaMalfa’s findings with respect to these mortgage production channels and the rise of wholesale 

lending will be discussed below in subsection III.C. LaMalfa’s finding that the brokerage 

channel accounted for about one-third of mortgage production during the 1990s, versus other 

estimates that brokers account for about 60 percent of mortgage originations, will be discussed 

below in both subsections III.C and III.D. 

Mortgage Channel. As shown below, in recent years there has not been a dramatic shift 

in production channels, with just a slight decline in loans originated through retail channels. The 

share of loans produced through retail channels has declined from 41.3 percent in 2004 to 37.9 

percent in 2006. The broker channel also declined slightly over this period from 30.9 percent to 

29.5 percent, with the gains made up in the correspondent channel, which rose from 27.5 percent 

to 32.9 percent. 

 

6

 Jacobides notes that the wholesale segment, which in 1989 accounted for 19 percent of all originations, reached 37 

percent in 1993 and then stood at around 32-43 percent during the remainder of the 1990s. 

7

 See Section III.D below for further discussion of the three channels of mortgage origination. As explained there, 

the correspondent channel includes loans sold to wholesale lenders by closed-end loan sellers, who are originators 

that fund mortgages (e.g., with a warehouse line of credit) prior to selling them to wholesale lenders. The brokerage 

channel includes loans from originators who do not fund loans using lines of credit, but rather close loans through 

either table funding or concurrent funding arrangements (defined in Section III.D). The retail channel includes loans 

originated through the retail outlets of banks, thrifts, and mortgage banks and are not sold to wholesale lenders (of 

course, wholesale lenders can originate loans on a retail basis, as well as purchase them from brokers and loan 

correspondents). 

 2-8
Originations by Production Channel 

A. Dollars (in Billions) 

WHOLESALE 

RETAIL Broker Correspondent 

TOTAL 

Production 

2002 $1,161 $887 $786 $2,885 

2003 $1,622 $1,104 $1,185 $3,945 

2004 $1,206 $903 $802 $2,920 

2005 $1,224 $976 $920 $3,120 

2006 $1,130 $880 $980 $2,980 

B. Percentage shares 

WHOLESALE 

RETAIL Broker Correspondent 

TOTAL 

Production 

2002 40.2% 30.7% 27.2% 100% 

2003 41.1% 28.0% 30.0% 100% 

2004 41.3% 30.9% 27.5% 100% 

2005 39.2% 31.3% 29.5% 100% 

2006 37.9% 29.5% 32.9% 100% 

Source: Inside Mortgage Finance, 2007 Mortgage Market Statistical Annual. 

III.B. Morgan Stanley Report and Technological Advances in Mortgage Lending 

Morgan Stanley examined changes in the origination market, as a basis for making 

market projections over the next few years. Morgan Stanley echoed several of Jacobides’ points. 

Some of main findings from the Morgan Stanley analysis are summarized below. This section 

also summarizes trends in technology affecting the mortgage origination process. 

Morgan Stanley concludes that the prime mortgage market is highly competitive and 

efficient, and that brokers are an important reason for this. The report notes that “tens of 

thousands of independent brokers” have competed away business from traditional (small and 

medium-sized) banks and thrifts, and Morgan Stanley does not foresee any reversal in this trend. 

According to Morgan Stanley, brokers are not hampered by high fixed costs (due to maintaining 

a large in-house sales force, for example) and are flexible enough to respond to the extreme 

cyclicality of the mortgage origination function. In other words, it appears that brokers can 

originate loans more economically than heavily staffed lenders -- brokers also have more 

flexibility to increase and decrease staff than lenders. This was demonstrated in 2001, when 

brokers doubled their originations in response to the substantial increase in refinancing activity. 

Morgan Stanley says there is little evidence of economies of scale in mortgage origination and 

cites evidence that brokers are more efficient originators than mid-size and large lenders. 

The Morgan Stanley report emphasizes that technology and automated underwriting 

systems are making big changes in the mortgage industry in areas such as servicing, pricing, 

connectivity, and unit costs. Brokers are increasing using technology supplied by lenders and the 

GSEs when submitting loans for electronic approval. Morgan Stanley also concludes that the 

 2-9
spread of automated underwriting and “open architecture” systems (allowing brokers to quickly 

qualify applicants and obtain prices from several lenders) should further improve brokers’ price 

sensitivity and competitive position (also see discussion below of Forrester report and of the 

GSEs’ automated underwriting systems). 

Morgan Stanley notes that despite the trend toward dis-integration, there has been a rise 

in a handful of “mega” wholesale lenders with efficient business processes and low costs. These 

lenders -- such as Countrywide, Wells Fargo, Chase Manhattan, and Washington Mutual -- have 

been a byproduct of the consolidation process in the banking and thrift industries. They serve as 

wholesale lenders purchasing loans from brokers and correspondents as well as operating their 

own retail operations. Brokers and correspondents allow these large wholesalers to expand their 

sales force in a low-cost way and to enter markets that they otherwise would not find profitable. 

According to Morgan Stanley, the market share of the top 15 retail lenders more than doubled 

from 27 percent to 56 percent between 1994 and 2000; the share of top 15 wholesale lenders 

purchasing loans from brokers and correspondents exhibited a similar increase since 1994. 

Morgan Stanley concludes that this industry concentration will improve competitive rivalry in 

the origination and wholesale processes, as episodes of irrational pricing will be less frequent. 

The concentration of the mortgage lending industry has continued since Morgan Stanley 

completed their analysis. Inside Mortgage Finance (January 24, 2003) reports that the top five 

originators boosted their share of the mortgage market from 38 percent in 2001 to 47 percent in 

2002. The top 25 as a group increased their market share from 71 to 79 percent during the same 

one-year period.8

 (LaMalfa’s comments on these patterns are discussed below.) 

Technology in Mortgage Lending. With respect to overall competition in the prime 

mortgage market, Morgan Stanley echoes the comments of Jacobides, who said that intense 

competition has reduced mortgage fees by almost 40 percent in recent years. Morgan Stanley 

sees advances in technology continuing the trend toward lower origination costs. Given the 

commodity-like nature of mortgages and the price sensitivity of consumers, Morgan Stanley sees 

the cost savings from technology advances being quickly passed through to consumers, with 

little increase in lenders’ profit margins. 

With respect to the impact of technology advances on small lenders and brokers, a report 

by Forrester Research, Inc. entitled “Resuscitating Mortgage Lending” echoes many of the 

sentiments of the Morgan Stanley report.9

 The Forrester report, based on interviews with lenders, 

states that the benefits of the automated underwriting (AU) systems deployed by the GSEs and 

third-party vendors have accrued mainly to smaller lenders and brokers. The fact that the GSEs’ 

systems go directly to brokers means that brokers do not have to rely on the AU systems of large 

lenders. The GSE systems enable brokers to make fast decisions (without collecting a lot of 

paperwork or committing to a specific lender), to shop their GSE-accepted mortgages among 

lenders for the best deal, and to accomplish all this without having to make a large investment in 

technology infrastructure. Even on important issues such as credit risk, brokers can often rely on 

 

8

 According to Inside Mortgage Finance (January 24, 2003), the share of the top five (25) originators was only 28 

percent (54 percent) in 1998. 

9

 Forrester Research, Inc., Resuscitating Mortgage Lending, May 2001. 

 2-10
the GSE and private mortgage insurance automated systems, without having to be tied down to 

specific rules of large lenders. 

Jacobides also says that the GSEs’ new underwriting tools “would enable smaller lenders 

to compete more easily with larger ones” (p. 120).10 Point-of-sale systems allow brokers to get 

an approval from the GSEs’ systems and then shop the loan among different wholesalers for the 

best rate. Jacobides also notes that internet connectivity has allowed brokers to link with lenders 

(without the need for specialized software), making disaggregated production even more 

attractive. Any broker can prepare a loan and then hook up with a lender to do comparisonshopping. Jacabodies says brokers are reaching more consumers from Internet inquiries and 

reaping productivity benefits such as elimination of price fax sheets and faster approval and rate 

lock communication.11 

Trends in Automated Underwriting. The trade publication Inside Mortgage 

Technology surveyed mortgage lenders with respect to their use of automated underwriting 

(AU).12 Key results included: 

• Most lenders surveyed said their top objective is to have the ability to change the 

rules they write into the AU system on a real-time basis to accommodate the everchanging underwriting guidelines. 

• Of the lenders that responded to the survey, only 27% said their AU system currently 

provides some form of connectivity to third-party service providers. 

• One third of respondents said they plan to upgrade or switch to a different AU system 

in the next 24 months because they want to have more flexibility or better features. 

• A key reason for switching AU systems is to improve connectivity with third-party 

service providers such as appraisers. 

III.C. Joint Center Study of the Evolving Financial Services System 

A study of HMDA data by the Joint Center also focuses on trends in the mortgage 

origination market, particularly the rise of large banking organizations. The study identified a 

number of key features and trends of the mortgage market including: 

• As state and federal restrictions on intrastate banking were eliminated in the 1980s 

and 1990s, commercial banks were able to expand beyond their previous boundaries, 

often through mergers and acquisitions. Many of the functions of mortgage lending, 

 

10 Michael G. Jacobides, “Technology With A Vengeance: The New Economics of Mortgaging,” Mortgage 

Banking, October, 2001, pp. 119-131. 

11 Jacobides does say that there is a potential that traditional retail banks could now use the internet to reach out 

directly and capture brokers’ customers. 

12 “Lenders Want AU Flexibility, More Features”, Inside Mortgage Technology, June 16, 2003, page 1. 

 2-11
such as marketing, account management, and servicing, involve high fixed costs and 

benefit from consolidation, to allow costs to be spread across a larger customer base. 

• Technology advances allowing loan applications to occur by phone, fax, and internet, 

and the growing use of electronic loan processing and underwriting make centralized 

operations more feasible. At the same time, the high fixed costs for such technology 

encourage consolidated operations, to spread the costs over more customers. 

• The front-end part of the mortgage process still requires a local presence, and benefits 

less from economies of scale. As a result, mortgage brokers, working on a fee-forservice basis, have become a larger part of the industry to handle the front end of the 

process on the local level. 

• As a result of these influences, mortgage lending has become substantially more 

consolidated. In 1993 only 4 lenders made more than 50,000 conventional home 

purchase loans a year, comprising 11 percent of such loan originations. By 2000, 12 

lenders made that many loans, and they accounted for 39 percent of the market. By 

contrast, while the number of lenders making fewer than 5,000 home purchase loans a 

year fell only slightly from 6,083 in 1993 and 5,944 in 2000, their share of loans fell 

from 46.7 percent to 29 percent. 

• While this consolidation was driven primarily by large banking institutions, which 

accounted for 78 percent of the total increase in home purchase loans between 1993 

and 2000, two independent mortgage and finance companies, Countrywide Home 

Loans and Cendant Mortgage, also made more than 50,000 home purchase loans in 

2000. Many other independent mortgage banking firms merged with, or were 

acquired by large banking firms. 

The Joint Center viewed these large lenders as competing in a highly competitive 

environment. They stated that these trends will persist with continued technological change and 

that low marginal costs will spur competition “as large firms seek to identify and exploit 

competitive advantage in their pursuit of customers in an increasingly competitive marketplace.” 

(page 17) 

III.D. LaMalfa’s Reports on Wholesale Lending 

Basic Facts, Consolidation, and Competitive Nature of the Wholesale Market. Tom 

LaMalfa has published two recent articles that best characterize trends in wholesale lending, as 

well as some issues related to brokers. (See LaMalfa, 2005, 2006.) LaMalfa’s results are based 

on a survey of wholesale lenders that his firm (Wholesale Access) has been conducting for 14 

years. The 28 surveyed firms accounted for 68 percent of total mortgage originations during 

2005. LaMalfa makes several interesting comments with respect to the market role of wholesale 

lenders: 

• With respect to the consolidation trends noted earlier, LaMalfa notes that the 

mortgage banking ranks have been thinning for two decades, as each year there are 

 2-12
fewer firms and they are bigger. With respect to wholesale lenders, in particular, 

LaMalfa reports that significant regional and national wholesalers have dwindled as 

over 100 firms since 1994 have merged, been acquired or closed. He notes while 

economies of scale or scope can be found in certain functions -- servicing, secondary 

marketing or specific production channels (such as correspondent lending) -- the 

driving force for consolidation is uncertain. He notes that textbook economies of 

scale (increased production per firm leads to lower average cost) have not yet been 

accomplished in mortgage production. 

• In 2005, the top nine wholesale lenders were Countrywide Financial Corp, Wells 

Fargo Home Mortgage, Washington Mutual, Chase Home Finance, CitiMortgage, 

Aurora Loan Services, Greenpoint Mortgage Funding, ABN AMRO Mortgage 

Group, and Indymac Bank. 

• LaMalfa emphasizes the competitive nature of the wholesale lender industry. He 

notes: “since 1994, more than 100 wholesalers have merged, been acquired or closed 

up shop. This high mortality rate reflects the perfectly competitive nature of the 

origination industry serving the primary market.” (LaMalfa, 2002, p.51) He further 

notes, “Today’s giants leapfrogged their way to size through acquisitions and 

mergers. However--and let us underscore this point--market “dominance” is not 

market power, in the sense of pricing power, of which a perfectly competitive market 

like mortgage banking has none.” (LaMalfa, 2002, p.58). LaMalfa also notes the thin 

profit margins found in the mortgage origination business. 

• LaMalfa believes that the rapid expansion of wholesaling that has occurred over the 

past decade is over, and that purchased production (i.e., wholesalers’ mortgage 

purchases from correspondents and brokers) will move with overall mortgage 

volume. 

Section V below compares findings of LaMalfa with several commenters who reached 

different conclusions concerning the competitiveness of the mortgage lender market. 

Broker Versus Correspondent. LaMalfa (2006) provides a detailed discussion of the 

different channels through which mortgages are produced. He estimates that in 2005, the retail 

channel accounted for 43 percent of total originations, the correspondent channel, 26 percent, 

and the brokerage channel, 31 percent. When discussing these channels, LaMalfa makes two 

distinctions that are important for understanding the concept of brokers and correspondents. 

First, LaMalfa (2006) distinguishes between the correspondent and brokerage channels. 

Correspondents are closed-loan sellers; they fund their obligations by drawing down funds from 

warehouse lines they establish and maintain with creditors. Brokers, on the other hand, are 

originators without warehouse lines of credit; they close their loans through either (a) table 

funding or (b) concurrent funding arrangements. In both cases, the wholesale lender funds the 

loan at closing. The difference between (a) and (b) depends on whose name is on the mortgage 

and who handles closing. In the case of (b), concurrent funding, the wholesale lender’s name is 

on the loan rather than the broker’s and the lender, not the broker, handles closing. In the case of 

 2-13
(a), table funding, the broker’s name is on the loan and the broker handles closing. It should be 

noted that LaMalfa’s definition of brokers follows the HUD definition of brokers. 

Second, LaMalfa (2006) distinguishes between (a) his more narrow definition of brokers 

(described above) and brokers as they are usually defined. The need for an explanation is 

highlighted by the following seemingly conflicting pieces of data -- LaMalfa (2006) reports that 

the brokerage channel accounts for 31 percent of mortgage production while others (including 

LaMalfa and David Olson, as described below) report that “brokers” account for over 60 percent 

of mortgage originations. In discussing this issue, LaMalfa notes that: 

“Do not conclude...that overall broker market share was 31 percent in 2005. 

Unfortunately, broker originations leak into both the correspondent and retail 

channels, but especially correspondent, where Wholesale Access estimates that more 

than half of correspondent volume actually comes originally from brokers. In retail, 

we estimate that one-quarter of applications are broker-driven meaning a loan officer 

at a brokerage took the loan application from the borrower.” (LaMalfa, 2006, p. 82). 

The specific definition of “brokers” that is used as the basis for the 68 percent figure is 

discussed in the next subsection. 

III.E. Analysis of the Broker Industry 

The most complete information on the characteristics of mortgage brokers and the rise of 

this sector during the 1990s comes from Wholesale Access, who has conducted several surveys 

of the brokerage industry.13 This review of Wholesale Access’ work first explains how they 

define a broker and then presents some of their main findings. 

Wholesale Access’ Definition of a Broker. Wholesale Access defined a broker as any 

independent (not connected with a bank, thrift, or credit union) firm who table funds more than 

half its production, does not service loans, and does not buy whole loans from other firms. This 

broker definition includes brokers that use lines of credit to finance up to half their production; it 

is therefore broader than the definition used by HUD and LaMalfa. As discussed above, 

LaMalfa estimates that approximately one-third of mortgage production has come through the 

brokerage channel (defined as table funding and concurrent funding) while another quarter has 

come through the correspondent channel. Wholesale Access’ larger estimate that brokers 

account for about 68 percent of market originations is due to his more expansive definition that 

covers brokers with warehouse lines of credit that also operate through correspondent 

arrangements with larger wholesale loan purchasers (rather than simply table funding loans). 

Wholesale Access’ Findings About the Broker Industry. Some of Wholesale Access’ 

(2005) main findings are summarized below: 

 

13 In fact, others commenting on the industry, such as Morgan Stanley, rely heavily on Wholesale Access’ research. 

Tom LaMalfa is also the managing director Wholesale Access. 

 2-14
• Brokers increased their share of the origination market from practically zero in 1980 

to 20 percent in 1987 to 55 percent in 2000 to 65 percent during the heavy refinancing 

wave in 2001, and further to 68% in 2004. Brokers accounted for $1.75 trillion (or 68 

percent) of the $2.589 trillion of mortgages originated during the heavy refinance 

year of 2004. 

• According to Wholesale Access, in 2004 there were 53,000 brokers selling their loans 

to about 100 wholesale lenders. These are typically small firms -- the median firm 

has one office and four workers including the owner. The median firm is only five 

and a half years old. The median firm originated 200 loans in 1998 and 125 loans in 

2000 and 90 in 2004. 

• Wholesale Access sees brokers as low-cost, highly competitive firms, vigorously 

competing with one another and with little opportunity to earn above-normal profits.

According to Wholesale Access, if brokers do not provide the consumer with good 

service, they go out of business. 

• Specifically with respect to broker profits, Wholesale Access notes, “most brokers are 

just breaking even”. They say that if brokers were so profitable there would not be a 

net exodus from the industry, as the average firm lasts only five and one-half years. 

• Wholesale Access also reports that their surveys find no economies of scale in 

mortgage production – a one-person firm produced as many loans per employee as a 

larger firm. 

• Wholesale Access concludes that brokers are particularly needed in today’s volatile 

mortgage market, as they can grow and contract their work forces much more quickly 

than existing retail firms. According to Wholesale Access, brokers were the main 

reason the industry was able to handle the refinance-induced doubling in mortgage 

origination demand during the 2001 through 2004 period. 

Wholesale Access (2005) contains results from its survey of the 2004 market. The main 

points from this study included the following: 

• In 2004, there were 53,000 brokers actively making loans. 

• Brokers accounted for 68% (or $1,748 billion) of all mortgages originated during the 

heavy refinance year of 2004. Retail originations accounted for the remaining $841 

billion. 

• The typical broker sells to an average of ten different wholesale lenders, but only 

three account for 80% of the broker’s production. 

• The average broker firm has 4.5 loan officers and 1.5 managers. 

• Similar to Wholesale Access’s five previous studies of the broker market, the typical 

broker firm has been in business five and one-half years. 

 2-15
• There are 418,700 workers in the broker industry, and 93% of these originate loans on 

a full-time basis. 

• Slightly more than three out of every four brokerages have only one office. 

The various data that Wholesale Access reports about the characteristics of broker firms 

are, in general, consistent with the data reported for brokers by the Census Bureau (see Chapter 

5). In addition, Wholesale Access’ statements about the competitive market behavior of brokers 

are generally consistent with what many say about the industry (see comments by Morgan 

Stanley). However, research reported in Section IV below suggests brokers overcharge 

borrowers by not giving them the full benefits of yield spread premiums; at first glance this 

seems inconsistent with Wholesale Access’ statements about the absence of above-normal profits 

in the broker industry. It is possible that brokers and other originators overcharge some 

borrowers (say the less informed borrowers) and undercharge other borrowers (say the more 

informed borrowers) with the end result being that the firms earn, on average, normal profits. 

(This issue of overcharging is discussed in Section IV below.) But others have suggested that the 

industry may be more profitable than indicated by Wholesale Access. 

In fact, David Olson of Wholesale Access testified before the Senate Committee on 

Banking, Housing, and Urban Affairs and stated that the brokerage business is not very 

profitable. Following the hearing, Senator Sarbanes asked Howell E. Jackson (a Harvard law 

school professor who also testified at the hearing) if he had any information on the profitability 

of the brokerage industry and, if so, to respond in writing.14 In his written response, Jackson 

stated, “While I have not undertaken an independent investigation of the profitability of the 

mortgage brokerage business, I reviewed several reports on the subject that Mr. Olson himself 

prepared. Contrary to Olson’s testimony at the hearing, these reports indicate that mortgage 

brokers have been extremely profitable in the past decade and, in particular, during the 1996-

2000 period...” (p. 85). Jackson made the following points based on his review of surveys of the 

mortgage brokerage industry conducted by Olson: 

• Citing the substantial growth in the industry, Jackson said he “would be skeptical of 

any claims that an industry experiencing such a sustained rate of growth ‘is not very 

profitable’” (p. 85). He noted that while the number of mortgage brokers more than 

doubled between 1991 and 1998, the level of originations of the median firm also 

increased by one-third, based on Olson’s survey data. 

• After citing Olson’s conclusion that brokers earned a higher rate of profit in 1998 

than earlier years, Jackson also notes that the $160,000 earned by the typical 

mortgage broker (operating as a sole proprietorship) in 1998 is “an extraordinary 

 

14 See Howell E. Jackson, “Response to Written Questions of Senator Sarbanes,” Predatory Mortgage Lending 

Practices: Abusive Uses of Yield Spread Premiums, Hearing Before the Committee on Banking, Housing, and 

Urban Affairs, United States Senate, 107th Congress, U.S. Government Printing Office: Washington, D.C., January 

8, 2002, pp. 85-89. Reference is Jackson (2002b). 

 2-16
median income for an industry that does not require substantial training or advanced 

degrees”.15 

A article in the Wall Street Journal (February 24, 2003) also raised several issues about 

the financial returns earned by brokers. The following points are drawn from that article: 

• The article included several examples of brokers without much know-how and 

training earning substantial sums of money during the past two years of heavy 

refinancing. The article notes that unlike many high-paying professions, mortgage 

brokers typically aren’t required to have much more training than what they get on 

the job, as only 13 states require a state license for individual brokers. (The article 

recognized that these large payments would likely decline with any fall off in 

refinancing activity.) 

• The article quoted Olson as evidence for the anecdotal stories of high payments. 

Olson said the average mortgage broker made $120,000 last year, while owners of 

brokerage firms took home $400,000. According to Olson, both figures were double 

the levels of only two years ago. At least five percent of the 120,000 individual 

brokers earned $1 million or more that year (the 120,000 individual brokers operate in 

the approximately 30,000 broker firms mentioned earlier). 

• The article quoted industry sources as estimating that brokers receive 1 percent to 1.5 

percent as fees, which highlights the potential revenue for a high-volume broker. The 

article explains that sometimes the broker fees come directly from borrowers 

themselves but in other cases brokers get paid by lenders, who will pay a premium for 

a mortgage with an above-market interest rate (see discussion of yield spread 

premiums in Section IV). 

• The article also quoted Howell Jackson as saying his research suggests that $1,600 

would be a fair fee, no matter the size of the loan -- this figure would cover the 

broker’s cost and still provide a reasonable profit. But according to Jackson, brokers 

have been earning twice that sum and thus earning “supra-normal profits”. (See the 

discussion of Jackson’s analysis in Section IV below.) 

• The article quotes Jack Guttentag (professor of finance emeritus at the University of 

Pennsylvania’s Wharton School) as saying that improved disclosure could cut 

brokers’ fees in half because it is fairly difficult to comparison-shop for mortgages in 

today’s market. 

The Wall Street Journal article was highly anecdotal and focused on a period of heavy 

demand for broker services. As Jackson states, he has not conducted any independent analyses of 

broker profitability. Thus, the major work on broker profits remains the work of Olson, who 

concludes that most are just breaking even.16 But as noted earlier, there are research studies that 

 

15 Ibid., 85. 

16 In his comments on the Wall Street Journal article, Olson emphasizes: (a) the competitive nature of the broker 

industry (individual firms can’t affect price and there are no barriers to entry); (b) the high turnover of firms in the 

 2-17
have examined the issue of fee overcharging by brokers (as well as lenders) and have found that 

some do overcharge; these studies will be reviewed in Section IV below. 

AARP Study. A survey by the American Association of Retired Persons (AARP) 

examined elderly homeowner views concerning the performance of brokers. This national study 

was conducted by Market Facts for AAPR and surveyed 1,008 older homeowners (over age 65) 

by telephone concerning their recent lending experience with brokers and lenders.17 The AARP 

noted that a concern had arisen that “mortgage brokers may focus more on the short-term 

profitability incurred at the origination of the loan rather than on the long-term performance of 

the loan since they are intermediaries who do not hold loans through maturity” (page 1) – 

specifically, the AARP was concerned whether the compensation system (i.e., yield spread 

premiums) for mortgage brokers inevitably resulted in higher interest rates and higher costs. 

AARP also noted that aggressive “push marketing” by some mortgage brokers had also raised 

questions that many refinance loans are “sold, not sought.” Selected findings from the AARP 

survey are as follows: 

• Older mortgage borrowers with broker-originated refinance loans (as opposed to 

older borrowers with lender-originated loans) reported more broker-initiated contact, 

more reliance on the broker to find the best loan, and a higher response to 

advertisements that guaranteed loan approvals. 

• Among older borrowers with broker-originated loans, only 16 percent reported that 

they returned to the same broker to refinance, while 40 percent of older borrowers 

with lender-originated loans did so.18

• Older borrowers with broker-originated loans were more likely to respond that the 

loans were not the best for them, the rates and terms were not fair, they did not 

receive accurate and honest information from their brokers, and they obtained worst 

terms than expected. For example, 23 percent of older borrowers with brokeroriginated loans said they did not feel the terms were fair, versus 8 percent of older 

borrowers with lender-originated loans. Twenty percent reported they received loans 

worse than expected (versus 8 percent for lender-originated loans). 

Based on these findings, the AARP paper concluded that it is important to assure that 

older households receive appropriate loans. 

 industry (most firms last only one or two years, according to Olson); and (c) the median profit of a broker was only 

$100,000 in 2000 (only 2%-5% of the industry made large profits). Olson’s response is in “Letter to the Editor of 

the Wall Street Journal in Rebuttal of the February 24, 2003 Article Titled, “Take-Home Pay, the Refinancing 

Boom Spells Big Money for Mortgage Brokers”, which can be found at Olson’s web site 

www.wholesaleaccess.com. 

17 See Kellie K. Kim-Sung and Sharon Hermanson, “Experiences of Older Refinance Mortgage Loan Borrowers: 

Broker- and Lender-Originated Loans,” published by the AARP Public Institute, January, 2003. 

18 Older borrowers with broker-originated loans were also more likely to have refinanced in the past and to predict 

that they would refinance in the future. 

 2-18
The discussion in this chapter suggests that, in general, the nation’s mortgage market is 

efficient and competitive. Combined with the growth in the secondary market, advances in the 

primary origination market have allowed homeowners to quickly obtain financing at reasonable 

interest rates that reflect the unique risks (e.g., credit and prepayment risk) of mortgages relative 

to benchmark Treasury securities. Compared to the traditional depository-based system that 

dominated home funding as recently as the early 1980s, the current system provides homeowners 

with ready access to both national and global capital markets. 

This does not mean that everyone has ready access to mortgage credit or that all aspects 

of the mortgage market operate in an efficient and cost-minimizing manner. The above 

statement by Guttentag, as well as additional analysis in Section IV below, suggest that it may be 

difficult for some borrowers to comparison shop in today’s mortgage market. In addition, 

Section IV presents statistical evidence that consumers are overcharged in today’s mortgage 

market. The preamble to the proposed rule and Chapter 3 also outlines several problems with the 

mortgage shopping and settlement (closing) processes that have raised concerns of fairness and 

cost-effectiveness, even in the prime (or so-called “A”) part of the mortgage market. The 

complexity of the origination process, combined with the fact that consumers have limited 

experience taking out mortgages, place a premium on having a process that is simple, easy to 

understand, and clear about the various mortgage options available to the consumer -- 

unfortunately, the current mortgage shopping process is too often characterized as confusing and 

providing little useful information to guide the consumer in making a final decision. The costs 

of settlement can not only be too high -- thereby combining with the down payment requirement 

to serve as an up-front barrier to homeownership for lower-income families -- but they can also 

be uncertain and subject to change between initial application and final closing, further 

frustrating consumers in their efforts to obtain homeownership. In addition, there are 

opportunities for further innovation in the mortgage origination process through volume 

discounting and other methods that would allow lenders to provide services at a lower cost. 

Chapter 3 will discuss these issues and concerns in more detail and explain how the RESPA Rule 

seeks to correct them and thereby improve the shopping and settlement process. 

Other Studies of Broker Fees. A 2005 study19 found that subprime borrowers who 

obtained loans through mortgage brokers paid lower annual percentage rates than borrowers 

using lenders directly. The study used data from 10 large lenders and contained over 2 million 

subprime loans originated between the third quarter of 1995 and the fourth quarter of 2004. 

Subprime borrowers using mortgage brokers save 53 basis points on the APR of fixed-rate firstmortgages compared to those borrowing directly from lenders, 84 basis points on variable-rate 

first-mortgages, 426 basis points on fixed-rate second-mortgages and 534 basis points on 

variable-rate second-mortgages. 

LaCour-Little (2005) 20 examines whether borrowers obtain more favorable prices on 

loans using a mortgage broker or through a retail lender directly. His findings revealed that, on 

 

19 Anshasy, Amany El, Gregory Elliehausen and Yoshiaki Shimazaki, “The Pricing of Subprime Mortgages by 

Mortgage Brokers and Lenders,” July 2005. 

20 Michael LaCour Little, “The Pricing of Mortgages by Brokers: An Agency Problem?”, California State 

University, Fullerton, 2005. 

 2-19
average, mortgage broker loans are priced approximately 19 basis points higher than comparable 

retail loans. Lacour-Little notes that this estimate is probably too low because his comparison 

examined only the differences in note rates and did not include points or fees associated with 

both groups. The results also revealed, however, that approximately 25 percent of borrowers 

would receive lower prices from brokers. This suggests that while better rates are usually found 

directly through retail lenders, some brokers reduce credit costs for borrowers. Some borrowers 

also prefer mortgage brokers because of the reduction in search costs, increased convenience, 

and overall ease of transactions. 

IV. Information on Yield Spread Premiums and Consumer Shopping 

This section focuses on yield spread premiums, which have recently spread throughout 

the market as a method for borrowers to trade-off higher interest rates for reduced up-front 

settlement costs. Studies of yield spread premiums have highlighted numerous pricing and 

shopping issues in the mortgage process. Therefore, this section examines several topics such as 

the complexity of the mortgage process, barriers to consumer shopping, dispersion among 

mortgage prices, price discrimination by lenders, as well as yield spread premiums. In this 

section, these topics are discussed mainly in the context of the prime mortgage market. Section 

VI discusses mortgage pricing and other issues with respect to the rapidly growing subprime 

market. 

This section is organized as follows. Subsections IV.A to IV.C define yield spread 

premiums, provide some basic market facts about them, and summarize concerns about their use 

in the market. 

Subsection IV.D is particularly important because it reviews new studies that address 

whether yield spread premiums offset the direct origination charges paid by borrowers. Two 

recent studies by the Urban Institute receive particular attention in this section. 

Examples of questions addressed in this section include the following: What are the main 

barriers hindering effective consumer shopping for home loans? How can consumers be 

overcharged in a market characterized by over 40,000 brokers and lenders vigorously competing 

with each other? To what extent do consumers understand yield spread premiums and to what 

extent are yield spread premiums used to offset consumer settlement costs (versus increasing 

borrower or lender compensation)? 

IV.A. Definition and Role of Yield Spread Premiums 

Upfront cash for a down payment and closing costs is perhaps the main obstacle that 

families face when considering homeownership. The 1990s saw a host of low-down-payment 

programs offered by conventional lenders to address the issue of down payments. The industry 

also came up with a closing-cost-financing option for cash-constrained borrowers, who are at 

their maximum loan-to-value ratio and are therefore prevented from further increasing their loan 

amount to finance closing costs. Under this option, commonly known as yield spread premiums, 

borrowers can finance their closing costs, either fully or partially, by getting a loan with an above 

market interest rate. Above-market-interest-rate loans are priced at greater than par value (par 

 2-20
value being equal to the loan amount); the excess of this price over par value is defined as the 

yield spread premium. In the case of a broker selling an above-market-rate loan to a wholesale 

lender, the broker receives a yield spread premium equal to the difference between the wholesale 

price of the loan and the loan amount. With a zero-closing-cost loan, the broker uses the yield 

spread premium as compensation for mortgage closing costs; in this case, the borrower would 

not pay any closing costs but would have higher monthly payments because of the higher interest 

rate on the mortgage note. In the same manner, borrowers can also fund a portion of their closing 

costs (rather than all of them) through loans with above-market interest rates. In fact, the idea 

behind yield spread premiums is that borrowers would be offered a range of interest-rate, 

closing-cost combinations and the borrower would choose the one that best suits his or her 

circumstances.21

Of course, yield spread premiums are not confined to broker and wholesale lender 

transactions (as illustrated in the above example). Portfolio lenders, who do not sell their loans 

on the secondary market, would pay a yield spread premium on an above-market-rate loan 

because of the higher return (i.e., the above market rate) they receive over the life of the loan. 

Mortgage bankers may fund an above-market-rate loan with a line of credit and hold the loan for 

a period of time prior to selling it on the secondary market. When they sell the loan (assuming 

that it is still an above-market-rate loan), they would receive a premium (above par) price for the 

loan, which would be their compensation for originating the loan. There is no reliable 

information on what proportion of loans made by portfolio lenders or mortgage bankers have a 

known yield spread premium at closing. For these types of transactions, Chapter 3 below 

discusses the implications of not being able to measure the yield spread premium at mortgage 

closing. 

IV.B. Concerns About Yield Spread Premiums 

There has been some controversy about how yield spread premiums are being used in the 

market. While some argue that yield spread premiums are doing their job, providing a vehicle for 

cash-constrained borrowers to finance their closing costs, others argue that yield spread premium 

payments from wholesale lenders to brokers do not offset borrower closing costs (on a dollar-fordollar basis), as they are designed to do. Rather they are seen as providing extra compensation 

for brokers, with borrowers not receiving the full benefits of the above-market-rate loan.22 Many 

feel that unwary or less-sophisticated borrowers are particularly vulnerable to what has been 

characterized as “rebate abuse”, where a “rebate” is the yield-spread premium collected by 

mortgage brokers. Guttentag recently provided a good description of the process by which an 

unwary borrower could be taken advantage of in a brokered transaction. (Of course, as Guttentag 

 

21 It should be noted that borrowers who are not at their maximum LTV ratio may also prefer a loan with a yield 

spread premium. It may be more economical for a borrower who plans to stay at his current residence only a short 

time to finance closing costs through a high interest rate loan (that would be shortly prepaid when the borrower 

moved), rather than paying closing costs up-front with cash. Borrowers may also prefer to use their available cash 

for other uses. 

22 Again, while the issue has been discussed most in the context of broker and wholesale lender transactions, the 

same points arise in the context of transactions by portfolio lenders (banks and thrifts) as well as mortgage bankers 

that use a credit line to fund the mortgages that they originate. 

 2-21
recognizes, the result described below could also be obtained in a transaction involving a bank, 

thrift, or mortgage banker, with some change in the details of the process). Guttentag (October 

7, 2002) states: 

Rebate abuse is the practice of steering unwary borrowers into high-rate loans on 

which they should receive a rebate from the lender but don’t. A rebate is negative 

points. Points are an upfront charge to the borrower expressed as a percent of the 

loan, and a rebate is an upfront credit to the borrower from the lender. When credited 

to the borrower, rebates are used to cover settlement costs...Most of the attention has 

been directed toward curbing rebate abuse by brokers. Lenders working through 

mortgage brokers (called “wholesale lenders”) transmit their price information to 

brokers, not to borrowers. With few exceptions, borrowers are not privy to this 

information. Borrowers are quoted prices by brokers that include the broker’s 

markup. For example, the lender’s quote to the broker is 6 percent plus a rebate of 1 

percent, and the broker’s quote to the borrower is 6 percent plus a broker fee of .5 

percent. The broker’s total compensation is 1.5 percent -- 1 percent from the lender 

rebate and .5 percent from the borrower fee -- but the borrower does not know about 

the 1 percent rebate unless the broker tells him. By the time borrowers become aware 

of rebates retained by brokers, they are often too far along in the transaction to back 

out. 

According to Guttentag, rebate abuse (or yield spread premium abuse) has been a 

“festering sore” in the home loan market. Guttentag has also noted that “most brokers don’t 

want to relinquish their capacity to deceive borrowers” and that “if HUD follows through on its 

proposal that lenders credit rebates to borrowers, 85 percent of the profit from deception will 

disappear...”23 

Because of the proprietary nature of lender files, there has not been much public 

information to date on yield spread premiums and the extent to which they actually offset 

borrower closing costs. Prior to recent HUD-sponsored research by the Urban Institute 

(summarized below), the information that was available was based on industry surveys and 

studies that have been conducted as part of recent court cases. The empirical findings from these 

earlier, court-based studies are reasonably consistent with Guttentag’s views. Section IV.D 

summarizes the available information on yield spread premiums and existing evidence about 

their relationship to mortgage closing costs. Before doing that, a somewhat related topic, 

overages, is briefly discussed. 

Overages. While yield spread premiums are legally defined in a way that precludes them 

from being earned by orginators that are not mortgage brokers, loan officers in non-brokers 

establishments can derive similar benefits by charging “overages.” An overage results when a 

loan officer charges a customer a rate that is higher than the minimum rate that could have been 

charged; for instance, a commercial bank’s mortgage lending department might issue a rate sheet 

indicating a rate of 6% / zero points for 30-year conventional loan, but a loan officer at the bank 

might tell a customer the only available rate is 6% / one point. The additional point is an 

 

23 As quoted to Broderick Perkins in Realty Times, July 17, 2003. 

 2-22
overage. Loan officers typically keep all or part of the overages they generate as a supplement to 

their salaries and commissions. Overages have been examined by several scholars. Courchane 

and Nickerson argue a key reason that overages exist is that mortgages are very complex and 

difficult for consumers to master. 

No matter what kind of research buyers do before applying and settling a mortgage 

loan, it is unlikely that they know all the options available at any one bank, at 

competitive lending institutions in that area or nationally. Nor will they be likely to 

fully understand what those options mean. We learned from interviews at banks even 

loan officers struggle to distinguish between origination points, discount points, and 

overage points, except insofar as the definition affected the commissions they were 

paid for loan origination.24

Courchane and Nickerson further argue that high search costs (i.e., the cost of search of 

the best priced mortgage) lead to market power across lenders, which can facilitate overages in 

general. 

Black et al. state, “[m]any lending institutions allow and even encourage their loan 

officers to charge overages.”25 They believe a key reason for overages is that borrowers do not 

understand the mortgage process, among other things.26 They also believe that another common 

reason for overages is that borrowers may request a long rate-lock period, but receive a short one 

from a loan officer who believes rates will fall. They find that minorities who purchase homes 

pay larger overages than whites, but they believe the differences may stem from nondiscriminatory reasons such as differential bargaining skills. 

IV.C. Some Basic Facts About Yield Spread Premiums 

As noted above Olson has conducted several surveys of the mortgage industry that focus 

on the business operations of mortgage brokers. In testimony before Congress, Olson (2002) 

noted that about 2 percent of the loan amount (or $2,800) was required to compensate brokers for 

their cost, time, and profit in originating mortgages. In more recent work (summarized earlier), 

Olson’s firm, Wholesale Access, estimated that 1.71 percent of the loan amount was needed to 

compensate brokers. According to Olson, most buyers either don’t have that amount of cash or 

prefer to finance the fee. In addition, Olson estimates that 45 percent of the income of mortgage 

 

24 M. Courchane and D. Nickerson, “Discrimination Resulting from Overage Practices”, Journal of Financial 

Services Research, 1997, pp. 133-151. 

25 H. Black, T. Boehm, and R. DeGennaro, “Is There Discrimination in Mortgage Pricing? The Case of Overages”, 

Journal of Banking and Finance, 2003, pp. 139-1165. 

26 For example: “for the borrower, a lack of financial information, a severe liquidity constraint, risk aversion, or the 

unwillingness to pursue negotiations for a better deal could lead to an overage. Because the borrower may be 

unaware of how the loan is priced, the most common way that an overage results is if the borrower agrees to a 

mortgage rate that is above the minimum quoted in the lender’s rate sheet. Since the consumer is generally unaware 

of the terms listed on the rate sheet, the lender may quote a higher rate or a larger number of points, resulting in an 

overage.” (page 1142). 

 2-23
brokers comes from yield spread premiums (paid by wholesale lenders to brokers) while 55 

percent comes from direct fees paid by borrowers. 

Jackson and Berry (2002) also provide some descriptive information based on their 

analysis of a sample of approximately 3,000 mortgages originated by a group of affiliated 

lending institutions in the late 1990s.27 Approximately 85 percent of Jackson’s sample had yield 

spread premiums. For these loans, the total compensation to brokers28 was similar to the number 

reported above by Olson -- $2,548 to $2,852 or slightly over 2 percent of the loan amount; the 

average yield spread premium was $1,850 per transaction. 

The market’s widespread use of yield spread premiums is also suggested by analysis of 

FHA data. Table 2.2 reports the distribution of interest rates for 30-year fixed-rate mortgages for 

the month of May 2001. When these loans were locked in, the average interest rate on a “par” 

value FHA-insured loan was about 7.25 percent, or even slightly less.29 As shown in the third 

column of Table 2.2, 44 percent of FHA-insured loans had an interest rate above 7.25 percent, 

suggesting that yield spread premiums were common in the FHA market, although not nearly as 

prevalent as in Jackson’s sample of loans. It is interesting that 36 percent (fourth column) of 

FHA-insured loans had an interest rate equal to or greater than 7.5 percent; and 9 percent had an 

interest rate equal to or greater than 8.0 percent. In general, a 7.5 percent mortgage in a 7.25 

percent environment is priced about one point over par ($1,000 on a $100,000 loan) and an 8.0 

percent mortgage is priced about 2.5 points over par ($2,500 on a $100,000 loan). Thus, there 

were significant YSPs in the FHA market.30 

The other indication that yield spread premiums are being used in the market is based on 

data for conventional home purchase loans from the Federal Housing Finance Board (FHFB). 

The FHFB data show that the average initial fees and charges on mortgages have fallen from 

1.87 in 1990 (when yield spread premiums were first being used in the market) to less than one 

since 1998 (e.g., 0.75 in 2000). This trend suggests that yield spread premiums have 

increasingly been used to finance borrower closing costs. 

 

27 Jackson used this analysis as an expert for the plaintiff class in Glover v. Standard Federal Bank, Civil No. 97-

2068 (DWF/SRN) (U.S. District Court of Minnesota) (pending). Jackson also draws on the larger paper he did with 

Jeremy Berry; see Jackson and Berry (2002), “Kickbacks or Compensation: The Case of Yield Spread Premiums.” 

28 Defined as yield spread premium plus loan origination fees plus other compensation minus offsets for settlement 

costs paid by the mortgage broker. See page 87 of Jackson and Berry (2002). 

29 From March 1 through April 13, FHA rates averaged slightly over 7.0 percent. They jumped to 7.13 percent on 

April 13 and were 7.37 for the last week in April. 

30 The same patterns were observed the two other months (April and June) that were analyzed. 

 2-24
IV.D. Studies of Yield Spread Premiums and Shopping for Mortgages 

IV.D.1. Introduction 

There is no academic literature examining the extent to which the presence of a yield spread 

premiums results in an offsetting reduction in direct payments of closing costs by the borrower. 

However, findings of two empirical studies that were conducted as part of a recent court case31

have been reported in Congressional Testimony by the authors (Jackson, 2002a; Woodward 

2002) – and this work has been followed-up by more detailed papers co-authored by Jackson 

(Jackson and Berry, 2001) and Woodward (2003). In addition, Benson (2001) also conducted an 

empirical analysis of yield spread premiums as part the court case that Woodward and Jackson 

were involved in. The next two subsections (D.2 and D.3) examine these studies in some detail, 

particularly the papers by Jackson and Berry (2002) and Woodward (2003), which are useful 

because they provide their insights about problems consumers face when shopping for a 

mortgage and the possible reasons that consumers are overcharged in the mortgage market. 

Other analyses of consumer shopping and market dynamics are incorporated in this discussion 

by Guttentag, staff from the Federal Trade Commission, in subsection D.3.a and Olson in 

subsection D.4. Subsection D.5 provides useful comments from FTC staff on issues such as 

price dispersion, price discrimination, and consumer shopping. A 2003 study by the CFI, 

discussed in subsection D.6, provides evidence that the complexity of the mortgage lending 

process should be reduced and consumers should be provided with more choices and 

information. In subsection D.7, a 2003 Bankrate.com survey is discussed that provides 

additional support reinforcing the confusing nature of fees and closing costs experienced by 

consumers when shopping for competitive rates and lower costs. A recent study by the FTC, in 

subsection D.8, investigates consumers’ understanding of loan disclosures and borrowing terms 

and tests whether improved disclosure forms increase borrowers’ understanding of mortgage 

costs and their ability to compare lenders. Subsection D.9 argues that the citation of Mark 

Shroder’s study of good faith estimates by the National Association of Realtors as evidence that 

the “bait and switch” is not widespread is hampered by selection bias and thus limits its 

usefulness in testing this technique. 

IV.D.2. Jackson and Berry Analysis: Yield Spread Premiums, Broker Compensation, and 

Consumer Shopping Strategies 

As noted above, Jackson served as an expert witness in a recent court case involving 

yield spread premiums. His work consisted mainly of an empirical analysis of approximately 

3,000 mortgages originated by one group of affiliated institutions in the late 1990s. According to 

Jackson, his analysis represents the most extensive empirical investigation of yield spread 

premiums to date. Jackson reported his findings publicly in a recent Congressional Hearing and 

in a paper co-authored with Jeremy Berry; see: 

Howell E. Jackson, “Prepared Statement of Howell E. Jackson” in Predatory 

Mortgage Lending Practices: Abusive Uses of Yield Spread Premiums, Hearing 

 

31 See above reference to Glover v. Standard Federal Bank. 

 2-25
Before the Committee on Banking, Housing, and Urban Affairs, United States 

Senate, 107th Congress, U.S. Government Printing Office: Washington, D.C., 

January 8, 2002, pp. 54-59. Reference is Jackson (2002a). 

Howell E. Jackson and Jeremy Berry, “Kickbacks or Compensation: The Case of 

Yield Spread Premiums,” unpublished manuscript, 2001. This paper was 

submitted as part of the public record and is partially reprinted in Hearing Before 

the Committee on Banking, Housing, and Urban Affairs, United States Senate, 

107th Congress, U.S. Government Printing Office: Washington, D.C., January 8, 

2002, pp. 155-171. 

This subsection will focus on the longer 151-page paper by Jackson and Berry. After 

briefly presenting their findings, the discussion will summarize their main insights about the 

mortgage shopping process and the interaction between consumers and brokers. Their discussion 

of the mortgage shopping process will be compared with the insights on mortgage shopping 

expressed by Woodward, Guttentag, Olson, staff at the Federal Trade Commission, and others. 

Jackson and Berry state their analysis shows that mortgage brokers receive substantially 

more compensation in transactions involving yield premiums than they receive in transactions 

without yield spread premiums. 

Depending on the method of comparison, the estimated difference in costs to 

borrowers ranges from $800 to over $3000 per transaction, and our best guess of the 

cost impact is approximately $1,046.... These findings strongly suggest that yield 

spread premiums are not a good deal for borrowers, but serve primarily to increase 

compensation to mortgage brokers. (page 8) 

Based on their regression analysis, Jackson and Berry further conclude that consumers 

get only twenty-five cents of value for every dollar of yield spread premiums -- seventy-five 

percent of yield spread premiums serve only to increase payments to mortgage brokers.32 

Jackson and Berry next offer some interesting findings that provide evidence that the 

payment of yield spread premiums allows mortgage brokers to engage in price discrimination 

among borrowers. First, they find that in situations where there is no yield spread premium 

involved (e.g., a par value loan where the consumer pays all closing costs), there appears to be a 

pretty clear market price for brokers. 

 

32 Professor George Benson, another expert witness for the defendant, reported that average homeowners’ settlement 

outlays decrease by 59-65 cents for each dollar increase in YSP, suggesting 35-41 cents in extra compensation 

(Benson, 2001). Jackson and Berry (2001) say these results from Benson are based on the 100-loan Heartland 

sample, which they considered unrepresentative. They report some later estimates from Benson based on the larger 

and more representative Defendants’ Sample. (See pages 139-143 of Jackson and Berry (2001) for a critique and 

discussion of Benson’s August 8th results.) Benson (2001) covers his July 9th results, which are also discussed by 

Jackson and Berry. These results (labeled Benson’s August 8th results in Jackson and Berry, 2001) are somewhat 

similar to his initial results; for example, as shown by Jackson and Berry’s Figure 27, Benson’s models 2a-2c 

suggest 34 cents in extra compensation due to YSPs. Thus, Benson concluded that YSPs offset borrower closing 

costs to a much greater extent than the expert for the plaintiff (Jackson). 

 2-26
In transactions where yield spread premiums are not at issue, the vast majority pay 

mortgage brokers total compensation of not more than 1.5 percent of loan value, and 

the largest group (on the order of 40 to 45 percent) pay mortgage brokers 

compensation in the range of 1.0 to 1.5 percent of loan value. 

But according to Jackson and Berry, the problem occurs when yield spread premiums are 

present, because in these situations there is no single price for broker services: 

Most borrowers pay more than 1.5 percent of loan value; more than a third pay more 

than 2.0 percent of loan value; roughly ten percent pay more than 3.5 percent of loan 

value. 

Jackson and Berry find this “price dispersion” troubling, as it suggests that brokers use 

yield spread premiums as a device “to extract unnecessary and excessive payments from 

unsuspecting borrowers” (page 9). 

Jackson and Berry also claim that the compensation practices of brokers disadvantage 

“less well-educated and less financially sophisticated borrowers”. Their results indicated that 

mortgage brokers charge African-Americans (by $474) and Hispanics (by $580) substantially 

more for settlement services than other borrowers. 

To summarize, the above findings of Jackson and Berry present a picture of a market 

characterized by excessive fees, price dispersion, and price discrimination -- with some 

borrowers getting market-rate deals while others (less-sophisticated borrowers) getting bad deals. 

As discussed below, others have reached similar conclusions. 

Next, Jackson and Berry note several features about the real estate process that make the 

above market results possible. Consumers are in general unsophisticated about the real estate 

and mortgage settlement process. The complex, multi-faceted nature of real estate settlement 

transactions further complicates the operation of market forces. The real estate transaction itself 

(i.e., the home purchase) represents a huge sum of money and will appear more significant to the 

consumer than any one of the many settlement services. Jackson and Berry state there is ample 

evidence in the economics literature that consumers, when faced with complex, multi-faceted 

transactions, will tend to limit their attention to the major expense (the home purchase), so it is 

not surprising that consumers don’t carefully monitor the prices of settlement services. Finally, 

they note that the “mysterious” nature of the process allows market professionals (such as 

brokers) to discriminate in the price they charge different types of consumers (sophisticated 

versus unsophisticated). According to Jackson and Berry, this ability to price discriminate is 

where the market breaks down, preventing ordinary competitive pressures to benefit all 

consumers, particularly those who are less informed. 

Jackson and Berry go a step further and relate the above themes to the actual case of yield 

spread premiums. Individual consumers rely on brokers for an array of settlement services and 

for the selection of a funding lender (i.e., a wholesale lender). According to Jackson and Berry, 

wholesale lenders offer products with YSPs to compensate brokers and attract their business. 

Many borrowers may not understand the financial complexities of YSPs, and in these cases, 

 2-27
YSPs offer mortgage brokers an opportunity to enhance their own compensation -- by receiving 

direct fees from the consumer as well as being compensated by the lender through a YSP. 

Perhaps the most important factor in the above process concerns the consumers’ ability to 

monitor and understand the YSP. Jackson and Berry (as well as many others) question whether 

consumers have much understanding of what YSPs are, and that the costs of YSPs are financed 

by the consumer through higher monthly interest payments. Even with a basic understanding, 

evaluating the various trade-offs (distinguishing the present value differences between a “parvalue” loan with a lower interest rate and an “above-par” loan with a higher interest rate) can be 

a daunting task for even the most informed consumer. Brokers typically have much discretion 

on the particular product (from a wide range of products available to the broker) that they could 

offer to any particular consumer. An individual consumer, even a relatively informed one, may 

not be shown the full range of available products. Furthermore, given the fact that the consumer 

may be more interested in the main transaction (the home purchase), or given the normal time 

pressures in settlements, consumers may not inquire too strenuously about broker compensation. 

According to Jackson and Berry, these are the situations where brokers can price discriminate -- 

crediting informed borrowers for all or a portion of any YSP while not crediting less informed 

borrowers (and thereby retaining the YSP as compensation). They note that this price 

discrimination takes place in the context of a market where wholesale lender prices are set 

competitively in the secondary market. The market breakdown occurs in the relationship 

between the consumer and the broker. The broker can steer consumers into financial 

arrangements that increase their overall costs. 

As explained in Chapter 3, an addition to the new Good Faith Estimate requires that 

lenders show lower-interest-rate and higher-interest-rate options to the selected loan indicated on 

the GFE. The intention is to reinforce to consumers the fact that lenders provide consumers with 

a variety of interest rate and closing cost options so that the consumer can choose the option that 

best suits his or her circumstances. This is designed to prevent the situation described above 

where brokers (and lenders) do not always clearly explain that YSPs represent one of several 

options, that the shopper can voluntarily choose and instead may steer shoppers to above-rate 

mortgages with YSPs. Jackson (2002a) states that, in his experience, YSPs are not described as 

an optional way to finance closing costs and that consumers are not given enough advice to 

compare the higher monthly payments over the life of above market-rate loan with the savings in 

closing costs due to the YSP. 

IV.D.3. Woodward Analysis: Yield Spread Premiums, Broker Compensation, and 

Consumer Shopping Strategies 

Susan Woodward's recent study echoed many of the same themes of the study by Jackson 

and Berry.33 Woodward used the same mortgage data as these authors, a sample of 2700 loans, 

funded through one national lender but written by thousands of mortgage brokers.34 Woodward 

 

33 Susan E. Woodward, “Consumer Confusion in the Mortgage Market,” Sand Hill Econometrics, July 7, 2003. 34 As Woodward notes, this sample is not a representative sample, but a sample of loans drawn during a court case. 

Woodward says her analysis covered approximately 2,700 loans from three data sets. (1) 108 loans funded by a 

single lender and originated through a single mortgage brokerage over the period 1996-2001. (2) A total of roughly 

600 brokered loans comprised of 200 each that were above par, at par, and below par. These loans were selected by 

 2-28
defined total fees to brokers as cash from the borrower plus the cash paid in the form of a yield 

spread premium to the broker by the lender, minus credits from the broker to the borrower. The 

average broker fee was $2,425. In her analysis of broker fees, Woodward controlled for 

characteristics of the loan (e.g., FRM versus ARM, loan amount, LTV ratio), borrower (e.g., 

credit score, race), census tract where the property was located (e.g., median house value, median 

income, education of population), and mortgage market environment (e.g., refinancing activity, 

level of interest rates). According to Woodward, her data confirmed that shopping for a mortgage 

was not easy, particularly for borrowers attempting more difficult shopping strategies. 

Woodward defines a "more difficult shopping strategy" as one that involves a tradeoff of interest 

rates and points. This contrasts with an "easier shopping strategy" that involves rolling either the 

broker's fee or all settlement costs into the interest rate (the latter being a "no-cost" loan). 

Borrowers choosing "no-cost" loans can shop on the basis of interest rate alone, which is less 

complicated than shopping based on both interest rates and points. 

Woodward's Main Findings. According to Woodward, borrowers choosing the more 

difficult strategy pay higher broker fees on average than borrowers who roll closing costs into 

the interest rate and thus can shop on the basis of rate alone. Borrowers who roll at least the 

broker’s fee (plus possibly some or all other closing costs) into the interest rate pay broker fees 

that are $900 lower on average than other borrowers. Borrowers who roll all closing costs into 

the interest rate pay fees that are $1,500 lower than those paid by other borrowers. In addition, 

borrower confusion is strongly related to the level of interest rates. According to Woodward, the 

higher interest rates are, the more borrowers try to pay points to reduce their rate, and the more 

mistakes they make, to the broker’s benefit. This costs them about $440 for each percentage 

point rise in the level of interest rates. Borrowers benefit from education. Those with a 

bachelor’s degree on average pay $1,500 less in broker fees than borrowers with only a high 

school education. The race of the borrower matters – on average, African-Americans pay their 

brokers an additional $500 and Hispanic borrowers, $275, compared to other borrowers, after 

accounting for education and other characteristics. 

Insights from Woodward's Study. While the above paragraph captures her main 

findings, Woodward’s study includes numerous insights on the shopping behavior of consumers 

and the business strategy of brokers. For the most part, her insights are consistent with the price 

discrimination argument also put forward by Jackson and Berry, including the notion that 

brokers take advantage of less sophisticated borrowers, particularly on loans that require 

complicated net present value calculations (that is, loans that involve tradeoffs between interest 

rates and points). In her paper, Woodward commented on several topics related to this RESPA 

rule. Because she is one of the few authors who have actually conducted empirical analysis, it is 

useful to describe her study in more detail and to note some of her views and comments 

concerning consumers and brokers and how mortgage shopping takes place. The points made 

below are taken from her study. 

 a judge, again from the 1996-2001 period. (3) A set of roughly 2,000 brokered loans originated on another set of 

dates selected by a judge; there was not an effort to over-sample par or discount loans in this sample of 2,000. 

According to Woodward, the combined set (1)-(3) over-samples par and discount loans. While Woodward notes 

that the sample is not a representative national sample, she concludes that “the data appear to be satisfactory for the 

questions addressed here. No aspect of the sample design depended on the key variables of my analysis.” (page 25) 

 2-29
(1) Importance of Broker Fee. Broker fees are negotiated one-on-one between 

borrower and broker. The broker is not the borrower’s agent, but a salesperson. It is safe to say 

that the brokers know a great deal more about this transaction than the borrowers do. How the 

borrowers cope with this information disadvantage as well as the resources they bring to the task 

manifest themselves in the fees they pay to their mortgage brokers. The charges to the borrower 

for a home mortgage origination are substantial. In the set of roughly 2,700 loans studied here, 

originated between 1996-2001, (covering two refinancing booms) average total closing costs are 

$4,050 on an average loan amount of $130,000.35 The broker’s fee is usually the single largest 

item among the closing costs, as it averaged $2,425 in Woodward's sample. 

(2) Complexity of Shopping For a Mortgage. Taking out a mortgage loan is not only 

the largest, but also the most complex transaction most consumers ever undertake -- involving 

many options (FRM versus ARM, 15-year versus 30-year, and so on). In addition, the choice 

regarding how to pay for closing affects the borrower’s interest rate, which in turn influences her 

inclination to prepay for any given move in interest rates. At one extreme, the borrower can seek 

a “no cost” loan, on which the lender will absorb all of the closing costs through a higher interest 

rate. At the other extreme, borrowers can also pay the closing costs in cash. Borrowers also have 

the inferior options of providing some cash themselves and having the lender provide some. But 

borrowers have yet another alternative, which is to pay cash not only for the closing costs, but to 

bring additional cash to the closing in exchange for an interest rate even lower than the rate 

offered if the borrower just paid the closing costs in cash. This is often described as “paying 

points” on a loan. If the borrower expects to move in a few years, the higher interest rate (on a 

no-cost loan) may have a lower expected present value cost for her than if she expects to stay in 

the house and keep the loan for a longer period. A borrower’s lowest cost way to pay for closing 

costs, and best overall mortgage deal, will depend on how long she expects to have her loan, or 

stay in the house. The different shopping strategies identified by Woodward are discussed in (5) 

below. 

(3) Rate Sheets. Mortgage brokers typically do business with a dozen or so wholesale 

lenders. The wholesale terms on the various alternatives offered are communicated to mortgage 

brokers on “rate sheets” that lenders send at least daily to mortgage brokers.36 A cell in a "rate 

sheet" indicates the amount the lender will pay for a loan of a specified interest rate and lock 

period -- for example, the lender will pay $100,500 for a $100,000 mortgage with a 7.00% 

interest rate and a 30-day lock period. In this example, the lender will provide $500 in cash at 

 

35 Closing costs include the services of the broker or loan officer, title insurance, appraisals, fees to the settlement 

agent, fees to local authorities (county, city) for recording the transaction and mortgage, services of a lawyer in some 

States, various inspection fees (flood, pests, earthquake), and sometimes fees to the lender as well. These fees are all 

in addition to any sales commissions paid to realtors involved in a house purchase transaction, and do not include 

additional cash the borrower may need at the closing for items such as hazard insurance, mortgage insurance, 

property taxes, and accrued interest, which are not appropriately classified as costs of closing. 

36 Lenders who provide such rate sheets are making what are called “table funded” loans in mortgage banking. This 

means that the loan is funded by the lender at the closing table, and the broker never owns the loan. This 

arrangement is in contrast to that of “correspondent brokers” who have capital and substantial lines of credit and can 

fund loans temporarily themselves, and do in fact temporarily own the borrower’s loan, though these loans are 

usually shortly sold into the secondary market. 

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closing which can be used to cover closing costs, including the broker’s fee, or returned in cash 

to the borrower. This $500 is called the yield spread premium. 

(4) Points. According to Woodward, the term points is a source of confusion in mortgage 

lending. Generally speaking, a point is one percent of the loan amount. In reference to the 

wholesale lender's rate sheets for a brokered loan, it is money paid by (or received by) the 

borrower to (from) the wholesale lender (through the broker) in exchange for a lower (higher) 

interest rate. Woodward provides a useful discussion of the many types of points and the sources 

of confusion on this subject. For example, the "points" that a broker shows a consumer will not 

likely be those on the wholesale lender's "rate sheet" -- they will be "points" from the broker's 

pricing sheet, which will typically be a marked up version of the wholesale lender's "rate sheet". 

Typically, the consumer is not shown the wholesale lender's rate sheet. 

(5) Consumer Shopping Strategies Ranked By Difficulty. Much of Woodward's paper 

involved her insights about different mortgage shopping strategies of consumers. Woodward 

ranks by increasing difficulty the borrower’s strategy for paying for closing costs as follows: 

(a) incorporate all closing costs into the rate and search for a loan with the lowest rate; 

(b) incorporate the broker’s fee into the rate, pay other closing costs with cash, and shop on rate; 

(c) pay all closing costs, including the broker’s fee, in cash, and shop on both broker fee and rate; 

(d) pay some closing costs with cash, and some with a payment from the lender for a premium 

interest rate (i.e., yield spread premium); and (e) pay all closing costs in cash and pay discount 

points to reduce the interest rate. According to Woodward, (d) and (e) are the two most difficult, 

both of which require skill in evaluating the rate/point tradeoff. 

Woodward also emphasizes, that in the negotiations between mortgage broker and 

borrower over the broker’s compensation, the broker has many more advantages than the 

borrower. The broker has the rate sheets, plus certified financial information about the borrower, 

but also, the broker has far more practice and skill with the transaction. The broker can use these 

advantages both to charge consumers direct fees and also to place consumers in high interest rate 

loans, thus collecting lucrative yield spread premiums from wholesale lenders. Woodward also 

points out that with respect to (e) above, consumers may also fail in their objective of buying 

down interest rates through payment of discount points (or negative yield spread premiums). 

(5a) No-Cost Loan. For the borrower, the simplest transaction to understand is the no 

points, or no-cost loan. The borrower seeking a no-cost loan can simply shop for the best interest 

rate (similar to how they shop for a car loan). According to Woodward, this strategy of rolling all 

costs into the rate and shopping for the best rate is a desirable strategy for borrowers who do not 

expect to have their loans for more than seven to ten years.37 If a borrower has chosen, because 

she is refinancing or because she expects to move or refinance within a seven to ten year horizon, 

to shop on the basis of rate, her shopping difficulty is greatly reduced compared to the borrower 

 

37 Most mortgage loans are prepaid well before they mature, so lenders set their rates to recoup their up-front costs 

sooner than the loan’s full term. Rate sheets typically offer terms that imply an expected loan life of roughly seven 

years. As a result, the borrower who actually pays off her 30-year loan over 30 years ends up paying for the closing 

costs several times over if she rolled closing costs into the rate. 

 2-31
who is trying to evaluate rate/point tradeoffs.38 In addition, the borrower’s comparative 

informational disadvantage to the broker is reduced because the broker is not in a position to 

offer the borrower rate/point choices that lure her towards the mortgage choice with a lower 

present value for her, but higher value to the broker. 

Woodward's regression analysis relates the fee negotiated between the borrower and 

broker to a "borrower's confusion" variable, defined as the ratio of YSP to the broker fee. Thus, 

the "no-cost" strategy was identified by loans with the YSP/broker fee ratio greater than one. For 

loans with a ratio greater than one, the YSP is sufficient to cover the broker’s fee plus at least 

some other closing costs as well. 

(5b) Finance Broker Charges. The next simplest shopping strategy for the borrower is 

to pay non-broker closing costs in cash, and shop on the basis of rate. This would roll the 

broker’s fee, but not other closing costs, into the rate. For loans in this category, the broker’s fee 

is exactly equal to the YSP, and the "borrower confusion" variable (the ratio of YSP to broker 

fee) in the regression analysis equaled one for these cases. Woodward showed there was a 

concentration of loans with the YSP exactly equal to broker's fees. 

(5c) Pay Closing Costs in Cash. A more difficult shopping strategy is to pay all closing 

costs, including the broker’s fee, in cash, but pay no additional points, and shop on rate. Here the 

borrower would have to have a correct idea of what the broker’s reservation fee might be, and 

there is the additional complication over strategies #1 (all rolled into the rate), and #2 (broker’s 

fee, but not third-party closing costs, rolled into the rate). Here the borrower is at a clear 

disadvantage to the broker in that the broker’s information on broker reservation prices is surely 

better than hers. 

In the regression analysis, the loans that are included in this strategy would all be “par” 

loans, and have a ratio of YSP to broker fee of zero, because the YSP on par loans is zero. 

(5d) Loans with Trade-Offs: YSPs. This strategy involves paying for closing costs 

partly with cash and partly with a YSP. For the borrowers intending to pay some closing costs in 

cash and some with a YSP, the ratio of the YSP to the broker’s fee will be between zero and one. 

According to Woodward, for loans with a ratio of YSP/broker fee between zero and one, there 

will be three types of loans – borrowers who intended to pay some closing costs with cash and 

some with a YSP, and did well; some who aimed for this choice and did poorly; and some who 

were trying to buy down their interest rate (through discount points, as explained below) but did 

not shop well on the basis of interest rate and thus paid both a high direct broker fee and a high 

interest rate, inducing the wholesale lender to pay the broker a YSP. 

 

38 Woodward notes that opting for the simplest shopping strategy is not necessarily the best long-run cost 

minimizing strategy for the borrower. Because most loans are prepaid well before maturity, sometimes because 

interest rates fall and borrowers refinance, and sometimes because borrowers move, lenders build their rate sheets to 

recoup any up front costs (yield spread premium) in roughly seven years. The farther is the borrower’s coupon rate 

above par, the faster the implied terms in the rate sheet recoup the lender’s upfront costs. This is true in both 

directions – the cells at a discount on the rate sheet reflect expectations of later prepayment the farther is the interest 

rate below par. Woodward points out that here lies the one informational advantage possessed by the borrower: how 

long will the borrower have the loan? 

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In the regression analysis, the loans included in this strategy would be those with 

YSP/broker fee ratio between zero and one. 

(5e) Loans With Trade-Offs: Discount Points. According to Woodward, the hardest 

shopping task is to pay all settlement costs in cash and in addition to pay discount points to 

reduce the interest rate on the loan. Here the broker has the advantage of seeing all the rate 

sheets, plus experience and presumably, some skill. The borrower who expects to hold a loan to 

maturity can, in principle, get a lower present value cost for her total mortgage transaction by 

paying cash for her closing costs and paying some points. This however, requires that the 

borrowers search for both a reasonable broker fee and a good rate, and be able to make the rate/ 

point tradeoff.39 

In the regression analysis, the loans included in this strategy would be those with a rate 

buy-down amount, or discount points, reported (a “negative YSP” so that the YSP/broker fee 

ratio is less than zero). These loans were grouped with the par loans (described in (5c) above) in 

the regression because brokers are receiving compensation from fees paid by borrowers and not 

in the form of a YSP for these loans. Willingness to pay discount points to reduce monthly 

payments suggests these borrowers have knowledge of the point/rate tradeoff so that while this 

shopping strategy is difficult, it may also be indicative of a higher level of shopping 

sophistication and ability to get a better deal. 

(6) Brokers Know the Rate/Point Trade-Off. Woodward expects that mortgage 

brokers will be much better at gauging the rate/point trade off on mortgages than consumers are. 

Brokers have more experience and they have the wholesale lenders’ prices in the form of rate 

sheets, which are not shown to consumers. The straightforward capture of present value in the 

rate sheets assures that brokers get the trade-off right, according to Woodward. On the other 

hand, the borrowers who pay part of their closing costs in cash and pay for the rest with a yield 

spread premium -- as well as borrowers who pay discount points -- have more a complicated 

shopping task, because they must have an idea of appropriate compensation for the broker and 

other settlement providers (like those borrowers who pay all closing costs in cash), but they also 

must be able to compare rates and points. If they could examine the wholesale lender's rate 

sheets, which are available to the broker, their task would be easier, but still not easy. 

(7) Factors in the Regression Analysis. Woodward classified the determinants of 

broker compensation into three broad categories: 

A. True cost factors, which are measures of the time and trouble to the broker for a 

loan involving more paper shuffling, documentation, and effort on the part of the 

broker that cause the loan to be more expensive;40

 

39 According to Woodward, it is difficult for the borrower to know which points are paid for origination and which 

actually go to buy down the interest rate, because the HUD-1, even on a table-funded loan, seldom discloses the 

precise payment to the lender for points. 

40 Examples of variables used by Woodward to measure time and trouble included the borrower’s credit score, an 

indicator for A-minus credit, the loan-to-value (LTV) ratio, whether the loan is a refinancing or a purchase 

transaction, the calendar time the broker has to close the loan, the day of the month on which the loan is closed, and 

the general level of earnings in the area.

 2-33
B. Factors that reflect the potential for price discrimination. In the one-on-one 

negotiation, brokers know more about the level of wholesale interest rates and 

points than borrowers do, and they have other information (e.g., credit score) 

about the borrower that could assist them in negotiations. For example, 

Woodward uses the median income of the census tract as a proxy for the 

borrower’s income, under the notion that the higher the borrower’s opportunity 

cost of time relative to money, the more likely the borrower will accept an 

inferior-to-market deal. 

C. Borrower confusion factors, which consisted mainly of the varying complexity of 

the borrower shopping strategies (see 5a-5b above) and education level of the 

borrower’s census tract, as a proxy for the borrower’s education level. 

(8) Results for Relative Difficulty of Borrower Shopping Strategy. For purposes of 

this economic analysis, the most useful of Woodward’s results dealt with the relative costs 

associated with different shopping strategies.41 Table 2.4 lists the coefficients on the ratio of 

YSP to Broker Fee in Woodward’s regression explaining broker compensation.42

Table 2.4 Coefficient of Ratio of YSP to Broker Fee 

Shopping Strategy 

Category Number Definition Coefficient 

(1) 0.0 Ratio (the par loans and loans where borrowers paid discount 

points) 

-$617 

(2) 0.5 Ratio (maximal rate/point confusion -- most difficult shopping) +$68 

(3) 1.0 Ratio (where the broker’s fee is paid entirely by the lender in 

the form of a YSP) 

-$847 

(4) 1.5 Ratio (where at least some closing costs are rolled into the 

rate) 

-$1,038 

(5) 2.5 Ratio (where nearly all closing costs are rolled into the rate -- 

easiest shopping) 

-$2,731 

(6) 4.0 Ratio (where even more closing costs are rolled into the rate – 

also easiest shopping) 

-$2,071 

Source: Woodward (2003a) 

Woodward interprets her results as confirming the relative difficulty of different 

shopping strategies. The above coefficient values at 1.0, 1.5, and 2.5 show that that broker fees 

fall as borrowers roll more and more of their closing costs into the rate and the ratio of YSP to 

 

41 As shown in Woodward’s Table I, the R-squared of her regression was 0.390. 

42 Because the actual ratio can be affected by the difference in interest rates on the date the borrower’s rate was 

locked and the day the loan was sold, few loans in the database have exactly the YSP to Broker Fee ratios shown. 

Loans are classified according to which ratio they are closest to. 

 2-34
broker fee rises. According to Woodward, the loans on which borrowers are struggling hardest to 

evaluate the rate/point tradeoff (at ratio = 0.5) have the highest fees, on average, with a 

differential of more than $900 compared to no cost (and more) loans and of nearly $700 

compared to par and discount point loans.43 Borrowers pay the broker more when they are 

pursuing strategies where the broker’s informational advantage is greater -- the highest broker 

fees are those on which both the borrower and the wholesale lender (by paying a yield spread 

premium) bring substantial cash to closing. 

(9) Education. While brokers have negotiating advantages over the average borrower, 

Woodward’s regression results indicate that education is one advantage for the borrower. 

According to Woodward, the difference between living in a census tract in which all adults have 

a bachelor’s degree versus one in which no adult has a bachelor’s degree is savings of $1,472 in 

mortgage broker’s fees.44 Woodward explains that the value of education in negotiating the 

broker’s fee is higher for the difficult strategies than in the overall estimates, and lower for the 

easier strategy of rolling costs into the rate. 

(10) Other Statistical Findings. According to Woodward, race does matter, even after 

controlling for all the other factors including education. African-Americans pay an additional 

$500 in broker fees, and Hispanic borrowers $275 more. In addition, A-minus credit borrowers 

pay higher broker fees (an additional $1500, although there were only 14 in Woodward’s 

sample). Broker fees are positively and strongly related to neighborhood family income, 

suggesting that brokers charge more to borrowers with a high time value of money.45 Broker’s 

fees exhibit a negative relationship with credit scores (meaning lower fees are associated with 

higher credit scores), a small positive relationship with LTV ratio, and strong positive 

relationships the loan amount and the market rate of interest. With respect to the latter, broker 

fees rise by $440 for each percentage point rise in market interest rates.46

(11) Suggestive Findings Related to Third-party Costs. When commenting on the 

shopping strategy where the borrower finances all broker fees with a YSP but pays the thirdparty fees in cash (see 5b above), Woodward reported some interesting empirical findings. In 

Woodward’s sample, the higher the fraction of settlement charges rolled into the interest rate, the 

 

43 More specifically, the coefficients are interpreted as follows (using the 0.5 group as a reference): the loans on 

which borrowers are struggling hardest to evaluate the rate/point tradeoff (at ratio = 0.5) have the highest fees, on 

average, with a differential of $915 more than loans with a broker’s fee that equals the YSP (the 1.0 group) and with 

a differential of $685 more than par loans (the 0.0 group). 

44 Woodward says the measured impact of education would probably have been larger if data had been available on 

the borrower’s education level (versus the census tract measure, which was used as a proxy for borrower education). 

However, it should be noted that there are probably not any census tracts that have 100% college education or 0% 

college educated adults. In addition, the income effect works in the opposite direction, so lower educated consumers 

with lower incomes may not actually experience a $1,500 penalty. 

45 Woodward calculates that moving from a census tract with income of $40,000, the 10th percentile in her data, to a 

census tract of $100,000, the 90th percentile, adds an additional $550 to the cost of a loan. And as Woodward 

emphasizes, her measure is for the census tract, not he individual borrower, which means that it is measured with 

error and biased downward. The true value is likely higher. 

46 See pages 31-32 for Woodward’s interpretation of this coefficient estimate. 

 2-35
lower are the total closing costs on the loans, not just the broker’s fee. In addition, there is a set 

of 50 loans in Woodward’s sample with no itemized settlement charges at all, but only disclosure 

of a YSP. These loans had even lower total closing costs than the loans with itemized charges 

paid for through a YSP. 

(12) Comments on Wholesale Lenders. Although not the focus of her analysis, 

Woodward references to the wholesale lending market were consistent with statements by 

LaMalfa (2002) and the Joint Center for Housing Studies (2002). When explaining the results of 

a regression analysis of interest (coupon) rates, Woodward says: 

The wholesale lending market is highly competitive and well-informed on both sides. 

The lenders have numerous metrics of the market, and the brokers have many rate 

sheets from competing lenders. Thus, we should infer that pure cost forces give rise 

to highly systematic differentials in coupon rates, and that they are not the result of 

price discrimination or confusion. (p. 38) 

Also, Woodward notes, that “the competing wholesale lenders are surely setting rate 

sheets so as to leave themselves indifferent as to which rate/point cells the broker and/or 

borrower select. It would not be profit maximizing for the wholesale lender to do otherwise.” (p. 

39 – also see below) 

(13) Woodward’s Comments on Findings. In her conclusions, Woodward offers the 

following comment on her main finding: 

....the discovery of just how ill-prepared some borrowers are to deal with the 

mortgage market and how much it costs them is disheartening. That less welleducated borrowers do less well may be not too surprising, but the size of the 

disadvantage, nearly $1500 per loan, on average, is shocking. (p. 39) 

In commenting on how this situation came about, Woodward notes that the technology of 

rate sheets provides opportunities for brokers to exploit consumers: 

In the brokered mortgage world, the rate sheet allows the broker to capture all of the 

profits on a loan that he can, because in posting prices to the brokers, the competing 

wholesale lenders are surely setting rate sheets so as to leave themselves indifferent 

as to which rate/point cells the broker and/or borrower select. It would not be profit 

maximizing for the wholesale lender to do otherwise. We can infer that in the old 

retail branch office world, banks left a lot of money on the table due to the poorer 

technology and the inherent rigidities of a bureaucracy. The mortgage broker leaves 

less. (p. 39) 

Finally, Woodward notes while some borrowers (particularly those who are savvy about 

mortgages and have a high value of time) are not exploited by brokers, other borrowers are.47

 

47While Woodward and Jackson and Berry examine costs at the front-end of the mortgage transaction, Susin (2003) 

recently examined variations in mortgage interest rates. Susin used 2001 American Housing Survey data to 

determine racial and ethnic differences in mortgage rates. He found that non-Hispanic Blacks pay interest rates 24 

 2-36
IV.D.3.a. Olson’s Comments on Shopping 

The themes outlined above by Jackson and Berry and Woodward of poor consumer 

shopping in a complex market and price discrimination by brokers and lenders are consistent 

with comments by other observers of the mortgage process, such as Guttentag and staff from the 

Federal Trade Commission (FTC). Before reviewing the work by Guttentag and FTC staff, this 

subsection reviews work by David Olson, who provides a contrasting perspective on consumer 

shopping. Also reviewed are a study by the CFI Group on consumer satisfaction with the 

mortgage lending process, a survey of mortgage fees that sheds light on the difficulty 

experienced by consumers attempting to shop for competitive mortgage rates, and the FTC’s 

recent study of mortgage disclosure. 

In his statement before the Senate Committee on Banking, Housing, and Urban Affairs, 

David Olson stated that his analysis of 4,000 broker firms leads him to conclude there is little 

abuse in that industry, and that brokers have simply priced everyone else out of business.48 

Consumers have flocked to brokers because they guide consumers through the complex, paperintensive process. Olson says consumers only need two numbers -- interest rate and fees -- and 

that it is easy to get a quote from one or more of the 33,000 brokers and 8,000 lenders operating 

in today’s mortgage market. His experience is that consumers get multiple quotes (as he says 

they should) and “make it difficult for brokers” (p.24). According to Olson, market information 

is widespread and prices are readily available from the internet, television, or newspapers for 

thousands of competing firms. Mortgages have become a commodity with very little variation in 

prices among lenders. 

IV.D.4. Guttentag’s Comments on Shopping 

Jack Guttentag has commented extensively on mortgage issues for years. His recent 

comments on the shopping process appeared in a short paper on the mortgage settlement process 

that he submitted to the Senate Committee on Banking, Housing, and Urban Affairs.49 

Guttentag’s conclusions about the mortgage process are similar to those of Jackson and Berry. 

Guttnetag states the core problem is that effective shopping for a mortgage is extraordinarily 

difficult for even sophisticated borrowers. In this “inherently complex” market, few borrowers 

want to take the time to educate themselves on its complexities. In an analysis of 774 brokered 

 basis points higher than non-Hispanic Whites, controlling for differing characteristics of the household, home, 

mortgage, and neighborhood, but not controlling for credit scores or non-mortgage debt. Using the same model, he 

also found that college graduates paid 33 basis points less than high school dropouts, and 14 basis points less than 

high school graduates. 

48 See David Olson, “Statement of David Olson, Managing Director, Wholesale Access Mortgage, Research and 

Consulting, Inc.,” (pp. 24-26) and “Prepared Statement of David Olson,” (pp. 78-84), Predatory Mortgage Lending 

Practices: Abusive Uses of Yield Spread Premiums, Hearing Before the Committee on Banking, Housing, and 

Urban Affairs, United States Senate, 107th Congress, U.S. Government Printing Office: Washington, D.C., January 

8, 2002. 

49 See Jack Guttentag, “Another View of Predatory Lending,” Predatory Mortgage Lending Practices: Abusive 

Uses of Yield Spread Premiums, Hearing Before the Committee on Banking, Housing, and Urban Affairs, United 

States Senate, 107th Congress, U.S. Government Printing Office: Washington, D.C., January 8, 2002, pp. 129-154. 

 2-37
loans, Guttentag finds a very large dispersion in gross profits per loan, with larger loans yielding 

more profits than smaller loans. According to Guttentag, “it is clear that brokers take advantage 

of the inability of borrowers to shop effectively by extracting more from those who can afford to 

pay more.” Guttentag says brokers tell him that a major determinant of profit per loan is the 

sophistication of the borrower relative to the sales skills of the loan officer. Guttentag said this 

was illustrated in his analysis of 17 conventional loans that had a loan amount of exactly 

$100,000 -- the profit per loan ranged from $1,077 to $2,748 with no relationship between profit 

and work load. Guttentag states: 

Some economists find it difficult to comprehend how profits per customer can vary so 

widely in a market with so many lenders and such easy entry. The reason is that 

borrowers can’t shop effectively...(page 138). 

According to Guttentag, one consequence of the combination of easy market entry with 

barriers to effective consumer shopping is excess capacity among loan officers. According to 

Guttentag, many if not most loan officers spend as much as four-fifths of their time looking for 

customers and only one-fifth of their time dealing with customers. 

Guttentag lists several reasons why consumers are not effective shoppers for mortgages. 

For example, market “nichification” -- meaning the specialization of mortgage products and 

prices to reflect the wide variety of borrower, property, loan, and documentation characteristics -

- causes problems for shoppers because they might choose a lender based on a generic price (in 

the newspaper) but find out later that the “specific product” that they qualify for is much more 

expensive. Many shoppers have difficulty understanding “rebate pricing “ (or yield spread 

premiums) and existing settlement disclosures are no help in doing so -- which means shoppers 

cannot determine the compensation that the broker or lender is receiving. The many steps and 

players (loan officer, processor, underwriter, appraiser, title insurer, abstract company, credit 

reporting agency, pest inspector, and many more) in the process of obtaining a home loan 

provide lenders and others ample opportunity to increase their fees between the good faith 

estimate and final closing -- with lenders telling the “overwhelmed” borrower at closing that the 

increased charges were due to circumstances beyond their control. Borrowers may suspect 

otherwise, but they have little choice except to proceed with the closing, according to Guttentag. 

In his comments on HUD's proposed rule, Guttentag, also commented on another 

important problem -- called "float abuse" -- that consumers face when obtaining a mortgage.50 

In fact, Guttentag states that "float abuse" is the "most pervasive abuse in the home loan market" 

(p. 7).51 "Float abuse" is the practice of a loan originator understating the interest rate when 

quoting it to shoppers, and then overstating the interest rate on the day it is locked by the 

consumer. For example, on a given day an originator might quote good credit customers making 

initial inquires 6% / zero points for a thirty-year, conventional loan. Some customers may lock

 

50 Jack Guttentag, “HUD’s Proposals For RESPA Reform,” submitted to Rules Docket Clerk at HUD, regarding 

Proposed Rule on Real Estate Settlement Procedures Act (RESPA): Simplifying and Improving the Process of 

Obtaining Mortgages to Reduce Settlement Costs to Consumers; Docket No. FR-4727-P-01; (July 29, 2002), 

October 18, 2002. 

51 Guttentag offers no study or data to support these claims; they appear to be based his own knowledge of and 

experience in the market. 

 2-38
into this rate, while others may chose to float. Those that choose to float will lock the rate at 

some later date. Suppose on some later date the originator quotes good credit customers making 

an initial inquiry 61⁄8 / zero points, but tells customers who have previously submitted their 

applications and want to lock that the current rate is 61⁄4 / zero points. This differential treatmen

(61⁄4 vs. 61⁄8) is float abuse. It is possible to overcharge the rate-locking customer because the 

customer has already invested considerable time (and possibly money) in completing his or her 

mortgage application and may be planning to close the loan within days. Guttentag argues that 

customers making rate lock requests should be treated as “twin siblings” of those making initial 

rate inquires. That is, customers with identical credit and loan profiles should receive identical 

rate quotes even if one customer is merely shopping for rates while another customer has already

shopped and is ready to lock. Guttentag argues that float abuse can be eliminated if originators 

post rate quotes on the

t 

 internet for all to see. 

According to Guttentag, "float abuse is pervasive, practiced by mortgage brokers as well 

as lenders, and often institutionalized " (p.8). Chapter IV discusses a posted pricing mechanism 

to ensure that consumers are not subjected to "bait and switch" schemes by originators who are 

offering Mortgage Package Offers.

IV.D.5. FTC Staff Comments on Shopping for a Mortgage 

Comments on HUD’s proposal from staff at the Federal Trade Commission provided 

useful insights into several of the issues (e.g., price dispersion, price discrimination, and 

consumer shopping) being discussed in this section.52 FTC generally supported HUD’s approach 

to provide consumers with more information about the mortgage process, emphasizing the 

importance of conducting consumer research on any proposed changes (which HUD has done, as 

discussed in Chapter 3).53 Some of the other points offered by FTC staff are discussed below. 

(Also see Section IV.D.8 below for a summary of the FTC’s recent study of mortgage 

disclosure.) 

FTC staff offered perhaps the best explanation of why the process of shopping for a home 

loan is so complicated (HUD has underlined what it thinks are the key points about consumer 

shopping in this quote from FTC staff): 

Currently, shopping for a mortgage can be a complicated process. The mortgage and 

settlement service options for consumer are diverse, and, in response to demand, new 

alternatives become available relatively often. The mortgage and settlement service 

field can also involve complex terminology, with which some consumers may not be 

familiar. Consumers do not purchase or refinance homes with the regularity that they 

may purchase other products and therefore they may deal with these issues 

infrequently. In addition, the loan and origination costs in mortgage transactions can 

 

52 “Comments of the Staff of the Bureau of Economics, the Bureau of Consumer Protection, and the Office of Policy 

Planning of the Federal Trade Commission,” October 28, 2002. 

53 As discussed in Chapter 3, the FTC staff raised questions about why HUD was requiring additional disclosures for 

mortgage brokers since HUD had indicated in its Economic Analysis that the broker industry was highly 

competitive. 

 2-39
involve various types of charges, with the loan price consisting of an interest rate, 

possibly points, and possibly a number of contingency prices, such as adjustable 

interest rates and prepayment penalties. Loan originators may charge different types 

of fees, such as those for underwriting, document preparation, and document review, 

which also do not have standardized (let alone simple) terminology. (page 11) 

FTC staff recognize that the dispersion of prices in the mortgage market suggest that 

there could be potential savings from more effective consumer shopping. They also note that 

empirical studies indicate (a) that price dispersion is common in retail markets, even markets 

where entry is relatively easy and economic profits are rare; and (b) that the extent to which 

consumers shop for low prices helps to explain why some consumers pay less than others. They 

go on to note that if the mortgage market is characterized by easy entry and little economic 

profit, then price dispersion in the mortgage market is probably explained by imperfect 

information and a lack of consumer search. As explained in Chapters 3 and 4, these are the very 

features of the mortgage market that HUD seeks to change. 

FTC staff also summarized evidence on consumer search in the mortgage market, noting 

that consumers vary greatly in the extent to which they search for mortgages. While most 

consumers shop extensively, a substantial minority contacts only one mortgage source. Based on 

a 1997 telephone survey of 1,001 consumers, Hogarth and Lee (2000) find that 14 percent of 

those refinancing contacted only one lender and 23 percent of home purchase borrowers 

contacted only one lender. A 1998 survey sponsored by the Mortgage Bankers Association of 

965 borrowers found that more than half reported they shopped three or more lenders for 

information before getting a loan; less than 30 percent shopped only one lender and only 14 

percent contacted only one lender throughout the entire process. FTC also mentioned that 

surveys indicate that some consumers may be confused by mortgage terms. Hogarth and Lee 

(2000) concluded “there is a general consensus that consumers’ lack of understanding is a 

problem in credit markets”; these authors noted that 40 percent of respondents in the University 

of Michigan’s “Surveys of Consumers” did not understand the relationship between the interest 

rate and the APR. 

The FTC staff also included a useful discussion of the marginal benefits and costs of 

additional search in the mortgage market. They note “differences in the expected marginal 

benefits of shopping across consumers might be explained by differences in consumer awareness 

of the extent of price dispersion, in awareness of the present value of interest rate differences, 

and in perceptions of broker services.” (p. 6). Again, as explained in Chapters 3 and 4, HUD’s 

intentions are to increase consumer awareness in these areas. FTC also makes an important point 

concerning the potential benefits of shopping: “HUD’s characterization of substantial 

competition on the supply side of the market also suggests that consumers who engage in 

information search should be able to find competitively priced loan products....” (p. 6). In other 

words, if consumers could increase and improve their shopping, there are many suppliers of 

funds (over 40,000 brokers and lenders) in the market that would compete for their business. 

This situation contrasts with the all-too-often-found situation in today’s market of an uninformed 

shopper being subject to price discrimination by a broker or lender. 

 2-40
IV.D.6. Survey of Consumer Satisfaction with Mortgage Process 

An October 2003 study by the CFI Group on consumer satisfaction with the mortgage 

lending process indicates the need to reduce complexity in the process and provide consumers 

with more information, choices and predictability.54 The study found that mortgage lending 

ranks relatively low on consumer satisfaction among financial services. Overall, consumers gave 

the process a satisfaction score of 69 out of a possible 100, placing the mortgage lending process 

at the low end of the scale among all financial service industries. A serious shortfall, the study 

found, was that consumers feel they have limited ability to effectively shop rates and settlement 

costs. First-time homebuyers rated their ability to shop for settlement costs at a very low 49 out 

of 100. 

The study used a nationwide random sample of homeowners who had either purchased or 

refinanced their homes in the first half of 2003. Reflecting the current market for mortgage 

financing, two-thirds of respondents had refinanced and one-third had purchased their homes. 

Respondents were about asked about key components of the lending process including: ability to 

research and find a lender, documentation, lender's performance, the closing process and costs. 

As described in a recent article, the study found, 

"a sense among borrowers that they have very little means by which they can shop 

rates and settlement costs effectively. This is reflected in very low ratings on their 

ability to do research to find a lender. This component is measured with questions 

related to the availability of accurate information about lenders, their rates and fees; 

and the possibility to compare fees and closing costs across lenders effectively – 

which borrowers rated at a poor 55."55

The results of the survey show that consumers regard the process as too complex. 

Consumers were asked if they agreed with the statement that the “current system for home 

financing is too complex.” There was strong agreement with this statement among both home 

purchasers and refinancers. On a scale with zero indicating complete disagreement and 100 

indicating complete agreement, an average score of 61 was reported, ranging from 59 among 

refinancers to 65 among all purchasers to a high of 71 among purchasers not buying for the first 

time. 

Key components of the mortgage lending process received low scores from consumers 

surveyed in the study. These included: information about lenders, rates and fees – 65; ability to 

effectively compare fees and closing costs across lenders – 55; degree to which you felt you 

could control the process – 63; and whether the system lets people shop effectively for the best 

rates and closing costs – 59. Of those surveyed, refinancers had higher satisfaction levels than 

purchasers, reporting an overall satisfaction rating of 71 compared with 67 for buyers (and an 

even lower 66 for first-time buyers). These low scores indicate there is substantial room for 

 

54 CFI Group, Consumer Satisfaction with the Mortgage Lending Process, October, 2003. 

55 Wilhite, Clayton and Park, Rodger, “Consumers Rate the Industry,” Mortgage Banking, pp. 32-43, October 2003. 

 2-41
improvement in consumer satisfaction when compared with other financial services industries 

and with leading customer service organizations in other fields. It should also be noted that the 

study probably underestimates dissatisfaction with the process, because it included responses 

only from successful buyers and refinancers and not from those who may have been turned away 

or given up out of frustration. 

The study shows serious room for improvement in the lending process and further 

supports updating RESPA requirements to reduce complexity and improve the ability of 

consumers to shop for competitive rates and settlement costs. As stated in the article in 

Mortgage Banking, 

“There are many indications in the survey results that suggest the ballpark is overdue 

for an overhaul and that HUD Secretary Martinez’s proposed rules for RESPA reform 

would be well-received by many borrowers. A closer look at the individual questions 

making up the satisfaction index score shows customers’ satisfaction is restrained by 

a nagging sense that the mortgage process could be improved.” 

The article goes on to state, “Certainly the notion of helpless homeowners at the mercy of 

a lending system that leaves them prey to confusion and even exploitation by a few unscrupulous 

players is a central feature of many of the arguments in favor of RESPA reform.” Other results 

of the survey further indicate the potential benefits of RESPA reform, including more positive 

satisfaction scores on other aspects of the lending process. The lowest scores were given to the 

category, “research to find a lender,” which includes items on consumers’ ability to shop rates 

and settlement costs effectively, availability of accurate information and the ability to compare 

fees and closing costs across lenders effectively – which borrowers rated at a very low 55. 

Given the potential of RESPA reform to improve these aspects of the lending process 

which consumers reported the most frustration with, consumer satisfaction with mortgage 

lending overall can be expected to rise significantly. 

IV.D.7. Survey on Fees in Mortgage Market 

A 2003 survey conducted by Bankrate.com sheds further light on the confusing nature of 

fees and closing costs and the difficulty experienced by consumers attempting to shop for 

competitive rates and lower costs.56 According to the survey, “[l]enders, brokers and third-party 

mortgage originators charge all sorts of fees to borrowers. It’s hard for borrowers to know 

whether they’re being overcharged.” 

The survey was conducted using closing cost information from 50 states and the District 

of Columbia and included a sample of 306 good faith estimates. This data was analyzed to 

determine the highest, lowest and average fees charged by the lenders in the sample. For a 

$180,000 loan to an applicant with good credit and a minimum 20 percent downpayment, total 

 

56 “Bankrate Closing Costs Survey: Mortgage fees vary widely and confuse borrowers,” 

http://www.bankrate.com/brm/news/mortgages/20031106a1.asp?print=on also see: 

http://www.bankrate.com/brm/news/mortgages/20031106b1.asp?print=on 

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closing costs varied widely from a low of $1,020 to a high of $11,395, with an average of 

$3,350. According to an analysis of the survey by Holden Lewis, writing for Bankrate.com, 

“The survey shows that the pricing of mortgage fees is a shell game, with different 

lenders calling the same fees different things. Some lenders charge a slew of separate 

little fees and others charge a few bigger fees.” 

Clearly, consumers are faced with a daunting task in attempting to obtain accurate and 

comparable information in order to locate the most competitive costs. This task is complicated 

not only by the widely varying costs , but also by the lack of uniformity in which fees and costs 

are included in estimates and what those fees are called as well as paperwork of various 

completeness and which costs are included in the estimates (e.g. title insurance, state and local 

taxes, etc.). As Mr. Lewis cogently points out, 

“The lesson is that you not only have to shop around, but you must compare and probe to 

find out which lender is really offering the best deal. Mortgage fees vary widely, lenders 

make errors when calculating things such as taxes and the good faith estimate doesn’t 

always include every cost.” 

IV.D.8. Recent FTC Study of Mortgage Disclosure 

Like the Department’s recent inquiry, the object of the FTC’s study is to investigate how 

consumers shop for mortgages, how well consumers understand various loan disclosures and 

borrowing terms, and whether or not “better” forms of disclosure improve consumers’ 

understanding of mortgage costs and ability to discriminate among lenders. At issue is the role 

that information plays in the home mortgage market—and what, if anything, can improve its 

quality. The study’s objectives are motivated by a lack of extant empirical evidence on the matter 

and are addressed via a series of 36 in-depth interviews with recent mortgage customers and a 

quantitative analysis of data on another 819 mortgage customers. The results, which are largely 

in agreement with the Department’s findings, suggest that, overall: (1) current forms of 

disclosure fail to fully inform consumers; (2) alternative forms of disclosure can significantly 

enhance the quality of information in the marketplace; (3) prime and sub-prime borrowers alike 

have trouble with current forms of disclosure and benefit from the alternatives; and (4) the 

benefits of improved disclosures are positively correlated with the complexity of loan terms. En 

route to these findings, the study also illustrates that careful testing is fundamental to developing 

effective disclosure instruments. The following paragraphs elaborate on the research design, 

specific findings, and how these line up with those of the Department’s study, which was similar 

in many respects. 

To begin, the FTC’s study was designed to develop both specific and generalizable 

conclusions via a combination of qualitative and quantitative analysis. The former approach 

involved conducting 36 in-depth interviews with consumers who had obtained mortgages in the 

four months previous. The interviews were conducted between September 2005 and February 

2006, and sought detailed information on approaches to shopping, consumers’ understanding of 

their mortgages, and the utility of alternative disclosure instruments. Participants from 

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Montgomery County, Maryland—who were demographically diverse and had made use of a 

wide array of financial instruments to purchase their homes—were recruited via telephone and 

then interviewed in person. During the interview, consumers’ understanding of loan disclosures 

and borrowing terms were compared against their actual loan documents. The latter approach 

involved conducting a quantitative analysis of data on 819 recent mortgage customers in 12 

locations around the country. Specifically, participants—an approximate 50/50 split between 

consumers who had obtained their mortgages through prime and sub-prime lenders—were asked 

to examine two hypothetical mortgage loans and then explain their understanding of the costs, 

terms, and other conditions. About half of the respondents were presented with the two scenarios 

via “current” forms of disclosure and the other half via alternative forms of disclosure. Since no 

standardized good faith estimate (GFE) form exists, a form similar to many currently in use was 

created specifically for this purpose; both the FTC and the Department believe that the 

instrument is representative of mainstream practices. The results of the survey were then 

analyzed in order to determine whether or not the two groups of participants understood the 

alternative loan scenarios differently. More specifically, a series of so-called “difference of 

means tests” was used to identify statistically significant differences in how well participants 

understood the loans, based on the type of forms they received. 

The interviews revealed that consumers are often confused by current forms of mortgage 

cost disclosures and commonly do not understand key terms and conditions—a finding that 

extends to participants own mortgages. Rather predictably, many consumers had mortgages that 

were more costly than they believed, even if they were savvy customers who had “shopped 

around” by consulting with multiple lenders. Participants reacted positively to the alternative 

disclosure instrument, and most characterized it as an improvement over what they had seen in 

the past. Taken together, these findings suggest that there is substantial room for improvement in 

the quality of information that consumers receive when shopping for—and agreeing to—home 

mortgages. The statistical analysis revealed a number of detailed findings that underpin the four 

general conclusions listed above. For example, the study reports systematic evidence of a failure 

on the part of lenders to convey key mortgage costs—a finding that probably understates the true 

scope of the problem, because survey respondents were provided with more information than 

required by law. The detailed outline of findings includes a chart that reports the number of 

respondents who received current versus prototype forms who could not correctly identify key 

costs terms and conditions. These findings are listed below, which, wherever possible, also 

includes corresponding results from the Department’s study, which is detailed in Chapter 3. 

The table below gives the percentage of respondents in the FTC study and in the first two 

(out of six) rounds of the Department’s study. The first two columns of percentages correspond 

to the FTC’s current and alternative, or improved, forms, respectively, and the second two 

columns of percentages correspond to rounds one and two of the Department’s study. All of the 

percentages in the latter two columns relate to survey questions that were either identical or 

closely analogous to those in the FTC’s survey; results for the latter rounds are not included even 

though they produced improvements, because the methodology of those surveys was different 

enough to preclude direct one-to-one comparison. As a set, the percentages listed below point to 

two straightforward conclusions: (1) there is clearly a lot of room for improvement in the quality 

of information available to consumers in the market for home mortgages; and (2) relatively 

simple changes in the way that this information is communicated, such as presenting it in simple 

terms, can have an appreciable impact. 

 2-44
Percentage of Respondents Who Could Not Correctly Identify Loan Costs, Terms and 

Conditions

FTC Study HUD Study 

Current Alternative Round One Round Two 

APR 20% 5% n/a n/a 

Amount of Cash Due at Closing 20% 17% n/a n/a 

Monthly Payment 21% 10% 5% 0% 

Settlement Charges 23% 8% 9% 3% 

Presence of a Balloon Payment 30% 30% 7% 10% 

Interest Rate 32% 20% 7% 0% 

Finance Settlement Charges 33% 24% n/a n/a 

Less Expensive of Two Loans 37% 24% 27% 14% 

Loan Amount 51% 13% 

Presence of a Prepayment 

Penalty 68% 44% 9% 3% 

Presence of Charges for 

Optional Credit Insurance 74% 30% n/a n/a 

Reason Why the Interest Rate 

and APR Sometimes Differ 79% 59% n/a n/a 

Property Tax and Homeowner's 

Insurance Amount 84% 21% n/a n/a 

Total Upfront Cost 87% 22% n/a n/a 

Prepayment Penalty Amount 95% 42% n/a n/a 

Note: n/a denotes that a direct comparison is not applicable. 

IV.D.9. Mark Shroder’s Study of Good Faith Estimates 

The National Association of Realtors questioned the benefits of the 2008 proposed rule 

and cited a study57 by Mark Shroder as evidence that “bait and switch” is not a widespread 

phenomenon. Such a conclusion can not be based on Shroder’s study. The sample in the study 

suffers from a selection bias that limits its usefulness in investigating the “bait and switch” 

 

57 Mark Shroder, “The Value of the Sunshine Cure: The Efficacy of the Real Estate Procedures Act Disclosure 

Strategy,” Cityscape: A Journal of Policy Development and Research, Vol. 9, Number 1, 2007 

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phenomenon. Mark Shroder examined 146 FHA insurance binders. The GFE was present in only 47 

of the 146 FHA binders. FHA does not require lenders to include GFEs in case binders. It is natural 

to suspect that those lenders that voluntarily submitted a GFE had nothing to hide. One can only 

speculate about those GFEs that are not present, but would a lender that purposefully tried to 

mislead a borrower knowingly report their activity to the FHA? HUD concludes that it is not 

likely that one would be able to detect “bait and switch” behavior from a study where disclosure 

by the lender is voluntary. 

IV.E. A Study of Closing Costs for FHA Mortgages - Urban Institute (2008) 

This section summarizes key results related to the origination costs and yield spread 

premiums from a study of FHA closing costs by the Urban Institute (2008). The study, entitled 

“A Study of Closing Costs for FHA Mortgages”, will be referred to as Urban Institute (2008). 

The report was written by Susan Woodward with the assistance of Urban Institute staff -- SigneMarry McKernan, Caroline Ratcliffe, Doug Wissoker, and William Margrabe. 

Readers not interested in the first section subsection, which is a background section on 

YSPs should proceed to the next section, which describes the data set. The third subsection 

summarizes the analysis of the data. An important focus of this study was to determine whether 

there is evidence that disclosures for mortgage borrowers could be improved. The answer is 

“yes”, for the following reason: the Urban Institute found that charges vary significantly by the 

race and education of the borrower, and the complexity of the loan. This section concludes by 

dealing with the question of where potential saving in yield spread premiums and direct 

origination fees will come from if this industry is competitive. 

IV.E.1. Background: Direct Fees and Yield Spread Premiums 

To understand the analysis done in this analysis of FHA loans, it is helpful to see how the 

rate-point tradeoff works from a mortgage lender’s perspective. About 20 percent of the loans in 

this study were done through mortgage brokers58, others were made by direct lenders. The main 

distinction is who owns the loan at the time it is closed: if the party arranging the loan owns the 

loan at closing, it is a direct loan. If a broker arranges the deal but a wholesale lender owns the 

loan at closing, it is a brokered loan. 

Mortgage brokers are free-lancing middlemen. They have relationships with wholesale 

lenders who give them, at least daily, the terms on which they are lending at present. The 

mortgage broker finds borrowers, offers them a deal, and earns money potentially in two ways: 

first, as cash fees paid by the borrower to the broker, and second, as a fee paid by the lender that 

is tied to the rate paid by the borrower. The higher the rate, the higher the broker’s payment 

from the lender, other things equal. The broker’s payment from the lender is called a yield 

spread premium, or YSP. 

 

58 These are brokers as HUD defines them (see earlier discussion). 

 2-46
A mortgage broker’s fees can come from cash paid by the borrower, or from cash paid by 

a wholesale lender, or from a mix of the two. In principle there could be a one-for-one tradeoff, 

with the borrower choosing whether to pay closing costs in cash or to agree to a higher rate and 

in essence, roll the closing costs into the rate on her loan. Whether there is a one-for-one tradeoff 

is one of the important questions the research here addresses. If borrowers thoroughly understood 

how rates and points work, we would expect to see a one-for-one trade-off. In a previous study 

of brokered loans, (mainly conventional, with some FHA and some jumbos), Woodward found 

that for each dollar paid in YSP, borrowers saved 55 cents in cash closing costs. 

The terms offered by wholesale lenders are detailed on a document called a rate sheet. 

The rate sheet shows the payments the lender will make to the broker for a loan of a given 

amount at a given interest rate. Because the rate sheets given by wholesale lenders to mortgage 

brokers make the rate-point tradeoff so clear, let’s review the mechanics the rate sheets. 

Below is a typical rate sheet for a day in the month of April 2000, for 30-year, fixed-rate, 

conventional loans59. Brokers usually have relationships with a dozen or so wholesale lenders 

who update their rate sheets at least daily. The wholesale terms on the rate sheet show the ratepoint alternatives offered. 

 

59 A rate sheet for FHA loans may not be identical to this rate sheet for conventional loans, but it will be functionally 

very similar. 

 2-47
Exhibit: A typical rate sheet: 

 lock period 

Rate 15 days 30 days 45 days 60 days 

9.750% 

9.625% 

9.500% 

9.375% 

9.250% 

9.125% 103.375 103.250 103.125 103.000

9.000% 103.000 102.875 102.750 102.625

8.875% 102.625 102.500 102.375 102.250

8.750% 102.375 102.250 102.125 102.000

8.625% 102.000 101.875 101.750 101.625

8.500% 101.500 101.375 101.250 101.125

8.375% 101.000 100.875 100.750 100.625

8.250% 100.625 100.500 100.375 100.250

8.125% 100.250 100.125 100.000 99.875

8.000% 99.750 99.625 99.500 99.375

7.875% 99.125 99.000 98.875 98.750

7.750% 98.625 98.500 98.375 98.250

7.625% 98.250 98.125 98.000 97.875

7.500% 97.625 97.500 97.375 97.250

7.375% 

The left-most column, in bold, shows the coupon rate on the loan, quoted in one-eighth 

increments or “ticks”. This is the interest rate that will be used to calculate the borrower’s 

payments. The top line indicates the length of time for which the lender will lock (guarantee) 

that interest rate, giving the lender and borrower the time needed to assemble the paperwork to 

complete the transaction. Sometimes brokers (and retail lenders as well) require an up-front 

payment of several hundred dollars from the borrower, often in an application fee, sometimes in 

an explicit lock fee, to provide a lock. 

The figures in the grid indicate the amount of cash the lender will deliver at closing for a 

given rate and lock term per hundred dollars of mortgage loan amount. For example, the cell for 

a rate of 8.25 percent and a 30-day lock indicates that for a $100,000 mortgage, the lender will 

deliver $100,500 to the closing table, and that this offer remains good (locked) for the next 30 

days. This choice will result in a mortgage with a principal balance of $100,000, for which an 

interest rate of 8.25 percent will be used to calculate payments, and the lender will pay at closing, 

in addition to the $100,000 mortgage loan amount, another $500 in cash. This additional cash 

can be kept by the mortgage broker or credited to the borrower. In the mortgage business, this 

$500 is called the yield-spread premium or YSP. 

 2-48
Consider another cell in the column for a thirty-day lock, at the 8.5 percent rate: for a 

loan of $100,000 at 8.5 percent, the lender will deliver $101,375 at the closing. By contrast, in 

order to get a rate of 7.5 percent on a thirty-day lock, the broker making a loan of $100,000 

notional value will have to pay $2,500 cash at closing, that is, to pay 2.5 points (also called 

“discount points”) at closing, and the broker will likely charge the borrower for at least this 

amount. It makes sense to think of YSPs as negative “points” on loans with above-par interest 

rates. 

Note that for the 45-day lock period there is an interest rate, in this instance 8.125 

percent, for which the lender delivers exactly the mortgage amount at closing, and neither 

requires nor provides additional cash. This is called the par interest rate for the 45 day lock. 

Note also that there is no par rate for the 15, 30, or 60 day locks. Because mortgage interest rates 

are quoted on ticks of one-eighth of a percentage point, frequently no loan will be quoted exactly 

at par, as one will arise only if the par interest rate happens to fall on a tick. Sometimes it does, 

often it does not. 

Loans with interest rates above par are called premium loans—those on which the lender 

pays a yield-spread premium. This payment is also sometimes called a “service release 

premium” a “broker’s premium”, “lender’s premium”, “deferred premium” and even “discount 

rebate”. The terminology used for this payment on HUD-1 settlement statements is far from 

uniform. 

Borrowers do not have access to rate sheets. For loans originated through mortgage 

brokers, the YSP is required to be disclosed on both HUD Good Faith Estimate, and on the 

HUD-1 settlement statement. Despite this requirement, YSPs are often not disclosed.60 Thus 

borrowers are frequently unaware of the existence of the YSP. Even when it is disclosed they 

may be unaware of it, as it is not easy to interpret HUD-1 settlement statements. All lenders have 

a functional equivalent of a yield-spread premium, but only mortgage brokers are required to 

disclose them. 

In practice, the yield-spread premium is always paid to the broker, not the borrower. 

Sometimes the borrower’s cash closing costs are lower when she pays an interest rate that results 

in a yield-spread premium, and sometimes they are not. In Woodward (2003), where the 

majority of the loans studied are conventional, (with also some FHA and jumbo loans), 

borrowers’ upfront cash charges fell about 20 cents for each dollar paid in YSP.61 

 

60 In Woodward (2003), a study of loans made 1996-2000, about one-third of YSPs were not reported on HUD-1s. 

61 Susan E. Woodward, “Consumer Confusion in the Mortgage Market,” Sand Hill Econometrics, July 7, 2003. 

Jackson and Woodward each examined the same data as part of the court case, Glover v. Standard Federal Bank. 

Jackson (2002a), serving as an expert witness for the plaintiffs, concluded that, for the most part, yield spread 

premiums are not being used to lower direct fees paid by borrowers. Based on his regression analysis, Jackson 

concluded that borrowers gain (as an offset to their closing costs) only about 25 cents on each dollar of YSP; the 

other 75 cents of YSP ends up as extra compensation for the broker. Woodward (2002), serving as an expert 

witness for the defendant, reached different conclusions based on analysis of the same sample, noting that Jackson’s 

analysis was incomplete because it failed to consider many factors that cause variation in broker compensation. In 

her initial regression analysis (as reported by Jackson and Berry, 2001), Woodward finds that 74 percent of the yield 

spread premium offsets borrowers’ closing costs. Woodward, however, has indicated to the Department that her 

 2-49
Direct lenders participate in the same wholesale market as do lenders who lend through 

mortgage brokers. They face the same wholesale rate-point tradeoff. Traditional direct lenders 

have not historically compensated their loan officers based on the size and interest rate on the 

loans they make. Instead, loan officers were salaried employees who likely received some bonus 

for volume and for the profitability of their book of business. More recently, lenders appear to 

be moving in the direction of compensating loan officers in ways more similar to how mortgage 

brokers are compensated.62

Total loan origination charges consist of two components: the direct loan charge and the 

yield spread premium (YSP). The direct loan charge is the fee charged directly by the lending 

loan originator in exchange for providing the loan. In the case of a brokered loan, the yieldspread premium is another payment received by the broker at the time the loan is made. The 

YSP is the present value of the higher monthly payments resulting from the higher interest rate 

the borrower will pay over the expected life of the loan. The borrower becomes committed to 

this higher monthly payment at the closing. For loans with relatively high coupon rates (above 

the market “par” rate), the broker receives the amount of the yield-spread premium upon selling 

the loan to the wholesaler. For loans with relatively low coupon rates (below the market “par” 

rate), the broker makes a payment to the wholesaler as part of the transaction selling the loan. 

These payments might well be called negative YSPs, but are commonly called discount points. 

YSPs are referred to as closing costs because the borrower gets committed to the stream of 

higher monthly payments at closing and the broker receives the YSP, the present value of the 

difference in the higher monthly payments at closing. 

On the HUD-1, which is the source of the FHA data, only mortgage brokers receiving 

(positive) YSPs are required to report them. Those loan originators who are not HUD-defined 

mortgage brokers – that is lenders – are not required to report YSPs, despite the fact that a lender 

receives the same monetary reward for originating loans at an above-par interest rate. They can 

either sell the loan and get the equivalent of a YSPs from the wholesaler or they can keep the 

loan in portfolio and keep the higher monthly payments for themselves, where the YSP 

equivalent is the present value of the expected higher income stream. So brokers and lenders are 

treated differently with respect to the disclosure of YSPs or their lender-equivalent. Since YSPs 

are not reported by lenders, the yield-spread premium is predicted for the non-brokered loans.63 

The analysis is based on observed yield-spread premiums for brokered loans and predicted yieldspread premiums for non-brokered loans. Neither brokers nor lenders have to report discount 

points (negative yield spread premiums) with the precision required of brokers who receive 

YSPs.64

 recent work using the court-case data base suggests that 55 cents in each dollar of YSP results in extra compensation 

to the broker. The latter work is consistent with her analysis as reported in Woodward (2003). 

62 Most FHA mortgages are securitized through GNMA soon after origination. 

63 Yield-spread premium is imputed for non-brokered loans using the relationship observed between yield spreadpremium, loan amount and interest rate for brokered loans with an interest rate at or above 7 percent. 

64 The HUD-1 data also does not indicate whether a loan is from a broker or a lender. Brokered loans are defined as 

loans for which a positive YSP was reported on the HUD-1. All other loans are considered non-brokered loans. 

 2-50
IV.E.2. Closing Costs Data 

The first goal of this research was to assemble a data set in order to provide HUD with 

descriptive information on closing costs. Information on the amount and variance of total 

closing costs and its components (direct loan origination fees, yield-spread premiums, title 

charges, and other third-party charges) are sparse. This data set fill that gap. These loans are 

from a sample of 7,600 FHA loans that were closed during a six-week period in May 2001 and 

June 2001.65 All loans are 30-year fixed rate loans. The Urban Institute collected data on loan 

closing costs from the HUD-1 settlement statements associated with the loans.66 The 

characteristics of the data set are reported in the table below. 

Borrower Charges for All Loans and Title Services (nationally-weighted sample) 

All Loans All Nonsubsidized loans Non-subsidized 

loans with 

coupon rate > 7% 

Total Loan Charges $4,917 $5,245 $5,635 

Total Lender/Broker Charges $3,081 $3,390 $3,766 

 Up-front charges $1,454 $1,450 $1,348 

 Yield-spread premium* $1,628 $1,940 $2,417 

Total title charges $1,329 $1,349 $1,364 

Other third-party services** $507 $506 $505 

Coupon rate 7.31% 7.38% 7.54% 

Down payment $2,486 $2,542 $2,470 

Loan Amount $108,237 $110,439 $108,704 

Number of Loans 7,560 6,366 4,603 

*The Yield-spread premium is actual for brokers and estimated for lenders. 

**Third-party services consist of appraisal, credit report, flood certification, and tax service. These are only the 

charges paid by originators. Other services such as closing, survey, and pest inspection are not included here. 

Closing costs are a significant portion of charges and, on average, are twice as great as 

the down payment. The above table presents the descriptive data for two sub-samples of the 

total data set: non-subsidized loans and non-subsidized loans with coupon rates greater than 7 

percent. These sub-samples were used for the regression analysis. Non-subsidized loans are 

loans that have not received contributions to closing costs from state or local programs and thus 

are thought to better reflect the typical market loan. Loans with a coupon rate greater 7 percent 

are thought to be more likely to have been a premium loan in May and June of 2001 and thus 

have received a yield-spread premium. The loans were all closed between mid-May and the end 

of June, 2001, During that period, the Freddie Mac published weekly rate varied between 7.1% 

and 7.2%. For the full sample, average closing costs are slightly lower at $4,917 than for nonsubsidized loans and represent a smaller fraction (4.5 percent) of the loan amount than for the 

 

65 The loans dropped from the full 7,600 sample are those (1) identified as government subsidized on the HUD-1 

form, (2) with interest rates that are not multiples of 1/8 (i.e., off tick), and (3) with interest rates less than 7 percent. 

66 The closing costs analyzed are those associated with loan charges (direct loan fees and yield-spread premiums), 

title charges (including title insurance), and other third-party fees (such as appraisal, credit report, survey, and pest 

inspection fees). Data to calculate these costs come largely from the 800, 1100, and 1300 series of the HUD-1 form. 

These charges comprise the bulk of total closing costs that must be paid at closing. 

 2-51
other two sub-samples described in the columns to the left. These loans are of modest size, not 

surprising since all are FHA-insured and FHA restricts the size of the loans it will insure. 

Average closing costs for non-subsidized loans are $5,245. The standard deviation, a 

measure of dispersion, of total charges is $2,267. To understand the magnitude of the variability, 

statistical theory (Chebyshev’s inequality) tells us that that as many as one quarter of the 

observations could be $4,534 away from the mean of $5,245. For the average loan ($110,439), 

total closing costs are 4.7 percent of the loan amount. Total loan charges average $3,390 

(standard deviation of $1,931) and account for the largest share of closing costs at 65 percent 

(and 3.1 percent of the loan amount). Of the two components of total loan charges, indirect loan 

fees paid through yield-spread premiums and direct loan fees, the yield-spread premium is larger. 

The magnitude and proportion of this difference increases in the sample (non-subsidized loans 

above 7 percent) that is likely to contain only premium loans. Total title charges average $1,349, 

with a standard deviation of $568, while the third category of costs (miscellaneous third-party 

settlement costs) average $506, with a standard deviation of $107. 

IV.E.3. Regression Analysis of FHA Closing Cost Data 

Introduction and Questions Addressed by Statistical Study. The original goal of 

RESPA was to assure the mortgage market was competitive and to make it easier for borrowers 

to shop for mortgage loans by giving them better information. Since RESPA was enacted in 

1975, and its amendments in 1983, new controversies have arisen about mortgage lending 

practices. As has already been discussed, one is the payment of yield-spread premiums by 

lenders to mortgage brokers. Race discrimination in lending continues to be an issue also. More 

recently, partly because of the YSP controversies, questions have arisen about whether our 

present mortgage disclosures help borrowers much and whether they could be better. 

• How much do FHA borrowers pay in lender/broker closing costs and how much do costs 

vary? 

• Are brokered loans more expensive than loans from direct lenders? 

• Do borrowers receive any benefit from yield-spread premiums paid to mortgage brokers? 

• Do borrowers receive any benefit from implicit yield-spread premiums when they borrow 

from direct lenders? 

• Are there differences in charges to borrowers by credit score? By education? By race? 

Does loan counseling help borrowers? 

• Are there differences in originator charges by State? 

• How large are title charges, and how are they related to borrower and loan 

characteristics? (The answer to this question is provided later in the discussion of title 

fees in Section V..) 

Each question is answered below. To answer these questions, comparisons need to treat 

direct loans and brokered loans similarly. Brokers are required to report yield-spread premiums, 

but direct lenders are not. Yield-spread premiums are without question a cost to the borrower, 

because the borrower pays a higher interest rate when the lender pays the broker a YSP. Rates 

vary on direct loans as well as brokered loans, and direct lenders have their functional equivalent 

of the YSP. Thus, for a proper comparison, YSPs need to be estimated for the direct loans. 

 2-52
How much do FHA borrowers pay in lender/broker closing costs and how much do 

costs vary? Thee answer to the first question is answered in table 5-1 above. Consumers pay 

approximately $5,000 in closing costs, which vary considerably (approximately $3,500 

depending on the data set). 

Are brokered loans more expensive than loans from direct lenders? The brokered 

loans are used to measure the relationship between yield-spread premium, the interest rate on the 

loan, and the loan amount. This measurement is then used to calculate estimated YSPs for direct 

loans. In this study, “total cost” always means the cash charges to the lender/broker plus the 

actual or estimated YSP. 

Brokered loans are identified as those loans with a YSP reported. If the YSP fails to be 

reported, and other data suggests brokers often do fail to report them, too few of the loans here 

are classified as brokered loans and some brokered loans are mixed in with what we treat as 

direct lender loans. This tends to make the two sets of loans look more alike than they truly are. 

Despite this, the brokered loans are measurably different from direct loans. 67Brokered loans are 

more expensive. But the customers brokers serve are, by all analyses in the data, more expensive 

customers. For example, a higher fraction of their customers have no credit score, and the loans 

they write are slightly larger than the non-broker average. Brokers on average charge $714 more 

than direct lenders charge. Taking account of the different characteristics of customers served by 

mortgage brokers, the difference falls to $422. 

It is also possible to look at differences in how brokers vs. direct lenders “treat” their 

customers by measuring how loan terms relate to borrower characteristics for each group, then 

using that set of measures to calculate what brokers would have charged to direct-lender 

customers, and vice-versa, and to calculate what each type of lender would have charged to all 

customers of non-subsidized loans. The results of this exercise plus other summary figures 

appear in the table below: 

 

67 A surprisingly large number of the loans in the study—nearly 16 percent—appear to be subsidized by some state 

or local program. The main analysis is restricted to the non-subsidized loans. In the FHA records, including the 

HUD-1 settlement statements, there were many signs showing which loans were subsidized. For some, 

contributions by various programs were clear. For others, the interest rate on the loan was far lower than any 

feasible market rate. For another group, the interest rate was off the “tick” (1/8, 1/4, 1⁄2, etc.) suggesting that the 

funds may have come from some state or local bond issues. These loans were all flagged as “subsidized” 

 2-53
Comparison of Charges, Direct Lenders vs. Brokers, non-subsidized loans only (from Table 

5-6a of Urban Institute 2008) 

 All 6,366 non-subsidized loans Brokers Direct Lenders difference

All non-subsidized loans $3,653 $2,939 $714 

 Upfront cash charges $1,481 $1,266 $215 

 YSP $2,171 $1,673 $498 

Average coupon rate, percent 7.45 7.32 0.13 

Percent of borrowers with no credit score 7.4 5.1 

Average loan amount $113,003 $108,145 

Difference measured as a regression coefficient $422 

 standard error of this coefficient $52 

While the differences between the charges of brokers and direct lenders are smaller when 

borrower characteristics are taken into account, brokered loans are still more expensive by more 

than 10 percent. 

Do borrowers receive any benefit from yield-spread premiums? This question has 

been central in litigation over mortgage lending practices for the last decade. The answer is 

“Yes, but very little.” For the sample of premium loans (coupon rate above 7 percent), the 

answer is “No” for the average borrower. These results are stunningly bad for borrowers. 

Clearly, the average FHA borrower has no idea a higher interest rate can be used to reduce 

upfront charges.

The table shows the net loss to the borrower from paying an additional $100 of yield 

spread premium. Borrowers who pay a higher yield spread premium should gain by paying 

lower closing costs. In the sample of all non-subsidized loans, borrowers see only $18 of savings 

in closing costs for every $100 of yield spread premium paid. This trade-off appears to vary by 

type of lender and is least advantageous for brokered loans: the reduction in closing costs is only 

$7 per $100 of yield spread premium for a net loss of $93. The trade-off is more advantageous 

for loans from large mortgage banks, where the savings in closing costs in $29 per $100 of yield 

spread premium. While better, this exchange is not close to what is ideal: a one-to-one trade-off 

between the yield spread premium and high upfront charges. Note that for the smaller sample of 

loans with a coupon rate above 7% there is no gain to be had for the average borrower. The 

borrower who pays a higher yield spread premium pays higher closing costs (an additional $10 

of closing costs for every $100 increase of the yield spread premium). 

The other empirical research that has made a thorough study of data from HUD-1 

settlement statements (plus lender’s electronic records, from which this FHA study does not 

benefit) found that borrowers saved about 55 cents for each dollar of YSP they paid (see the 

description above of Woodward 2003 in Section IV.D.3). The loans in the Woodward (2003) 

study were mainly conventional, with a small fraction of FHA and also jumbo loans. The FHA 

data shown in the table from the Urban Institute (2008) reveals a different picture. These tradeoffs compare unfavorably to that faced by mainly conventional borrowers, who save on average 

 2-54
55 cents on cash fees for each dollar of YSP according to other studies. The trade-offs compare 

even more unfavorably to the implicit trade-off on the rate sheets as measured between rate and 

YSP among the brokered loans, or on actual rate sheets. Service providers are expected to make 

a profit on a deal, but it appears that they make an extra profit when the deal is made more 

complicated for the borrower. 

In reading the table, keep in mind that the distinction between brokers and lenders in this 

study is imprecise. It is reasonably certain that all loans designated as brokered are indeed 

brokered, but there are likely some brokered loans for which YSPs were not reported among the 

direct lenders. Thus, the figures for direct lenders may be on the high side. In Woodward (2003), 

about one third of the YSPs were not reported. Total charges were no higher on the loans with 

unreported YSPs. 

Borrower Losses from YSPs (from Table 6-1 from Urban Institute 2008) 

 Loss is measured per $100 of YSP 

all non-subsidized 

loans > 7% only 

 Type of lender Net loss # of loans Net loss 

# of 

loans 

all lenders $82 6,366 $110 4,603 

 Depositories $78 913 $76 494 

 Large mortgage banks $71 1,745 $67 1,324 

 Smaller mortgage banks $81 2,275 $120 1,611 

 Mortgage brokers $93 1,433 $116 1,174 

From Woodward (2003) $45 2,624 

In sum, the borrowers are getting a small benefit from the YSP: 7 cents on the dollar from 

brokers; 22 cents per dollar from depositories; 29 cents per dollar from large mortgage banks; 

and 19 cents on the dollar from smaller mortgage banks. The difference between the measures 

of the YSP benefit here versus the other study of mainly conventional loans may arise because 

FHA borrowers are in many ways disadvantaged borrowers, less well prepared to make their 

way in complex financial transactions. 

Are simpler loans less expensive? The answer is “yes” It appears that when a loan is 

simpler, it is easier for consumers to compare different loans and choose the least expensive. 

Features such as discount points and sellers’ contributions to closing cost increase the cost of a 

loan. Overall, borrowers see a benefit of only $20 for each $100 of points paid, for a net loss of 

$80. Those who borrow through mortgage brokers see no benefit at all from paying benefits 

while customers of depositories realize $65 for every $100 of discount points. When sellers 

contribute to closing costs, there does not appear to be a one-for-one trade-off between costs paid 

by the seller and costs paid by the borrower. On average borrowers pay $50 less themselves for 

every $100 of contribution from the seller. This is not an even trade. As described in the 

previous section, the yield-spread premium, which is a function of a complex market, is of little 

or no benefit to the benefit to the borrower (7 cents for every dollar). 

 2-55
Just as increasing the complexity of a loan makes it harder to figure out which loan is the 

cheapest, reducing the complexity of loans makes it easier. This effect is most dramatic for “NoCost” loans. When sellers want to avoid up-front fees for loan origination, they can do so by 

rolling these up-front charges into a higher interest payment. The advantage of shopping for a 

“No-cost” loan is the ease of comparison with other offers. Instead of comparing interest rates 

and settlement charges, the borrower can focus on finding the loan with lowest interest rate. Nocost loans in the sample are cheaper than other loans by $1,200. In addition, the race and 

education premium found for other loans (described below) do not exist for “No-cost” loans. 

This result is important one because it gives HUD an estimate of the potential economic gains for 

consumers of simplifying the process of obtaining a loan. 

Do settlement charges vary by the characteristics of the borrower? The answer is 

“yes.” The cost of a loan depends on a borrower’s credit score, race, education, and whether the 

borrower has received loan counseling. 

Credit Scores. FHA borrowers who are not part of a local or State subsidy program have 

credit scores averaging about 600 points. Just under 6 percent of non-subsidized FHA borrowers 

lack a credit score. In order to measure differences on both the level of credit score and whether 

borrowers had one or not, credit scores for borrowers lacking them were estimated from the data 

for borrowers with them using methods that account for bias in the data. Whether we measure 

the impact of credit scores on loan terms with or without State effects, the measured impact is 

very close, so the results with States effects are reported here. 

Good credit is worth more to borrowers who get their loans through brokers than those 

who get their loans through direct lenders. Brokers’ customers save $604 for each additional 100 

points of credit score on a $100,000 loan, and they pay an extra $534 for not having a credit 

score at all. The customers of direct lenders save $376 for each additional 100 points of credit 

score and they save $207 for having a credit score (see Table 4-2, Urban Institute 2007b). 

Borrower Education. The differences in amounts charged to borrowers with different 

levels of education are one of the most compelling reasons to revise and improve mortgage 

disclosures. Taking account of all of the other borrower differences which can be measured, 

education differentials are very large by any metric. They are about three times the size of race 

differences. This is especially striking given that borrower education is measured with noise: we 

do not know actual borrower education, but only the average educational attainment of the adults 

in the borrower’s census tract. In addition, taking account of the factors that generally explain 

mortgage defaults (loan size, credit score, whether borrower has a credit score, and more), 

borrower education is unrelated to defaults. 

The results below show the education differential (which represents how much more 

borrowers with only high school are charged, other things equal, compared to college-educated 

borrowers) measured both with and without State-level effects. The differential is lower taking 

account of State effects. This suggests that borrowers with less education tend to live in more 

expensive States. 

 2-56
Differences in Lender/Broker Charges Related to Education 

(Table 5-4 from Urban Institute 2008) 

Differential Charges, High School vs. College

Measured 

with State 

effects 

Measured 

without State 

effects 

All non-subsidized loans $1,091 $1,699 

Non-subsidized loans with rate > 7% $1,271 $1,882 

These very large differences in mortgage costs for borrowers with different levels of 

education should give regulators concern. The differences are measured taking account of just 

about all the borrower characteristics we can measure—loan amount, credit scores, income, 

whether borrowers were counseled, by whom, metropolitan area incomes, borrower race, and 

more. Borrower education, taking account of other factors, is unrelated to differences in default 

likelihoods. The education differential is measured with high precision (the effect is five to 

seven times its standard error, depending on which measurement) and is within $100 (without 

State effects) of that found by Woodward (2003). This result is not a fluke, but something very 

systematic in the functioning of our mortgage markets. 

Borrower Race. There are measurable differences in the loan charges to borrowers of 

different races in the FHA data. Looking at only the non-subsidized loans, the differences can be 

approached in several different ways. First, the easiest is to compare the averages of the different 

population. On average, African-American borrowers are charged $756 more ($3,671) and 

Latinos are charged $1,043 more ($3,958) than non-minority borrowers ($2,915) in this sample. 

A simple comparison of the means could be misleading. Minorities tend to have smaller loans, 

which would reduce their charges, but worse credit, which would increase them. Consider also 

State effects, which have an especially large impact on the measured differential for Latino 

borrowers because Latinos tend to live in the States with the most expensive lending. The 

estimates taking all characteristics into account will give a more accurate measure of how 

differently groups are treated. Thus, when measuring the race differential, it is desirable to 

control for borrower and loan characteristics by treating race as a categorical variable is a 

regression equation. The race differential is then the regression coefficient on the race 

categorical variable, which is an additional $563 for African-Americans and $489 for Latinos. 

Differences by Race: all non-subsidized loans 

(from Table 5-3a, Urban Institute 2008)

Measure of Race Difference 

AfricanAmerican Latino 

Difference in simple means +$756 +$1,043 

Regression coefficient +$563 +$489 

Actual minus forecast +$414 +$365 

The last assessment of race differences does something different: it measures how loan 

costs are related to borrower characteristics using only non-minority borrowers, and then asks 

 2-57
what the minority borrowers would have been charged using this set of parameters. These 

measurements include neighborhood-level race effects because non-minority borrowers 

sometimes live in neighborhoods with minority residents. These are the last figures in the table 

above. They indicate that African-American and Latino borrowers would have been charged, 

respectively, $414 and $365 more than white borrowers if the same standards applied to whites 

had been applied to them. All of these measurements are done using only the non-subsidized 

loans. 

Loan Counseling. Loan counseling does help borrowers. Counseling data identifies 

borrowers who were counseled by their lenders, counseled by third parties, declined counseling, 

and those for whom data was lacking. The only group that stood out as different from the others 

was the group that received third-party counseling, who saved $306 taking into account loan and 

borrower characteristics. The savings indicated, combined with the low frequency of third-party 

counseling (there were only 101 non-subsidized loans), suggests that additional investigation is 

in order before dismissing the value of counseling. Again, these measurements were done using 

only the non-subsidized loans above7 percent. 

Are there differences in originator charges by State? If the differences across States 

were just random noise, among 50 States only one or two would be more than two standard 

errors from the average. Instead, after taking account of the variety of borrower and loan 

characteristics, there are many States whose average costs to borrowers are outside of two 

standard errors. The lowest-cost State is Alaska, and the highest is Nevada. High property 

values (and larger loans) do not explain why Nevada is the highest cost state: these differentials 

are measured taking property values into account. The source of these differentials is not clear. 

One possibility is state law. A categorical variable controlling for the eight states where a 

mortgage loan is a nonrecourse loan shows that such a legal regime the cost to consumers by 

$550 per $100,000 of loan amount. This does not explain why borrowers in Nevada, Michigan, 

and Utah pay a premium of $2,500. 

IV.E.4. Sources of Potential Savings in a Competitive Market 

One question that arises is where the savings in yield spread premiums and direct 

origination fees comes from if this industry is, in fact, competitive. This brings up the issue of 

how the conditions in the loan origination market might differ from the classic conditions of 

perfect competition and allow for these savings.

On the demand side, borrowers do not have perfect information. Most borrowers are not 

professional loan applicants. It would be so costly to obtain perfect information relative to its 

expected benefits that virtually no applicants would obtain it. But, most loan originators are 

professionals in their field and typically do have excellent information at their fingertips. Loan 

prices offered by originators to borrowers are often the result of one-on-one negotiations and 

every borrower need not pay the same. Borrowers with poor information facing loan originators 

who are willing to exploit the borrowers’ poor information may well be offered and accept loans 

with higher prices. So asymmetric information may lead to some borrowers paying higher prices 

for their loans than other borrowers do for loans are otherwise identical, even if there are a large 

number of loan originators and low barriers to entry. 

 2-58
But even if there were not uniform pricing, it would seem that there would still be entry 

until economic profit were zero, that is, only normal profit would exist. We would expect entry 

would eliminate economic profit in the long run.

Another potential explanation is that all resources may not be equally productive. Take 

the salesperson, the person who is the loan originator, for example. Some might be better than 

others in getting the borrower to accept more costly loans that result in higher revenue for the 

firm originating the loan. But that skill may be easily identified as the salesperson’s and the 

salesperson may recognize this and look for better pay. The owners of the loan origination firms 

might recognize this as well and be willing to pay more for it. Thus, the market forces might 

lead to higher pay to the owners of this more effective resource. Labor market competition will 

eventually lead to the superior salesperson capturing the market value of this skill rather than the 

owner of the firm retaining it as profit. And without profit, there is no incentive for new firms to 

enter the industry. And to the extent that this skill is innate, potential new entrants with this skill 

are limited and the return to this special skill can persist in long run equilibrium. The higher 

prices borrowers pay and the higher compensation paid to more effective employees can persist 

in long run equilibrium. 

A variation on this theme is the superior skill that the manager of the loan origination 

firm may have. The manager might enhance the ability of all the loan originators who work 

there to get borrowers to agree to higher-priced loans. But the same rationale that applied above 

would apply here and the manager would capture the value of that skill rather than the owner of 

the firm. It would generate higher labor compensation rather than higher profit. Borrowers 

could pay different prices with some of them paying high prices, but the firms would earn zero 

economic profit in the long run. 

What if this superior manager were also the owner of the firm? Would this lead to the 

firm earning positive economic profit? No. The owner could use this skill as the manager of 

somebody else’s firm and earn higher wages there. This skill would warrant higher pay 

regardless of which firm utilized it. Analytically, its use by the owner in the owner’s own firm 

has a opportunity cost equal to its value in the market. Thus, this skill’s value is reflected in the 

opportunity cost of its use rather than as economic profit going to the owner. As before, this 

higher return goes to the resource’s owner as a cost to the firm and does not generate economic 

profit that stimulates entry. But the owner has a choice. The owner could elect to keep the 

firm’s books in such a way that this return is recorded as accounting profit rather than wages. If 

so, the firm could have high accounting profit and earn that in the long run. But there is no 

economic profit that results from this accounting choice, and therefore no entry would result. If 

the superior manager skill is innate or difficult to replicate, all this could persist in the long run. 

The poorly informed borrower might well accept a higher-price loan. Firms could react 

to these opportunities by expending resources in the attempt to make these borrowers the firms’ 

profitable customers. These marketing expenses will be incurred until, at the margin, the costs of 

obtaining these borrowers equal the additional revenue to be obtained. Firms will enter until the 

expected profit of entry is zero, but this could exist with the firms still expending marketing 

dollars to obtain the poorly informed,- more profitable borrowers.

 2-59
How does all this fit into the effect of the new RESPA rule? All of these profitable 

scenarios rely on the borrower being poorly informed. The new rule and its new GFE are 

designed to give the borrower better information. This better information will reduce the extent 

to which borrowers will accept higher prices in the market for loans. So the first effect is on 

demand.

The superior salesperson will face less of an opportunity to charge higher prices. 

Attempts to do so will result in less success than before. Prices will fall and the return to the 

superior resource will fall. The salesperson will earn less money per loan but could wind up 

originating the same number of loans. The profit of the loan origination firm will be unaffected 

by this. In the long run, it will earn zero economic profit. 

The manager of the firm who enhances the ability of the salespeople he manages faces 

the same fate. His compensation will fall but the profit of the firm will be unaffected in the long 

run. The owner who is the manager faces the same fate as well. And the long run effect will be 

no change in the zero economic profit the firm earns. But there may be a drop in accounting 

profit if the owner had foregone higher wages and recorded the higher return as accounting 

profit. Once the higher wages disappear, the accounting profit will fall.

In the case where the higher marketing expenses were incurred to capture the more 

poorly informed borrowers who would accept higher prices, the reduction in the borrowers’ 

willingness to accept higher offers will result in lower expenditures to capture these borrowers. 

Fewer resources will be expended to pursue these borrowers because they will not be worth as 

much as they used to be. 

Thus, the savings mentioned in connection with this rule come at least in part from the 

higher returns earned by those who excel in getting borrowers to agree to higher prices. That 

return is currently going as economic rent to those who possess and exercise those skills, not as 

economic profit to the owners of loan origination firms. They could also result from lower 

marketing expenses aimed at those poorly informed borrowers who are more likely to accept 

higher prices, capturing poorly informed borrowers. Both these can serve as sources of savings, 

even in a market in long run equilibrium where firms earn zero economic profit. And we would 

expect that both of these to be sources of savings to be tapped as borrower information improves 

and the prices paid by those who formerly had been poorly informed fall. 

V. Title and Settlement Services: Background Analysis and New Studies 

Chapter 3 discusses features of the proposed rule that are intended to reduce consumer 

costs of third-party settlement services. Some of the commenters on the 2002 proposed rule 

raised questions about whether HUD’s proposals, particularly packaging, would lead to any 

reduction in the fees charged by third-party settlement service providers. According to these 

commenters, there is no evidence of “fat” (excess fees) in the system; or if there were any 

reduction in third-party fees, lenders would not pass the reduced costs through to consumers. In 

addition, these same commenters predicted that large providers of third-party services (e.g., 

settlement agents and independent title insurance agents) would replace small providers of these 

services, thus reducing options available to consumers. 

 2-60
This section provides background analysis of issues concerning third-party services and 

reports the results of some new empirical analyses of title and settlement fees by the Urban 

Institute and HUD. These latter studies are important because to date there has been little hard, 

statistical evidence on title fees. Most information on the title industry was through anecdotes, 

court cases, industrial organization studies, and a few small surveys. Now more comprehensive 

data are available from the Urban Institute and HUD. 

Organization of Section. The remainder of this introductory section provides a brief 

discussion of consumer shopping for title and third-party services. Subsection V.A provides an 

extensive literature review of the title industry. Subsection V.B examines whether title fees can 

be reduced -- most observers believe that third-party fees are too high and can be reduced. This 

section reports findings from a major HUD-sponsored study of title fees by the Urban Institute. 

Subsection V.C examines the question of whether lenders will pass through any fee reductions to 

consumers -- there is substantial evidence that competition will ensure that any cost reductions 

will be passed through to consumers, rather than retained by lenders. As discussed in Chapter 3, 

the proposed rule includes many provisions that assist in bringing about savings in third-party 

costs. In addition, the increased ability of consumers to shop under the new GFE, combined with 

the competitive nature of mortgage lenders, will ensure that any cost savings are passed through 

to consumers. 

Consumer Shopping for Title, Settlement, and Other Third-Party Services. In their 

comments on the proposed rule, ALTA noted that title agents typically market their services 

directly to consumers, as well as to real estate brokers, builders, and lenders. There is much 

evidence that homebuyers rely on their real estate agent for recommendations of third-party 

providers (e.g., closing agents) as well as lenders. Chapter 3 makes the argument that consumers 

may not be the best shoppers for third-party providers, and that one of the potential savings from 

the limited tolerances and discounting provisions of the GFE is that lenders (with more expertise 

than consumers) will be encouraged to shop for third-party services and drive down the prices 

for consumers. These provisions of the proposed rule will encourage competition among thirdparty settlement services providers, leading to lower costs for these services. 

There are other problems with today’s methods for delivering third-party services, in 

addition to lack of consumer expertise in this arena. These problems were identified by FTC 

staff, who examined the issue of consumer shopping for third-party settlement services (for their 

insights into consumer shopping for lender services, see subsection IV.D.5). As noted above, 

consumers may directly shop for settlement services or may rely on recommendations from the 

real estate broker (in the case of a home purchase) or the broker/lender (in the case of a refinance 

as well as a home purchase). The following quote (a continuation of the earlier quote in 

subsection IV.D.5) from the FTC staff highlights issues when the consumer relies on referrals in 

today’s market: 

Borrowers must also purchase various settlement services, such as appraisal, title 

search, and title insurance, to obtain a mortgage. It can, therefore, be time consuming 

and costly for borrowers to search for all features of a mortgage transaction, including 

all aspects of the loan and settlement services. Some borrowers may do so; others 

may choose to rely on referrals, for example, from their loan originator for settlement 

services. Originators, however, may not always have strong incentives to refer 

 2-61
borrowers to low-cost settlement providers. Savvy borrowers may ask for 

information about settlement service costs when contacting potential originators and 

may consider these costs when they select a lender, but other borrowers may not. In 

addition, settlement services are likely not the primary products for which borrowers 

search. Rather, borrowers may devote more search time to a loan, which itself may 

be a secondary consideration if the borrower is also searching for a home to purchase. 

(page 11) 

Thus, one concern is that there may not be any incentive for the referring party (e.g., the 

loan originator) to direct the consumer to the lowest cost provider, and because settlement 

services may be a secondary consideration to the consumer (rather than the primary one of 

buying a home), the consumer may not closely monitor settlement costs, much less engage in 

some intensive search for them. As the FTC staff note, consumers may not obtain low-cost 

settlement services: 

Settlement service providers can, of course, also compete to attract consumers. But, to 

the extent that some borrowers rely on referrals from lenders and those referrals do 

not depend mainly on price, inefficient producers of services may survive if they are 

able to attract referrals, thorough other means. As a result, borrowers may not 

necessarily obtain low-cost services, and the current situation may not be fully 

efficient. (page 11) 

In his comments on HUD's 2002 proposed rule, Jack Guttentag echoed similar sentiments 

when he stated:68

Under existing arrangements, competition in the markets for settlement services is 

"perverse" -- it tends to drive up prices, or prevent them from falling in response to 

deployment of more efficient technology. Perverse competition arises when one party 

selects the seller of the service and another party pays for it. (page 9) 

In the case of "perverse competition", the loan originator selects the settlement service 

provider but the consumer pays for the service. In this situation, according to Guttentag, the 

settlement service providers compete for the favor of the loan originator, rather than competing 

for customers (i.e., consumers) by lowering prices. 

As explained in Chapter 3, the limited tolerances and discounting provisions under the 

enhanced GFE are intended to improve on today’s current practices where consumers rely on 

referrals that may or may not be in their best interests. 

 

68 Jack Guttentag, “HUD’s Proposals For RESPA Reform,” submitted to Rules Docket Clerk at HUD, regarding 

Proposed Rule on Real Estate Settlement Procedures Act (RESPA): Simplifying and Improving the Process of 

Obtaining Mortgages to Reduce Settlement Costs to Consumers; Docket No. FR-4727-P-01; (July 29, 2002), 

October 18, 2002. 

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V.A. Literature Review of Market Issues in the Title Industry 

Introduction. With exception to the discussion of Eaton and Eaton (2007), This 

literature review was written for HUD by Bob Feinberg of American University. While there is 

some overlap with the earlier background discussion of the title industry, it was decided to 

present this literature review in its entirety since it focuses on important market issues. 

This section discusses recent research on the workings of the U.S. market for title 

services; this market includes both title insurers and title agents, as well as closing (settlement) 

and escrow service providers. The exact role of each of these participants varies from state to 

state and even by metropolitan area within states, however the basic structure of the services 

provided remains the same. The economic importance of title costs is shown by the fact that 

they account for almost 73 percent of the third-party fees included in this analysis. In addition, 

as reported in GAO (2007), they account for almost thirty percent of total loan origination and 

closing fees on a typical real estate transaction (though a much smaller percentage of all closing 

costs, including real estate broker commissions and escrow payments). 

These services involve searching the history of legal and tax documents pertaining to the 

real estate in question (the title search), evaluating the likelihood of “defects” in the title (e.g., 

liens against the property), arranging for a title insurance policy to be written (either on the value 

of the mortgage – a lender’s policy – or on the total value of the property (with the possibility of 

this covering appreciation as well), and providing the actual insurance.69 Beyond this, as 

discussed by Lipshutz (1994, p. 7), “[t]he expense component of title insurance is expanded even 

further by the fact that the title insurer is frequently also responsible for the closing of the real 

estate transaction, a responsibility that encompasses correction of any really serious title 

problems prior to closing; drafting , or at least collecting, all the relevant documents, including 

deeds and mortgages; maintaining the escrow account; conducting the settlement itself; and 

recording the documents establishing the new ownership, releasing the mortgage liens of lenders 

who have been repaid, and recording the lien interests of the new lenders.” 

The title search itself traditionally involved a time-consuming investigation through 

documents at a county courthouse, but larger title insurers and agents developed and “maintained 

their own title plants – a physical housing of title-related documents. Over the past few decades, 

title plants have become, to a large extent, computerized and title insurers have merged title 

plants into joint title plants. These joint title plants provide access to other title insurers and 

underwritten title companies – non-owners – for a subscription fee. Title plant information 

comes from individual counties as the title-related information – such as property sales, liens, 

and tax information – is filed initially within the county (Birnbaum 2005, p. 12).” The 2007 

GAO report details considerable variation across states in methods (and efficiency) of title 

searching: in New York, title agents send employees to various county offices to conduct 

document searches manually and a “typical title insurance issuance took 90 to 120 days for a 

purchase and 30 to 45 days for a refinance”; in contrast, for an automated title plant in Texas, 

 

69Lipshutz ( 1994, p. 1) states: “Title insurance is unique in that it is insurance against ignorance of the past, that is, 

whether some unknown past event has clouded the ownership interest or lien interest in a parcel of real property that 

the insured believes to exist when the title insurance policy is issued.” 

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“typical turnaround time for a completed title search, examination , and commitment for a title 

examiner simultaneously working on several titles was 2 to 3 days” (p. 17). 

The rationale generally provided by the industry for premiums far in excess of losses is 

that title search is costly, both in fixed (maintenance of title plants) and variable (labor expenses, 

primarily) costs.70 Title insurers argue that it is this extensive search which keeps losses low. Of 

course, there is a classic principal-agent problem here in that the ultimate purchaser of title 

insurance has no idea how much search is really required to bring expected losses to a reasonable 

level and must rely on the title agent to do the optimal amount of search.71 While Baker et al 

(2002, p. 148) state that “...title insurers have a strong interest in ensuring that the search is 

optimal,” they give no explanation for why title insurers’ interests would be the same as 

society’s. They find (on p. 153), in a cross-state analysis, that a higher risk of defects is a 

determinant of longer – and presumably more expensive search – and interpret this as consistent 

with efficient search. But their empirical proxy for this higher defect risk is simply the average 

title insurance premium in a state. So, the finding of a positive partial correlation between 

premium and search can be interpreted in a more cynical way as suggesting that the title industry 

simply uses more search as a justification for higher rates. 

Structure of fees. Title insurance fees vary considerably across states. Lewis (2006) 

reports – based on a 2005 Bankrate.com survey of closing costs on a $180,000 loan to urban 

buyers -- that these costs ranged from $439 in North Carolina to $1451 in New York. However, 

in discussing title insurance fees, there are several factors which make comparisons difficult. 

The first is that the services covered by a title insurance premium may differ from state to state – 

in some covering title search by an agent (and possibly additional paperwork and settlement 

expenses), while in others only the actual insurance is covered and separate charges are made by 

the title agent for the title search.72 A second is that different rates apply to owners (covering 

buyers on the value of the property as long as they own the particular property) and lenders 

policies (covering lenders up to the value of the loan only until the loan is paid off, either 

through sale of the property or refinancing). Finally, there are also generally discounts available 

(though -- as noted below – not always offered to homeowners), “reissue rates,” on refinancings. 

Birnbaum (2005, p. 17) reports: “The bulk of the title insurance premium goes to 

expenses as opposed to claim payments. A.M. Best reports that title insurers paid an average of 

4.6% of premium for claims and claim settlement expenses from 1995 to 2004 compared to 

around 80% for the property casualty industry. 

 

70 The 2006 GAO report (2006, p. 3) notes that “the amount of premium paid to or retained by title agents, generally 

to pay for title search and examination costs and agents’ commissions, accounted for approximately 71 percent of 

title insurers’ total premiums written in 2004.” 

71 In fact, GAO (2007) reports that title insurers themselves do little analysis of actual costs incurred by agents and 

that the percentage of premium retained by agents was negotiated based on a variety of factors but not generally the 

agent’s actual costs. 

72 Lewis (2006) attributes this explanation to James Maher, executive vice president of ALTA. Indicative of a lack 

of cost basis for title insurance rates is the discussion in GAO (2007; p. 39) reporting that insurers “generally share 

the same percentage of the premium with their agents, around 80 to 90 percent, regardless of whether those agents 

were in states where consumers were to pay for agents’ search and examination services within the premium rate ... 

or whether they were in states where agents can charge consumers separately for these services....” 

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The title insurance premium is split between the title insurance company and the 

underwritten title company, when an underwritten title company is involved in the title 

transaction. The typical premium split in California is 8% to 12% for the title insurer and 92% to 

88% for the underwritten title company ...[comparable to a title agency in other states]... The 

percentage of gross title premium retained by title insurers in California – a bit less than 10% on 

average – is much less than the percentage retained by the same title insurers in other states.”73 

Commission rates (or split of premiums between title insurers and agents) are generally 

unregulated and simply reflect negotiations between insurer and agent. Exceptions are Florida, 

New Mexico, Texas, Connecticut and South Carolina (Lipshutz 1994, p. 38). The agent can be 

an employee, an affiliated agency, or an independent agent. According to Lipshutz (1994, pp. 

35-36), more than half of all title insurance premiums are written by independent agents; the 

agent often does more than just marketing, and serves an underwriting function (producing “a 

fully examined and insurable title”). Even on the marketing side, the agent’s efforts are directed 

not to ultimate consumers but to local real estate professionals. “... customer loyalty runs 

primarily to the producer, not the insuring company as such, and so competition among insurers 

for established producers is intense. In some cases, established title producers can be induced to 

become employees of an insurer branch office. But many very effective producers prefer to 

conduct business as independent agents, and in the competition to attract these agents, the 

primary competitive tool is the commission rate. As institutional loyalties throughout the 

economy have eroded, switching among insurers by agents has become more common and has 

led to the perception that prevailing commission rates have crept upward.” 

Rate determination. Fay (2005) provides a summary of the current mechanisms of 

regulation of title insurance rates, which varies considerably from state to state. There are 36 

“file and use” states, in which title insurers must file rates with the state regulatory body (and 

often wait for a short time – often 15-30 days – for either regulatory approval or lack of 

objections) before using them. Insurers in Alaska, Arizona, Nevada, New Jersey, New York, 

Oregon, and Pennsylvania can avoid separately filing by joining a licensed rating bureau. Three 

states (Florida, New Mexico, and Texas) directly promulgate rates for insurers within their 

jurisdictions. Three others (Hawaii, Vermont, and Wisconsin) ask insurers to file or make rates 

available for inspection, but do not require them to wait for approval. Iowa does not allow the 

sale of title insurance. The remaining states have no rate filing requirements for title insurers. 

Roussel and Rosenberg (1981), an article written by two lawyers with strong ties to the 

title insurance industry, is essentially a defense of title insurance price-fixing via rating bureaus. 

They state (p. 646) “[t]itle insurance rating bureaus at present provide rate computation for all of 

their members, based upon consolidated industry data.“ Lipshutz (1994, p. 53) notes that the 

dominant price scheme in the 1972-1985 period was the rating bureau mechanism – voluntary 

associations of title insurers to file joint rates for members in “file and use” states -- but that this 

largely ceased in 1985 due to an FTC antitrust complaint (which argued that the McCarranFerguson exemption did not protect them). Nyce and Boyer (1998, p. 227) discuss the case -- 

“[o]n June 12, 1992, in FTC vs. Ticor Title Insurance Co. et al., the U.S. Supreme Court sided 

with the FTC in finding that rate bureaus were guilty of horizontal price fixing for title searches 

 

73 Lipshutz (1994, p. 37) gives an estimate of 80% for the average agent commission. 

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and examinations.” While the decision provided some guidance on how rate bureaus could be 

reformed – essentially, to make them less industry cartel and more directly state regulated – they 

have become less important since the decision (though they remain in the seven states mentioned 

above). 

Birnbaum (2005, p. 15) explains that in California, “[t]he price a consumer pays for title 

insurance is based on rates filed by title insurers with the California Department of Insurance. 

Rates for title insurance are typically a function of the amount of liability. The liability is the 

amount of coverage, which is the amount of the loan for the lender’s policy and the purchase 

price of the house for the owner’s policy. The filed title insurance rates typically do not vary 

within the state. However, because title rates are a function of sales price or loan amount, the 

average title premium varies considerably by county. 

Similarly, Arrunada (2002, p. 9) states: “Premiums differ substantially across states. 

They usually increase in a lower proportion than the amount insured. According to a 1997 

survey, for a property valued at 50,000 US dollars, the owner’s policy costs on average 3.55 per 

thousand, but this falls to 2.44 per thousand for properties valued at one million dollars. These 

premiums do not include the costs of search (estimated between $192.72 and $519.03), closing 

services and document preparation.” 

Roussel and Rosenberg (1981, p. 645) agree on the basic pattern of pricing: “...the cost 

of production of a policy does not vary consistently with the exposure for loss; the same cost 

may be incurred on a policy for a $1,000,000 industrial project and a $50,000 single-family 

residence. However, the single most important variable in the price of a title insurance policy is 

its face amount: the typical price structure is ‘x’ dollars per thousand dollars of coverage. 

Because of the relatively constant cost of production, the result is a substantial crosssubsidization of purchasers of small, single-family, residential policies by purchasers of large 

facilities, typically commercial, industrial, or large residential developments.74 The 2007 GAO 

report notes (p. 34) disagreement among industry officials and state regulators as to whether this 

subsidization was intentional or not. 

Price Discrimination by Title Service Providers. Price discrimination is defined by 

economists as pricing differences to different consumers not justified by cost differences. The 

discussion above makes clear the systematic price discrimination present in the industry. As 

both title insurance premiums and escrow fees generally rise with loan value (while costs, if they 

rise at all, do so only modestly), owners of higher-valued properties are discriminated against 

relative to owners of lower-valued properties.75 Whatever one may think of the equity (fairness) 

 

74 Lipschutz (1994, p. 50) agrees this pricing pattern results in a cross-subsidization for small consumers (as “cost 

per transaction was not strongly dependent on the amount of liability insured”). Birnbaum (2005, p. 22) notes that 

(for California at least) “[l]ike title insurance rates, escrow fees vary by the size of the transaction. Unlike title 

insurance rates, escrow fees also vary by county.”

75 Woodward (2003b), however, in an econometric study of the determinants of title insurance fees fails to find this 

relationship; while these fees do increase with loan value, the effect is not statistically significant once other factors 

– in particular yield spread premiums on the loan – are included. This is a puzzling result which deserves further 

exploration, considering that the monotonic relationship between title fees and loan size is accepted as truth by 

virtually all who have written on the industry. 

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aspects of this price discrimination, it does strongly suggest an element of market power present 

in the market (this is discussed in more detail below). 

In addition there are less systematic aspects of price discrimination present as well in 

favor of better informed consumers. Reissue rates with discounts of 50% or more (Harney 2002) 

on refinancing transactions are not always offered to consumers – those who ask get them.76 But 

given the limited title searching required on refinancings, it is likely that the costs associated 

with these policies fall by much more than the premiums, implying price discrimination against 

refinancers (despite the discounts). Similarly purchasers of properties recently sold would seem 

to be discriminated against given the limited amount of search required to find title defects since 

the previous sale. 

Both the Woodward (2003a) and Courchane et al (2004) papers deal with broker fees and 

yield-spread premiums, with no separate discussion of title services and fees. But they do both 

suggest that homebuyers can be segmented into types by degree of sophistication and that this 

translates into different fees paid. From the perspective of title fees, this strongly supports the 

ability to price discriminate by title insurers and agents as well. 

Reverse Competition, Referral Fees, and Controlled Businesses. A feature of the 

market for title services which is often the focus of discussion is “reverse competition.” 

Birnbaum (2005, p. 2) describes the basics well: 

“Title insurance and escrow markets are characterized by reverse competition where the 

marketing of the products is directed at the real estate agents, mortgage brokers and 

lenders who steer and direct the home purchaser or borrower – the consumer who 

actually pays for title and escrow services – to particular title insurers, underwritten title 

companies and escrow companies. Residential consumers have little, if any, market 

power because title insurance and escrow services are required for the closing of a real 

estate transaction, resulting in inelastic demand. In a reverse competitive market, 

expenses are inflated as title insurers compete for the producers of title business – the real 

estate agents, mortgage brokers and lenders and others involved in real estate 

settlements.” 

However, Birnbaum (2005, p. 33), goes on to refer to a 1980 Peat Marwick study for HUD: 

“Peat Marwick’s study found that ‘the combination of reverse competition and prices set by 

historical and customary practices has led to excess revenues which either are used to obtain 

referrals or contribute to underwriter profit.’ The study also concluded that excess profits may 

not accrue to title insurers, but rather to the producers of the title business. The underwriter may 

be forced to bid away the excess profits to acquire the business from the real estate settlement 

entity.” 

Referral fees (otherwise known as kickbacks, rebates, bribes) result, despite being illegal 

under RESPA, section 8. However, enforcement of RESPA has led to the growth of “controlled 

 

76 Harney (2002, p. H1) quotes James R. Maher, executive vice president of ALTA acknowledging that the 

association is “aware that not all of our members disclose” the possibility of these reissue discounts. 

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businesses” or what the 2007 GAO report refers to as “affiliated business arrangements” 

(ABAs); Owen and Grundfest (1977, p. 943) noted that the potential for collusive profits 

combined with anti-rebate laws have prompted entry by these“controlled firms” – title insurers 

and/or title agencies owned by real estate brokerages (and sometimes lenders). 

ALTA’s 1979 paper, The Controlled Business Problem in the Title Insurance Industry,

argues, referring to controlled title insurance agencies as ones owned or affiliated with a broker 

or lender, that a controlled title insurance agency faces little competition and therefore is unlikely 

to worry about keeping prices low. They also note that these arrangements create entry barriers 

for new title insurance service providers into the market. 

Lipshutz (1994) has a concise discussion of the relevant issues. Referring to Owen and 

Grundfest (1977), he states (p. 68) that it can be argued “the payment of kickbacks [or referral 

fees] is an efficient way to market, the profits earned through kickback mechanisms are applied 

by the kickback recipient to reduce the prices it charges for its other services, and any 

misbehavior on the part of the kickback recipient is forestalled by the recipient’s regard for its 

business reputation.” And, when in response to RESPA, real estate businesses have opened title 

insurance agencies – controlled businesses -- Lipshutz reports (p. 66) that some argue [referring 

here to White (1984)] “the profits earned on title insurance agency business are used to subsidize 

the cost of the other real estate activities of the controlled business agent, and thus reduce the 

price for other services related to real estate transfer, if not the title insurance rate itself.” 

However, Lipshutz (p. 66) goes on to note that others “maintain that controlled business 

agents extract monopoly rents from their control of customers by charging a higher than 

necessary commission, or by extorting special concessions from their insurer. With respect to 

ultimate consumers, they maintain that controlled business agents exploit their monopoly of 

information by failing to alert purchasers to the existence of lower title insurance rates offered by 

insurers for whom they do not act as agents, or even from their active insurer through available 

discounts for special conditions...” 

But the latter point is important. It is only because of monopoly power in related 

services, especially by brokers that these rebates or referral fees are not translated into lower 

prices to consumers. White (1984, p. 313) claims that even successful enforcement of Section 8 

simply reallocates rents between the various real estate service providers with no change in the 

price of title insurance to homebuyers. “Instead, the title insurers would keep a larger share of 

the potential profits that the large price-cost margins promised; referrers would receive less.” 

Furthermore, he claims that if there was competition among the referrers of business to 

title insurers (brokers, lenders, lawyers), the ability to get referral fees (reverse competition), by 

lowering their cost, would push them to lower prices on their services to consumers. Even 

without price competition among these providers, they might still compete on non-price 

measures to the benefit of consumers. Sec. 8 of RESPA limits this and thus likely makes 

consumers worse off. With respect to controlled businesses, White (pp. 317-318) sees these as a 

2nd-best response to Section 8 of RESPA. Controlled businesses will still need to compete 

(either in price or non-price ways) to attract consumers, though he does acknowledge that there 

may be inefficiencies in combining the various providers into a single entity. 

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More recently, Martin and Ludwick (2006) conclude that title agents within ABAs do not 

charge higher fees to consumers than those who are independent. Nevertheless, the 2007 GAO 

report finds (p. 33) that “the concerns expressed by regulators and some industry participants 

over ABAs raise questions about the potential effects of some ABAs on consumers.” 

Recent Developments Involving Allegations of Title Insurance Kickbacks and 

Captive Reinsurance Arrangements. The 2006 GAO report (p. 14) discusses state and federal 

investigations of these activities, in particular the practice of captive reinsurance deals. “In such 

arrangements, a home-builder, real estate broker, lender, title insurance company, or some 

combination of these entities forms a reinsurance company that works in conjunction with a title 

insurer. The title insurer agrees to “reinsure” all or part of its business with the reinsurer by 

paying the company a portion of the premium ... for each title transaction.” Given the minimal 

level of risk involved in title insurance, with less than 5% of premiums going to pay losses on 

average, regulators have questioned the need for reinsurance.77

That same report (on pp. 14-16) describes recent settlements involving HUD as well as 

cases brought by state insurance regulators in California, New York, and Colorado. It describes 

the “typical fraudulent business arrangement” as one involving “a shell title agency that is set up 

by a title agent but that generally has no physical location, employees, or assets, and does not 

actually perform title and settlement business. In cases we examined, regulators alleged their 

primary purpose is to serve as a vehicle to provide kickbacks by being a pass-through for 

payments or preferential treatment given by the title agent to real estate agents and brokers, 

home-builders, attorneys, or mortgage brokers for business referrals. Investigations have alleged 

that the arrangements in these cases violate RESPA (p. 15).” 

One example of a recent settlement involves two leading title insurers – Fidelity National 

Financial and First American – who each agreed to pay $2 million and reduce rates by 15 

percent. New York Attorney General Eliot Spitzer claimed “the insurers drove up rates for 

homeowners by providing developers free or discounted insurance in other states in exchange for 

client referrals in New York (Washington Post, 2006, p. D-2).” 

The 2007 GAO report identifies “13 [state and HUD] investigations [from 2003 to 2006] 

involving 37 entities that were related to captive reinsurance arrangements, with 1 multistate 

settlement agreement involving activities in 26 states” (p. 30). “On the basis of details provided 

in a multistate settlement, insurers were allegedly giving away [to reinsurers] as much as onethird or more of the premiums consumers paid in order to obtain consumer referrals” suggesting 

to state regulators that these ABAs led to consumers being overcharged relative to competitive 

levels (p. 31). 

The Nature of Competition in the Market. Birnbaum (2005) is a recent discussion of 

competition in the California title services industry. Using a traditional framework from the field 

of Industrial Organization – looking at the structure, conduct and performance of the market – he 

finds that there is not “a reasonable degree of competition” in the markets for title insurance and 

 

77 Erin Toll, a deputy commissioner at the Colorado Division of Insurance, testified before the House Financial 

Services Subcommittee on Housing and Community Opportunity on April 26, 20006 that “there is no financial 

necessity to reinsure in a residential, single-family dwelling – there’s absolutely none.” 

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escrow services in California. The focus of the discussion below is on the aspects of this study 

of broader relevance nationally. There has been criticism of the Birnbaum report by other 

economists retained by the title industry, and these views will be considered as well.78

First, consider market structure. Birnbaum (p. 72) reports “significant consolidation and 

growth in concentration in the title insurance industry on a countrywide basis and in California. 

The American Land Title Association web site lists 46 mergers or acquisitions of title insurance 

companies that appears to cover the period 1987 through 1999. Between 1986 and 1991, three of 

the seven largest title insurers were acquired by two of the remaining four. Chicago Title 

acquired Safeco Title and Ticor Title and Commonwealth Land Title acquired Transamerica 

Title (now Transnation Title). ...The top three title insurers in 2003 wrote 72.5% of the market, 

up from 53% in 1996 and the top five title insurers in 2003 wrote over 90% of the market 

compared to 74% in 1996.”79

Stangle and Strombom (2006), in a report prepared for the First American Title Insurance 

Company, acknowledge consolidation in the industry but note (p. 3) that “there is no necessary 

connection between the number of firms and price competition.” 

Another important consideration in judging competition, from a market structure 

perspective, is the role of entry barriers. Three possibilities considered by Birnbaum are: (1) 

fixed costs of maintaining title plants; (2) the monoline nature of title insurance; and (3) 

availability of skilled personnel. At least in larger local markets in California Birnbaum finds 

(pp. 67-68) that “title insurers and underwritten title companies that do not own their own title 

plant can gain access to joint plants for a relatively small fee. In 2004, underwritten title 

companies reported title plant rent and maintenance expenses of about 5% of gross title 

premium” and thus do “not represent a significant fixed cost for underwritten title companies or 

title insurers.” 80

However, Birnbaum (p. 66) states that “[t]he fact that title insurance is a monoline 

product means that other property casualty insurers cannot enter the title insurance market 

without first creating a new title insurance company. And while creating a new title insurer and 

obtaining a license to do business is not impossible, it is not a trivial undertaking. It requires 

millions of dollars in capital and a detailed application and approval process. In other property 

 

78 For example, Vistnes (2006), critiquing the study on behalf of the California Land Title Association, rejects the 

analyses in the Birnbaum report. 

79 GAO (2007) provides similar figures for 2005 and points out that concentration is even higher than this in 

individual states, with two or three insurers generally dominant. 

80 Nyce and Boyer (1998, p. 228) do suggest that requiring title plants may be a barrier to entry. They present some 

data suggesting that in states not requiring title plants (15 states) there are more title insurers, and a lower Herfindahl 

index (a measure of market concentration) -- even after controlling for differences in state size. They do, however, 

expect that technology will lessen this barrier. 

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and casualty lines of insurance, an existing insurer licensed to sell insurance in one line can enter 

another line of insurance without a new insurance company application and approval.”81

Finally, while Birnbaum concludes (p. 69) that the available pool of skilled personnel to 

perform title searches and escrow services is sufficient, “the availability of established 

relationships to the referrers of title insurance business is a barrier to entry. Because of reverse 

competition in the California title insurance and escrow markets, existing firms with established 

relationships to the referrers of title insurance business have a significant competitive advantage 

over new entrants who do not possess such relationships. In our view, that is why the new 

entrants are either acquiring existing firms with such relationships and controlled business 

arrangements owned, in whole or in part, by the referrer of title insurance and escrow 

business.”82

Adding to the market power of title insurers, according to Birnbaum (p. 69) is that 

“[t]here are no substitutes for title insurance.... Lenders require assurance of title before agreeing 

to make a loan and, in 49 states and the District of Columbia, the only acceptable method of 

providing title assurance is title insurance.” Furthermore, Birnbaum notes (p. 70) – as many 

others have as well – that “[c]onsumer demand for title and escrow services is inelastic, meaning 

that changes in the price for title insurance and escrow services have very little or no effect on 

the amount of these products purchased... the demand for title insurance and escrow services is 

derived from the demand for real estate purchases and real estate loans. The cost of title 

insurance and escrow services is relatively small in comparison to the size of the underlying real 

estate or loan transaction and are often financed as part of the larger transaction or paid for by 

another party to the transaction. Even though the cost of title insurance and escrow may be 

thousands of dollars, a consumer – who generally has little knowledge of title insurance and 

escrow because he or she infrequently uses the services – is unlikely to stop a real estate or loan 

closing because of concerns about the cost of title or escrow.”83

On the last point, White (1984, p. 312) notes that it is standard to assume that consumers 

are unfamiliar with title insurance and will just rely on recommendations from other 

professionals, so that title insurers cannot compete directly for business from home buyers. “This 

reluctance to approach consumers directly is quite consistent with the insurers’ reluctance to 

compete on the basis of price. There have been sporadic instances of title insurers approaching 

consumers directly, but these have been the exception rather than the rule. We would expect a 

more competitive industry to advertise in the real estate sections of newspapers, along the lines 

 

81 Jaffee (2006) does suggest that there may be efficiencies associated with the monoline insurance requirement. 

82 Nyce and Boyer (1998, pp. 230-231) agree that controlled business arrangements may discourage new entry by 

requiring partnerships with existing producers of business (affiliations short of ownership raise same issue). 

83 In a similar vein, the 2006 GAO report (pp. 10-11) states that “while consumers are the ones paying for title 

insurance, they generally do not know how to ‘shop around’ for the best deal, and may not even know that they can. 

Meanwhile, the potential exists for real estate or mortgage professionals to recommend – not the least expensive or 

most reputable title insurer or agent – but the one that is most closely aligned with the professional’s best interest.” 

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of ‘To protect your home and to get the best price, insist on XYZ title insurance when you buy 

your home.’ Even in states in which regulation makes price competition impossible, one would 

expect to see ads along the lines of ‘For the best way to protect your home, insist on XYZ title 

insurance when you buy your home.’ Normal homeowner’s insurance is sold in this manner, 

despite the fact that it too is a complicated instrument. One suspects that adequate advertising by 

title insurers could go a long way toward educating consumers.” The 2007 GAO report 

continues to find that “title agents market to those from whom they get consumer referrals, and 

not to consumers themselves, creating potential conflicts of interest where the referrals could be 

made in the best interest of the referrer and not the consumer” (p. 25). 

Turning to the issue of market conduct, Birnbaum (2005, p. 3) “found numerous 

examples in California of illegal rebates and kickbacks where the title insurer or the underwritten 

title company provides money, free services or other things of value to a real estate agent, a 

lender or homebuilder in exchange for business referrals. These illegal rebates and kickbacks – a 

consequence of reverse competition – show that title insurance and escrow charges are excessive 

and that some portion of the overcharge is passed from the underwritten title company or title 

insurer to the referrer of business.” On the reverse competition issue, Birnbaum comments (p. 

26): “the vast majority of title insurance and escrow business is generated by local referrals. 

...the key point of competition among underwritten title companies and title insurers is for 

referrals from the real estate professionals who can steer the ultimate consumer – the buyer or 

seller of a property or the consumer borrowing money secured by real estate – to the escrow 

company, the underwritten title company and the title insurer. In most cases, this competition for 

referrals is quite local and focuses on escrow and title sales staffs who have established 

relationships with the real estate professionals who are able to steer title and escrow business. In 

other cases, the competition is at a national level, characterized by the largest title insurers 

seeking a countrywide relationship with lenders or others who are able to steer business on a 

nationwide basis.” 

Consistent with a lack of competition in pricing towards ultimate consumers, Birnbaum 

(p. 3) “found a remarkable absence of rate changes by title insurers over the past five years, 

despite declining costs of production, increased number of transactions and increased revenue 

per transaction. During a period when costs per unit of production declined significantly, 

underwritten title companies and title insurers maintained excessive rates. The prices charged by 

title insurers and underwritten title companies were not and are not responsive to the changing 

costs of production or increasing revenue per transaction at a given set of rates.” Much earlier, 

Owen and Grundfest (1977, p. 940) had noted uniform and stable prices (despite the cyclical 

nature of demand) as an indicator of a lack of competition among title insurers; the requirement 

imposed by most state regulators for posting prices with the state and sticking with these 

(preventing discounting to consumers) facilitates this. They noted, as does White (1984), that 

price discrimination (higher rates on more expensive homes relative to cost) also indicates a lack 

of competition, or market power. 

The views of Roussel and Rosenberg (1981) should be noted, as they essentially reject 

the notion that rate competition among title insurers could lower prices or in any way benefit 

consumers. Their main points (p. 644) are that rating bureaus (and lack of rate competition more 

generally) subsidize low-value residential transactions (by forcing title insurers to stick to 

premium formulas based on loan value), reduce costs of insurers by allowing sharing of data – 

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helping to keep smaller (possibly less efficient) title insurers afloat, and “by mitigating the 

effects of reverse competition they lower costs [to consumers, presumably], especially for 

residential real estate transactions.” They argue that, with the introduction of rate competition, 

small residential purchasers will have to pay more for title insurance if the insurers “reverse 

compete” by offering rebates to brokers or lenders or lawyers to get the business, but that large 

purchasers will be able to shop around and not pay more. In contrast, Baker et al (p. 157), in one 

of their econometric specifications, do find that the title insurance premium “is smaller in states 

in which pricing was judged to be relatively competitive” where the latter judgment is based on 

an admittedly old survey published in a 1973 law review article (Stephen J. Quiner, Title 

Insurance and the Title Insurance Industry, 22 Drake L R. 711 (1973)). 

Stangle and Strombom (2006) argue that prices in California (the focus of their study) are 

highly competitive. They compare (one-time) title insurance premiums to the much higher total 

homeowner’s premiums paid over the expected 14 year period of ownership (though they fail to 

take the present discounted value of the latter, which would provide a more appropriate 

comparison); this shows little as costs and risks associated with the two types of policies are 

quite different. Similarly their comparison of California title insurance premiums to those in 

other large states says little about the state of competition either in California or nationally. 

Stangle and Strombom focus on premiums per dollar of coverage to argue that California title 

insurers have dramatically lowered prices over time: for example, they note (p. 3): “in 1962, 

the price of First American’s CLTA Standard Coverage owner’s policy for the median priced 

home in California of $15,100 was $6.89 per thousand dollars of coverage... By 2005, the price 

of coverage for the median priced home of $548,400 had fallen to $3.06 per thousand dollars of 

coverage.” However, the cause of this trend was not reduced premiums but the tremendous 

appreciation in the value of California real estate over this period; in fact, over the 1962 to 2005 

period, the premium for that median-priced California home increased from $104 to $1678, by 

more than 1500 percent, while the consumer price index over that period increased by just under 

550 percent. 

On the issue of reverse competition, Owen and Grundfest (1977) claim that rebates and 

referral fees may actually lower costs, and that the main reason for high closing costs is the lack 

of competition in the real estate transactions industry – in particular price fixing by local real 

estate broker associations, facilitated in large part by participation in Multiple Listing Service 

organizations (p. 948). Similarly, White (1984, pp. 308-309) states “that the absence of price 

competition in title insurance is the fundamental problem of the industry and that reverse 

competition and controlled business arrangements are symptoms of that problem, rather than 

being problems themselves. Indeed, reverse competition and controlled business arrangements 

represent ameliorations of the problem of the absence of price competition and should be 

encouraged rather than discouraged, so long as true price competition remains absent.” 

Both Owen and Grundfest (1977) and White (1984) use the analogy of the airline 

industry under CAB regulation to describe an oligopolistic industry where competition in 

marketing practices occurs because of the combination of monopoly rents and the lack of other 

means of competition. Owen and Grundfest (p. 942) suggest that the inability of title insurers to 

stop this form of competition among themselves has led the industry to call for government to 

make referral fees (and other forms of “reverse competition”) illegal. Owen and Grundfest argue 

for deregulation of title business and antitrust action against brokers (noting that antitrust against 

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title insurers themselves may be blocked by the McCarran-Ferguson Act). They (p. 952) claim 

that if brokers were competitive, rebates and kickbacks and referral fees would be bid away in 

lowering prices to final consumers. 

White (1984, p. 310) emphasizes that the direction of causality often drawn between high 

settlement costs and “reverse competition” is the wrong one: “...the conclusion that it is the 

kickbacks and fees that would cause the high prices of title insurance is simply incorrect. 

Instead, proper analysis will show that it is the high price of title insurance (relative to the basic 

costs of title searches, claims payments, etc.) that lead to the referral fees. The model that should 

be applied to this situation is that of non-price competition in concentrated or regulated 

industries.... the competitive instincts of the firms are likely to be channeled into non-price 

dimensions. If the margin between price and the basic costs of producing the product or service 

is large, each extra sale is quite attractive to the firms in the industry, and substantial sums are 

likely to be spent on non-price competition; this non-price competition could exhaust a large part 

of the potential profits which would otherwise be present.” 

White argues (pp. 318) that “[c]ontrolled business arrangements with respect to title 

insurance largely represent an imperfect way of referrers reestablishing referral fees....In this 

sense, these arrangements are a loophole in Sec. 8 of RESPA, but they are a loophole that should 

be encouraged rather than discouraged, as long as Section 8 itself is not repealed. To the extent 

that there is competition among real estate brokers, builders, lenders, and attorneys –and this is 

likely to increase, since added antitrust attention is being paid to real estate brokers and attorneys 

and relaxation of economic regulation of banks and savings institutions should bring more 

competition among these institutions – controlled business arrangements will allow benefits to 

flow through to consumers.” 

Finally, a major indicator of exploited monopoly power is profits. While difficult to 

measure precisely, in a competitive market sellers should be earning a reasonable return. 

Birnbaum found (2005, p. 76) countrywide profitability of title insurers licensed to conduct 

business in California (profitability measured as after-tax net income divided by mean 

policyholder surplus) to average 27.2 percent over the 2001-2004 period. He also examined (p. 

78) the profitability of the publicly-traded parents of the four largest insurer groups – First 

American, Fidelity National Financial, LandAmerica and Stewart. For the latter two virtually all 

revenues were generated from title insurance premiums, and their average profitability (here net 

income divided by stockholder equity) over the 2001-2004 period was 16.4 percent – well above 

any reasonable notion of a normal rate of return.84 The 2007 GAO report found that the 

industry’s financial performance has been strong since as far back as 1992 (with return on equity 

above that of the property-casualty insurance industry in every year since then but one). 

How were title agencies doing during this period? In the California market, the 

underwritten title companies – again, comparable to title insurance agencies in other states-- 

realized after-tax net income as a percentage of stockholder’s equity (as calculated by Birnbaum, 

 

84 Average profitability was even higher for the other two holding companies during the same period, but a 

significant part of revenues for these companies was generated from non-title insurance sources. Stangle and 

Strombom (2006) make a different comparison, title company net income margin and operating profit margin vs. 

property/casualty insurers, homebuilders and the S&P 500, to claim title insurers have comparable or lower profits. 

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p. 82) of 49.0% and 32.3% respectively in 2003 and 2004. Furthermore, Birnbaum notes that 

these figures “almost certainly understate the actual profitability because many owners of 

underwritten title companies were also paid salaries, commissions and bonuses as employees of 

or contractors to their underwritten title companies. In some cases, the salaries, commissions and 

bonuses paid to owners were in the millions of dollars.”White (1984), writing more than 20 years 

ago, observed potentially large rents available to be shared by players in the real estate 

transaction market. Birnbaum’s recent results suggest that these rents remain. White argued that 

(p. 319) “public policy should encourage the maximum amount of competition – price and nonprice – at all levels and among all types of real estate settlements services. Restrictions on 

competition in this area, as in virtually all other areas of the U.S. economy, must inevitably mean 

reduced overall economic welfare.” 

Eaton and Eaton (2007) present arguments that the American title insurance operates as a 

cartel and enjoys excessive profits. The authors demonstrate that the American title insurance 

industry has induced laws granting itself special benefits, such as mandated price floors in most 

states in U.S. and being exempt from federal antitrust liability. As a result, consumers are 

generally overcharged for title insurance policies, and the “wealth poor” Americans’ chances of 

homeownership are also hurt (P.6). 

Unlike industries for other forms of insurance against casualty losses, the companies in 

the title insurance industry do not compete for market share in an open market, the industry 

enjoys a government-enforced minimum price in most states, and title insurance is mandatory for 

purchasing a property with a mortgage in U.S. Also, “title insurance premiums are set by 

regulators without actuarial details on how closely premium levels reflect the industry’s 

overhead costs” (P.51). All are evidence that this industry operates in outside the market 

economy. 

Price discrimination suggests that overpricing for title insurance exists. For example, title 

insurance premium rates vary significantly from state to state. “No state has published 

regulatory operational guidelines ... on how to set title insurance premiums that are both costeffective for consumers and provide sufficient income to the industry” (P.34). The authors argue 

that, if it were not because “title insurance companies earn much more than required to meet 

their costs and make a reasonable profit” (P.51), then the industry could not sell the same ALTA 

policy in some states for much less than in other states. 

Comparing the cost of insuring a property through a for-profit private enterprise with 

lower-cost governmental programs in Iowa and in Canada sheds more light on this issue: the forprofit title insurance agencies in the United States reported losses and loss adjustment expenses 

much higher than those of Iowa, with Iowa’s loss experiences much more in line with the actual 

statistics inferred from mortgage default rates of Fannie Mae and Freddie Mac. And in Canada, 

several American title insurance companies prosper while charging only a small fraction of what 

the same services cost across the border in U.S.. As an additional piece of evidence, the Iowa 

Title Guaranty Division reinsures itself against any loss in excess of $500,000, for a fee of 0.35 

cents per $1,000 of coverage, much lower than the prevalent premium rates charged by the title 

insurance industry. 

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Eaton and Eaton (2007) present five additional arguments that there is evidence of 

noncompetitive behavior. The fact that the cost of title insurance premiums has risen much 

faster than the rate of inflation for decades suggest the monopolistic privileges of the industry. 

Although there probably are significant differences in loss rates due to location variations 

or property types, “in all but a few jurisdictions, title insurance policies on all properties are 

charged according to a single premium schedule, varying only with the size of the mortgage and 

the price to be paid for the property” (P.25). The authors suggest that this fact may imply that 

excessive premium charges exist. 

The authors state that “title insurance prices are not based on evidence of actual losses” 

(P.6). The current loss minimization process against a defected title is working well, and not all 

title defects result in covered losses. Also, the risk of a faulty title decreases every time a 

property is sold. No actuarial statistics are available to the public “to check whether mandatory 

fixed-price premium schedules are reasonable and to review the fairness of the legal provisions 

in the standard title insurance contract forms” (P.19). 

A large proportion of the premium is retained by the title abstract and settlement agency 

(from 60 to more than 90 percent), which title insurance industry officials argue is justified by 

the alleged high cost of title searching back into the distant past. However, “in fact, a high 

proportion of noncommercial properties are searched only through the most recent transaction” 

(P.15). The cost of title search does not seem to be high, and has been declining with 

technological advances. 

There may be “double coverage” (P.25) premium income generated when owner policies 

are purchased simultaneously with a lender policy. 

V.B. Title and Settlement Fees -- Can They Be Reduced? 

The improved shopping, limited tolerances, and volume discounting provisions in the 

proposed rule are intended to drive third-party settlement costs down. However, some believe 

that there is no “fat” or excess in third-party fees, although others believe that more effective 

shopping and competition have the potential to significantly reduce third-party costs. This 

subsection examines these different viewpoints about third-party settlement costs, paying 

particular attention to title fees. While many of the comments were directed at packaging, the 

market dynamics being addressed by the comments are also important for the changes in this 

proposed rule as well. 

In their 2002 comments, the American Land Title Association (ALTA) says there is no 

comprehensive study (or indeed, no responsible study at all) that supports the conclusion that 

packaging will reduce “fat” or unnecessary charges in the title industry.85 They go on to say: 

 

85 See comments from James R. Maher, Executive Vice President, ALTA, to Rules Docket Clerk, HUD, regarding 

“Proposed Rule on Real Estate Settlement Procedures Act (RESPA); Simplifying and Improving the Process of 

Obtaining Mortgages To Reduce Settlement Costs to Consumers; Docket No. FR-4727-P-01; 67 Fed. Reg. 49134 

(July 29, 2002),” October 4, 2002. 

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Indeed, other than some potential savings in marketing costs and modest operational 

efficiencies, there are no significant savings in the title-related or closing-related work 

that has to be performed in 1000 transactions involving 1000 different properties 

whether those transactions involve a single mortgage lender or multiple mortgage 

lenders. (page 28) 

Ann Schnare, who prepared a report for the National Association of Realtors entitled 

“The Downside Risks of HUD’s Guaranteed Mortgage Package” (dated October 24, 2002), 

expressed similar sentiments. According to Schnare, “there is no theoretical or empirical 

evidence to suggest that mortgage packaging will lead to lower settlement costs. In fact, one 

could easily argue just the opposite” (p. 22). Schnare notes in the case of “no closing cost” 

mortgages, lenders already “have an incentive to seek out low cost service providers in order to 

keep their offerings as competitive as possible” (p. 11). However, in the same paper she suggests 

that third-party service fees are overpriced when she comments on HUD’s enhanced GFE: 

HUD’s proposed changes to the GFE should make these incentives [to seek out low 

cost service providers] even stronger. The new GFE should make consumers more 

aware of closing costs, thereby increasing the incentives of lenders to seek out low 

cost service providers as a way of competing for market share. (p. 11) 

While ALTA and Schnare believe that settlement fees cannot be reduced, other industry 

observers believe they can. In fact, title service providers, who levy the majority of third-party 

fees, are increasingly criticized for charging excessive fees. This criticism has been leveled by 

private industry, consumer advocate groups, and scholars. Charges that title fees are too high are 

increasingly common in the popular press and also have led to several court cases. Many of the 

comments received by HUD in response to the 2002 proposed rule suggested that title fees are 

excessive and can be reduced. Although many of the charges are not fully substantiated, or 

provide only anecdotal evidence, there is substantial evidence that fees can be reduced. 

The remainder of this section discusses the various types of information available on this 

issue. As noted above, HUD has available new information on title fees from the HUD-1s of 

FHA borrowers. When looked at in combination, the anecdotal, industry, and data analyses 

reported below suggest that there is substantial potential to reduce title and settlement fees. 

V.B.1. Anecdotal and Industry Evidence on Title Fees 

When commenting on HUD’s 2002 proposal Wells Fargo, a large mortgage lender, made 

it clear that that they believe settlement costs are too high.86 These points are made in the 

following three quotations. 

 

86 They further argue that with packaging, prices will decline for three reasons: (1) unnecessary services will be 

eliminated; (2) the purchasing leverage of packagers will result in more negotiation of prices, volume discounts, and 

other techniques for reducing costs; and (3) competition will increase because consumers will be more 

knowledgeable of prices. 

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Cumbersome and overpriced settlement services that have been the tradition for 

generations of consumers will begin to evolve. Settlement services that are 

deemed to be unnecessary or overpriced will be eliminated. (p. 2) 

Significantly, the [HUD] proposal removes restrictions in RESPA that have 

effectively prevented loan originators from using their purchasing leverage to 

offer consumers lower, guaranteed closing costs. (p. 2) 

With more reliable information about interest rates and closing costs, consumers 

will be able to shop more effectively for loans and free market dynamics will 

result in a reduction in closing costs. (p. 2)87

Other mortgage lenders and mortgage industry observers share Wells Fargo’s position. 

In discussion with HUD, the large mortgage lender ABN-AMRO noted costs in title and 

settlement fees are excessive and savings of up to $400 are possible. Lenders that held 

discussions with HUD, such as ABN-AMRO, emphasized that there was little negotiation in 

today’s market to reduce title and other third-party fees. Based on these comments, it appears 

that incentives to negotiate prices, such as offered by tolerances and volume-based discounting , 

have the potential to significantly reduce closing costs. Too often in today’s market, increases in 

title and closing costs, as well as other third-party costs, are simply passed through to the 

consumer with little effort on the part of the originator to contain these costs. 

Wholesale Access Mortgage Research & Consulting, Inc. also sees a potential for savings 

in title fees. In their letter commenting on the proposed rule, they write, 

Perhaps total savings might be as much as $5 billion, but that assumes states 

allow average pricing of title insurance.88

Of course, this proposed rule does exactly that – allows average cost pricing. 

Fannie Mae’s vice president for credit policy, Joe Biegel, also saw a potential for reduced 

fees. Speaking in reference to title insurance premiums Biegel states, “it’s safe to say that prices, 

in many respects, are higher than they ought to be.”89 Forbes magazine takes the editorial 

position that the title insurance industry is a “racket” and a “cartel.”90 In its analysis of the title 

 

87 See comments from Peter J. Wissinger, President and Chief Executive Officer, Wells Fargo Home Mortgage, Inc., 

to Rules Docket Clerk, HUD, regarding “Proposed Rule on Real Estate Settlement Procedures Act (RESPA); 

Simplifying and Improving the Process of Obtaining Mortgages To Reduce Settlement Costs to Consumers; Docket 

No. FR-4727-P-01; 67 Fed. Reg. 49134 (July 29, 2002),” October 28, 2002. 

88 See comments from Tom LaMalfa and David Olson, Wholesale Access Mortgage Research & Consulting, Inc., to 

Rules Docket Clerk, HUD, regarding “Proposed Rule on Real Estate Settlement Procedures Act (RESPA); 

Simplifying and Improving the Process of Obtaining Mortgages To Reduce Settlement Costs to Consumers; Docket 

No. FR-4727-P-01; 67 Fed. Reg. 49134 (July 29, 2002),” September 30, 2002. 

89 Ruth Simon, Wall Street Journal, December 18, 2002, p. 1. 

90 Ira Carnahan, Forbes Magazine, September 2, 2002. 

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industry, Standard and Poor’s concludes that HUD’s proposed 2002 RESPA rule “could place 

downward pressure on title rates.” 91

A 2004 industry article concludes that title fees are excessive and can be cut. An article 

"Cutting A Better Title Deal: Money-Back Settlement Programs Put Cash in Buyers' Pockets" by 

Kenneth R. Harney92 indicates the potential for cutting title fees in the Washington D.C area. 

According to Harney, at least two title insurance agencies are now offering substantial credits or 

rebates to home purchasers at closings. The money-back programs rely on cash that otherwise 

would go to little-publicized joint venture arrangements between real estate brokerage companies 

and title insurance agencies. These joint ventures funnel hundreds, and sometimes thousands, of 

dollars from homebuyers' settlement fees to the real estate brokerage firm owners, according to 

Harney. Industry executives say that consumers rarely understand that their payments are 

flowing back to the realty company. Harney reviews the programs of two firms that are giving 

the money back to consumers. For example, First Savings Mortgage Company and Monarch 

Title Inc are jointly offering a program that guarantees closing cost credits of anywhere from 

$500 to $5,000 to homebuyers who obtain their mortgages from First Savings and their 

settlement services from Monarch Title. Jerry Boutcher, president of Monarch Title, says the 

money paid to homebuyers would otherwise have been paid from the title premiums to a real 

estate brokerage firm through a joint venture agreement; Boutcher says his firm avoids such 

deals with real estate firms. A similar program, called "1Roof Credit," is offered by Federal Title 

& Escrow Co. in Washington, D.C. This program, which offers a credit with or without the use 

of Federal Title's mortgage lender partners, pays credits back to homebuyers ranging from $525 

to $1,525 on a $300,000 house. In announcing the program, Federal Title said also said that the 

settlement credit paid to buyers would have otherwise gone to a real estate company. 

The lenders involved in these programs provide some insights into the types of cost 

savings that can result from discounting arrangement and RESPA reform. The title firms taking 

part appear to be cutting their own net fees in exchange for expected higher volumes of business 

from individual buyers and their realty agents. Larry Pratt, president and chief executive of First 

Savings Mortgage said there are two separate levels of cost reductions built into his firm's 

program: First Savings is reducing or putting lids on cost items such as appraisals, credit reports 

and other origination services, and then guaranteeing home buyers that the costs will not exceed 

a specific amount at settlement. A second level of savings is the lower total fee for title and 

settlement services by virtue of not having to split the money with a real estate broker via an 

affiliated business relationship. 

Pratt notes that the bulk of the title insurance premium goes to the title agency that does 

the closing, as only a fraction goes to the title insurance company that provides the insurance 

coverage against title problems. Harney reports that industry officials say that title agents get 70-

85 percent of the title premium, depending upon the amount of business the agents direct to a 

specific title insurance underwriter. Those same title agents may have joint venture 

arrangements with large real estate brokerage firms and share with the real estate brokers the 

 

91 Standard and Poor’s, Industry Report Card: U.S. Mortgage and Title Insurers, 2003, page 2. 

92 Kenneth R. Harney, “Cutting a Better Title Deal: Money-Back Settlement Programs Put Cash In Buyers’ 

Pockets,” The Washington Post, January 24, 2004, p. F01. 

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total fees generated by every client the firm brings in for a settlement transaction. Monarch 

Title's Boutcher reported a case of a settlement company paying a brokerage $800 to $1,000 per 

transaction. Boutcher notes "We are talking about a lot of money that is coming out of the home 

buyer at the settlement table and going to the broker" (Harney, 2004). Boutcher goes on to say 

"...this is a very sensitive subject for the big [real estate] brokers. They have exclusive 

arrangements to direct as many settlements as they can to their [joint venture] partners. Boutcher 

said most of the joint venture agreements are tightly held proprietary deals, with no information 

available to the public about them. 

An article on the practice of lenders creating vendor management companies as 

subsidiaries expressed similar sentiments about the title industry (Shenn, 2004a). A big reason 

vendor management subsidiaries have been lucrative for their lenders is that they are created as 

title agencies; Shenn (2004a) notes that "title premiums, which often are set by states, are among 

the most expensive pieces of the settlement pie, and are often split on a negotiated basis between 

title agents and insurers." In these cases, Terry Wakefield, president of a Wisconsin consulting 

firm, notes that "the ability to make some extra money on each loan as a title agent is a big 

benefit"(Shenn, 2004a). 

Several consumer advocate groups believe title and closing costs are excessive. 

Consumers Union and the National Community Reinvestment Coalition (NCRC) have been 

especially critical of the title insurance industry for regularly overcharging consumers that 

refinance their homes. Refinancing borrowers are generally eligible to pay lower title insurance 

premiums than purchase money borrowers.93 These lower premiums are widely known as 

“reissue rates.” Title insurers and agents regularly fail to offer refinancing borrowers the 

discounted reissue rates. The difference between reissue rates and standard issue rates can easily 

amount to several hundred dollars. Paying the standard rate instead of the reissue rate confers no 

benefit on the refinancing borrower, but confers substantial benefit to title insurance agents and 

carriers. In testimony presented before the California state legislature, NCRC director Kelly 

Brinkley questioned the sincerity of title insurers who claim to be working for the best interest of 

consumers. Specifically she asked: “If title insurers are truly interested in what is best for the 

consumer why is it necessary for consumers to specifically ask for a cheaper rate? Why is the 

rate not automatic?”94

An article by Ken Harney also focused on reissue rates, which are the discounts off 

standard premiums charged on title insurance policies.95 As noted above, the idea behind 

 

93 One reason that title insurance rates can be lower for refinancing borrowers is that because a title search was done 

recently, when the home was purchased, it is relatively simple to do a new title search and establish title 

merchantability. Thus, the discount reflects the fact that when there has been no change in ownership of the 

property, and the title for that property was examined earlier (when the person bought the property), there is less 

need for another comprehensive search of the records. 

94 Kelley Brinkley, Director – Legislative and Regulatory Affairs of the National Community Reinvestment 

Coalition, testimony before the Insurance Committee of the California Legislature, April 30, 2003 (available at 

http://www.ncrc.org/). 

95 See Kenneth R. Harney, “How to Save 50 to 60 Percent on Title Insurance When Refinancing,” Realty Times, 

June 17, 2002. 

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discounted reissue rates for title insurance on a refinancing is that there may be no need to pay 

the full price for a complete title search on a property that received such a complete title search 

only a few years earlier as part of the initial home purchase or an earlier refinancing. Harney 

gives the following hypothetical example -- rather than paying $1,200 for a new title policy, why 

not take advantage of a reissue rate at $500-600. While the discounts vary from State to State 

and from title insurer to title insurer, Harney reports that they average 50-60 percent.96 While 

reissue rates are normally available on refinancings, in some areas they can be obtained on home 

resales where a title search was performed relatively recently. Harney’s article focuses on the 

issue raised above by Brinkley -- why this concept of discount pricing is not widely known to 

consumers nor is it widely promoted by the industry. Harney quotes James R. Maher of the 

American Land Title Association (ALTA) as saying he is aware that “not all of our [ALTA] 

members disclose” the existence of reissue rate discounts. Harney also notes that while some 

mortgage brokers routinely ask the title or closing agent for reissue rates on refinancings, others 

admit that unless an applicant asks, they don’t mention the reissue rate option. With respect to 

title agents or closing attorneys disclosing reissue rates, some do, but Harney notes there are 

financial incentives against them doing so. This is because the title agent or attorney receives 

most of the insurance premium back from the insurance company; thus, the smaller the premium 

that is charged for the insurance coverage, the smaller the compensation to the title agency or 

settlement attorney. Harney quotes Maher as saying the average national “split” of the premium 

charged at closings is 70-72 percent to the title or settlement agency, and the balance to the title 

insurance company. The splits go as high as 92.5 percent to the agent or attorney and just 7.5 

percent for insurance, according to Maher. 

Further evidence of variation in settlement service costs is presented in a 1996 Media 

General study.97 Media General surveyed 489 settlement service providers in Virginia. The 

survey revealed that some settlement service providers charged substantially more than others. 

Specifically, settlement service providers that were attorneys charged an average of $451 for title 

examination and closing, while those that were not attorneys charged an average of $272, or 

nearly 40% less. 

Radian Lien Protection. Some private sector financial institutions believe title 

insurance premiums are too high. Against considerable opposition from existing title insurers, 

Radian Guaranty introduced a title insurance alternative called Radian Lien Protection (RLP). 

RLP is a form of mortgage guaranty pool insurance pool insurance with additional coverage for 

mortgage defaults involving undisclosed liens. If a loan in a mortgage pool protected by RLP is 

found to have a title defect, RLP will reimburse the loan owner, up to certain limits. RLP is 

designed to take the place of traditional lenders’ title insurance. Radian claims its lien protection 

product is comparable to traditional title insurance, but costs several hundred dollars less. 

Specifically, Radian states 

 

96 According to Mike Finnerman, a senior title officer with the American Title Company, deeply discounted reissue 

rates are usually available on refinances, typically ranging from 30-50 percent of the normal premium fee. 

Finnerman also notes “these discount opportunities seem to be a deep, dark secret in today’s marketplace.” See 

“Trimming the Cost of Title Insurance,” South Coast Today: The Standard Times, June 29, 2002, page T3. 

97 Media General, “Residential Real Estate Closing Cost Survey,” September 1996. 

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Radian Lien Protection was developed as an innovative, cost-saving product that can 

reduce closing costs by more than 50 percent on refinances, second mortgages and 

home equity loans. A mortgage insurance pool policy, Radian Lien Protection is 

designed to provide coverage for a range of losses arising from defaults, including 

losses due to undisclosed liens.98,99

Radian believes its lien protection product can save consumers an estimated $3 billion 

per year.100 After selling its product for a brief period prior to receiving explicit regulatory 

approval from any state insurance commissioner, Radian suspended sales pending explicit 

regulatory approval.101 Prior to its suspension, about half a dozen lenders have used RLP and 

the investment banking firm Lehman Brothers accepted RLP as an alternative to title insurance 

on asset-backed and mortgage-backed securities. Fannie Mae is reportedly “looking at” 

alternatives to traditional title insurance.102 Both the Community Financial Resource Center and 

the National Community Reinvestment Coalition support Radian’s efforts to reduce the cost of 

title insurance. 

 finds 

2 

utz 

tle records would deteriorate if 

RLP became widely used. (See Chapter 5 for further details.) 

ning to offer 

a new insurance product that essentially mimics RLP and costs as little as $275 per 

 

RPL proved to be quite controversial and the subject of two expert, technical analyses. 

One of these analyses is very much in favor of RPL; the other is very much against it. Liu

that RPL could save refinancing borrowers in California an average of $272 dollars. He 

estimates that for mortgages under $650,000 the average refinancing title insurance was $548 in 

2001, and the average RLP fee would have been $276.103 Applying the average saving of $27

to certain assumptions regarding future mortgage activity in California, Liu estimates that RPL 

could increase consumer surplus in the state by at least $1.38 billion. In sharp contrast, Lipsh

argues that consumers would actually pay more for RPL than they would for traditional title 

insurance. 104 He also contends that the integrity of American ti

Fidelity National Financial, the nation’s largest title insurance carrier, is plan

98 http://www.radiangroupinc.com/RadianGroup/MortgageInsurance/RadianGuaranty/products/ 

mi_products_radianlien.asp 

99 Unlike traditional title insurers, Radian will not attempt to correct any title problems that it discovers. 

100 The Legal Description, April 1, 2002. 

101 The Radian Group Inc. failed to get regulatory approval to sell Lien Protection in California. In July, 2003, the 

head of California’s Department of Insurance, John Garamendi, upheld a ruling barring Radian from offering the 

product in California. See Jody Shenn and Erick Bergquist, “Clearer Signs of Shakeout in the Mortgage Business,” 

American Banker, January 5, 2004, pp. 1, 18. 

102 The Legal Description, May 16, 2002. 

103 Paul Liu, “The Increase in Consumer Surplus From Radian Lien Protection: The California Market”, 2003. 

104 Nelson Lipshutz, “Consumer Impacts of Substituting Radian Lien Protection Coverage For Refinance Lender’s 

Title Insurance,” 2003. 

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transaction.105 This suggests that when confronted with the possibility of competition, title 

insurers can indeed reduce the cost of their products. Fidelity’s action is interesting given the 

vigorous resistance the title industry has exhibited towards Radian’s product. While Fidelity’s 

co-chief operating officer Ernest Smith believes the firm’s new product is not suitable in every 

situation, according to Jody Shenn of American Banker, Smith believes that the new product 

makes sense for certain lenders, particularly those planning to self-insure against title risk or 

refinancing existing loans.106

V.B.2 HUD Actions, Court Cases, and Government Reports Involving the Title Industry 

Title and closing costs have been the subject of investigation and litigation across the 

country by HUD and by the courts. HUD and state regulatory agencies have initiated many 

investigations identifying allegedly illegal activities in which realtors, lenders and builders have 

been compensated for consumer referrals to title agencies in apparent violation of provisions of 

RESPA. While many of these cases do not establish liability, taken as a collection they are a 

strong indication that consumers and state officials are often dissatisfied with title and closing 

fees. 

HUD Investigations. Among the real estate settlement service businesses under 

RESPA’s jurisdiction, title insurance companies are the nexus for a disproportionate number of 

RESPA violations. HUD has identified and addressed a number of illegal activities related to the 

marketing and sale of title insurance. Although title insurance is required in the vast majority of 

residential real estate transactions, title insurance companies almost always market their services 

to potential referral sources (real estate agents, real estate brokerages and lenders), not to 

consumers. 

In recent cases, the Department has entered into settlements with a number of title 

insurance companies for operating affiliated businesses that were solely designed to ensure a 

stream of referrals by paying kickbacks to potential referral sources. 

HUD continues to coordinate with state and federal regulatory agencies. For example, 

HUD is presently pursuing RESPA enforcement cases with the states of Pennsylvania, Florida, 

Minnesota, Alabama, and Texas. HUD has recently coordinated RESPA regulatory and 

enforcement efforts with the states of Alaska, Arizona, Colorado, New Mexico, and Tennessee. 

Captive reinsurance cases have been a strong area of cooperation between HUD and state 

regulators working through the National Association of Insurance Commissioners (NAIC). 

Similarly, HUD continues to coordinate RESPA enforcement activities with various federal 

agencies including the Federal Deposit Insurance Corporation, Federal Trade Commission, 

Office of the Comptroller of the Currency and the Department of Justice. 

 

105 According to Inside Mortgage Finance, unlike RLP, the Fidelity National Financial product will not require the 

borrower to certify that no liens have been placed on the financed property and will not require the borrower to be 

sufficiently creditworthy. Inside Mortgage Finance, June 6, 2003, page 9. 

106 Jody Shenn, “Title Insurer Transforms Debate Over Lien Policies”, American Banker, June 18, 2003, page 1. 

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Finally, the Department has developed a memorandum of understanding with a state 

insurance commissioner that HUD hopes will form the basis of additional information sharing 

agreements. HUD believes these agreements will expand the Department’s outreach to state 

regulators regarding enforcement of RESPA, and will assist in developing close working 

relationships with the states to enforce RESPA in the title insurance field. 

Examples of Allegedly Illegal Referral Fees Described in Investigations by HUD and 

State Insurance Regulators. 

• A title agent paid real estate agents’ business training and printing expenses. 

• A title agent provided trips, entertainment, and catering for entities involved in real 

estate transactions. 

• A title agent contributed to a pool of funds that was given away in a drawing among 

real estate agents. 

• A title agent paid an excessive rate to rent a conference room from a real estate 

company. 

• Title agents provided free or below-cost marketing services to real estate agents. 

In captive reinsurance arrangements, a home builder, real estate broker, lender, title 

insurance company, or some combination of these entities forms a reinsurance company that 

works in conjunction with a title insurer. These arrangements have been used as a means of 

paying referral fees. 

Other Cases. Examples include:

As of April 2003, there were eight class-action lawsuits pending in New York 

State alleging that title agents intentionally overcharged homeowners who were 

refinancing their loans. 

The State Insurance Commissioner in California ordered an investigation of the 

title and escrow rates of five of the state’s largest title insurance sellers; this came 

after the Consumers Union surveyed the rates of six major title insurers, which 

sell 84 percent of all title policies in the state (see below).107 In October 2002, the 

California Attorney General reached a $50 million settlement in a consumer 

protection lawsuit brought against six major title companies and their affiliates. 

The companies were charged with deceptive advertising and unfair business 

practices regarding their escrow services.108 They were charged with deceiving 

Californians with hidden fees and costs while providing routine residential escrow 

and title services.109

The court case Lane V. Residential Funding revealed that title insurers do offer 

significant discounts to certain customers. Specifically, Chicago Title offered a 

 

107 Broderick Perkins, “Title, Escrow Firms Gear Up to Give Borrowers Discounts,” Sacramento Business Journal, 

June 30, 2003. 

108 Office of the Attorney General, State of California, Press Release dated October 8, 2002. 

109 Perkins, op. cit. 

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25% price reduction on title services offered in conjunction with mortgage loans 

originated by Residential Funding Corporation. This suggests that title fees can 

indeed be reduced through volume discount pricing and other business 

arrangements.110

Government Reports. The GAO111 examined in more detail issues which had been 

previously raised (in an earlier GAO report) as worthy of further study, concerning the nature of 

competition in the title insurance industry and the impact on consumers. While examining 

national data and contacting government and industry sources familiar with the title insurance 

industry more generally, the focus of this report is on the performance of the industry and 

regulatory regimes in six states – California, Colorado, Illinois, Iowa, New York, and Texas. 

These states were chosen because they appeared to display a wide range of variation in size, 

industry practices and federal/state regulatory oversight. 

The report finds the title insurance market to be highly concentrated nation-wide at the 

level of insurers, with 92 percent of premiums written by the top 5 companies (as of 2005); 

within particular states the degree of concentration is generally higher. There is variation across 

the six states in business practices. For some examples: (1) the method title agents employ to 

conduct searches is highly automated in some, much more labor-intensive in others; (2) affiliated 

business arrangements (ABAs) among lenders, real estate agents, and title agents (and sometimes 

“reinsurers”) are more common in some states than in others; (3) services included in what is 

viewed as the title insurance premium varies across states. For this reason it is quite difficult to 

determine with precision the nature of price variation across states and across consumers within 

the same state. 

The GAO study notes that the nature of the market for title insurance makes it difficult, if 

not impossible, for consumers to comparison shop for this service – which in turn makes it less 

likely that they tend to pay a competitive price for title insurance. Consumers generally do not 

choose their title agent (and title agents make no effort to market directly to consumers), and 

most likely are unaware that they are able to make this choice. The fact that title insurance is a 

very small share of all closing costs (estimated to be 4% of these costs in California), and that the 

title fees are not disclosed until the settlement process has started moving along adds to the 

reluctance of consumers to seek an alternative title agent and/or insurer which may delay their 

closing. Attempts by GAO to closely relate title fees to costs of activities performed were 

frustrated by a lack of data; however, there seems little evidence that variations in title fees (for 

example, as the size of the mortgage loan increases) can be reasonably explained either by 

variations in risk or by effort required for title searching. 

The fact that title agents market to real estate agents and mortgage brokers, and are 

sometimes in ABAs with these parties, can lead to conflicts of interest with benefits received by 

these real estate and lending professionals but no guarantee that these benefits are passed on to 

 

110 U.S. Court of Appeals for the Ninth Circuit. No. 01-16798 D.C. No. CV-96-03331-MMC. 

111 U.S. General Accountability Office, Title Insurance: Actions Needed to Improve Oversight of the Title Industry 

and Better Protect Consumers (Report to the Ranking Member, Committee on Financial Services, House of 

Representatives), April 2007. 

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consumers. The report discusses recent investigations by HUD and state regulatory agencies 

identifying allegedly illegal activities in which realtors, lenders and builders have been 

compensated for consumer referrals to title agencies in apparent violation of provisions of 

RESPA. However, state and federal regulators are seen as being limited by resources, the 

complexity of many ABAs, lack of coordination between different agencies within the states 

(each focusing on a particular sector of the real estate industry) and between federal and state 

agencies, and limited enforcement penalties available to them. 

The GAO report makes several recommendations to promote price competition both at 

the title insurer and title agency level, to require more detailed cost data be provided to state 

regulators by title agents and insurers, and to better enforce existing rules relating to potentially 

illegal marketing practices in the industry. At the federal level, the study proposes providing 

HUD with increased authority to penalize violators of section 8 of RESPA, to clarify regulations 

on ABAs and referral fees, to better coordinate with state regulators in enforcing RESPA, and to 

require consumers be better informed (and earlier in the process) about options for purchasing 

title insurance, warnings about dealing with title agent ABAs, and discounts available – 

especially on refinancings. Also recommended is strengthened state-level regulation of title 

agents, increased collection and auditing of title agent costs and revenues, and improved methods 

of publicizing title insurance price information to consumers. 

V.B.2. Surveys and Other Industry Data on the Title Insurance 

Consumers Union Survey. A Consumers Union study found evidence that borrowers 

were paying too much for title insurance when they refinance their homes. Consumers Union 

surveyed California title agents and found they consistently are not offering refinancing 

borrowers the discounted reissue rates. Norma Garcia, a senior attorney for Consumers Union’s 

West Coast Regional Office declared, “Californians are paying too much for title insurance. We 

believe the high cost of a refinance title insurance policy would be substantially lower if there 

were more competition in the industry.”112 As noted above, as a result of the Consumers Union 

survey, the California Attorney General reached a $50 million settlement against six major title 

companies and their affiliates, charging them with deceiving Californians with hidden fees and 

costs while providing routine residential escrow.113

Analysis of the Consumer Union survey data also suggests wide dispersion among fees 

offered by settlement and title service providers. The Consumer Union data indicate the fees 

quoted by escrow agents for the same sized loan vary widely within the same metropolitan area. 

For example, quoted fees for title insurance and all other closing expenses for a $250,000 

refinancing in the Los Angeles metropolitan area ranged from $1,000 to $1,464, placing the 

highest price quote almost 46 percent higher than the lowest quote. The average quoted price in 

the Los Angeles area, $1,286, was $286, or 28.6 percent, greater than the lowest quoted price. 

There are four possible explanations for the variation in prices. First, the firms that are quoting 

lower prices may not be accurately representing the actual prices that they will eventually 

 

112 Norma Garcia, Consumers Union news release, April 2, 2003. 

113 Office of the Attorney General, State of California, Press Release dated October 8, 2002. 

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charge. Second, the firms that are quoting higher prices may have uncompetitive cost structures. 

Third, the firms that are quoting higher prices may have cost structures similar to those of the 

firms that are quoting lower prices, but price their services higher and earn excess profits. 

Fourth, some firms may provide different title and closing services, which would call for 

different fees. While there will always be some dispersion in prices (reflecting the specifics of 

each transaction),114 it is not clear that differences in services explain the price dispersion 

observed here. Whatever the explanation, some consumers appear to be either deceived or 

paying more than they have to. 

The Consumer Union data reveal similar pricing practices across California. Among 

surveyed areas, prices varied the least in the San Diego metropolitan area; however, even there 

they ranged from $1,079 to $1,338, placing the highest quoted rate 24% higher than the lowest 

quoted rate. In San Francisco quoted prices ranged from $1,110 to $1,370, placing the highest 

quoted rate 24% higher than the lowest quoted rate. In Sacramento quoted prices ranged from 

$1,136 to $1475, placing the highest quoted rate 30% higher than the lowest quoted rate. In 

Fresno quoted prices ranged from $940 to $1512, placing the highest quoted rate 60% higher 

than the lowest quoted rate.115

Data from ABN AMRO. ABN AMRO provided HUD with information on loans it 

originated during the period February 2002 through April 2002. The data included information 

on 8,771 loans, all of which were conforming. About half of the loans were funded through a 

program that used traditional title insurance, and about half of the loans were funded through a 

program that used Radian Lien Protection. The average loan amount for loans with traditional 

title insurance was $145,667; the average loan amount for loans with Radian Lien Protection was 

$132,024. The data are interesting for two key reasons. First, they demonstrate how widely title 

insurance and closing costs vary across states. Second, they demonstrate that borrowers benefit 

from RPL through lower costs and quicker processing times. 

The ABN AMRO data show title insurance and closing costs vary widely across states. 

Specifically, ignoring the states where ABN AMRO did little business, title insurance and 

closing costs ranged from 0.5% to 1.3% of the loan amount.116 While the existence of this 

variation may not be news to most mortgage market insiders, it is still somewhat surprising. 117 

 

114 The Consumers Union telephone survey sought quotes for the same loan amount within a single metropolitan 

area, thus controlling for two important factors that might affect title fees. This is why the dispersion in quotes is 

suggestive of excess fees. 

115 The average quoted prices in San Diego, San Francisco, Sacramento, and Fresno were $1,190, $1,246, $1,323, 

and $1,182, respectively. Thus the percentages by which the average price exceeded the lowest price are as follows: 

San Diego (10.3), San Francisco (12.3), Sacramento (16.4), and Fresno (25.7). 

116 States where ABN AMRO originated less than fifty loans in the period February 2002 through April 2002 are 

excluded from this analysis. Including them would further increase the cross-state variation in title insurance and 

settlement costs. 

117 HUD staff observed title insurance prices, one component of title and settlement costs, across the country. All 

prices are for a $130,000 loan. The price is less than $400 in several states and above $1,000 in several others. The 

others are spread out all over between $400 and $1,000. Different claims rates cannot warrant these differences 

because claims are only a small percent of total title insurance premiums. While different legal requirements could 

explain some of the settlement cost differences observed among states, the very large differences in the regulated 

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All the settlements in the ABN AMRO data, regardless of location, result in the same thing: the 

closing of a loan. Given this homogeneity, why do costs vary so much? Indeed settlement 

practices vary across states, as does the cost of doing business, but can this variation explain the 

huge variation in title insurance and settlement costs? Not likely. The Department believes that 

title insurance and closing costs can be reduced in states where they are currently especially 

high.118

V.B.3. Recent Statistical Studies of Title Insurance 

This section reviews recent studies showing substantial variation in title fees. Earlier, 

Section IV.E provided background discussion of the data used in these studies by the Urban 

Institute and HUD. 

V.B.3.a. Urban Institute’s Analysis of Title Fees 

The statistical study of FHA closing costs by the Urban Institute (2008), described in 

Section IV.E., includes a brief analysis of title fees. This statistical study sought to answer the 

following questions: how large are title charges and how do they vary? For example, are they 

related to borrower characteristics? 

How large are title charges? Total title charges include the cost of title insurance and 

other fees associated with getting title insurance. Total title charges are captured by the total of 

all fees in the 1100 series (excluding lender’s and owner’s coverage premium 1109 and 1110) on 

the HUD-1 form as well as any courier delivery fees from the 1200 and 1300 series. Total title 

charges for the non-subsidized loans studied here are $1,349 per loan and vary substantially 

across homebuyers (standard deviation of $568). This amount approximately half of the average 

down payment. 

Do title charges vary by race and education of borrower? Race effects are present in 

title charges roughly in proportion to those in lender/broker fees. African-Americans pay an 

extra $123 in title fees (other things equal) compared to others, and Latino borrowers an extra 

$106, both measured including State effects. These race differentials are related only to the 

 title insurance prices among states would still be a prime suspect as at least part of the explanation for the difference 

in overall title and settlement costs among states. 

118 In addition to demonstrating wide variations in title insurance and closing costs, the ABN AMRO data reveal that 

borrowers can benefit from using Radian Lien Protection instead of traditional title insurance. Borrowers benefit 

because Radian Lien Protection costs less than traditional title insurance. On average borrowers saved nearly $600, 

or just over 50 percent, by using Radian Lien Protection. Borrowers further benefited from the shorter time period it 

takes to settle a mortgage with Radian Lien Protection compared with traditional title insurance. On average, 

Radian loans closed twenty-one days faster than loans with traditional title insurance. This shorter time period 

yields two benefits, one of which is psychological and the other of which is financial. First, there is simply less 

waiting – nobody likes waiting. Second, it costs money to lock a rate. A rate quote for a 60-day lock is more 

expensive than a rate quote for a 30-day rate quote. Each 15 days in lock duration typically costs at least a eighth of 

a point, or nearly $200 on a $150,000 loan. Since loans that have Radian Lien Protection closer sooner than loans 

with traditional title insurance, they can provide borrowers better rates. 

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racial composition of the borrower’s neighborhood, not to the race of the individual borrower. 

Borrowers with a college education pay $200 less than borrowers with a high school education. 

Note that the education differentials are larger than race differentials, which is the same 

relationship found with origination fees. The signs of price discrimination present in 

lender/broker fees are present in title charges as well. 

Do title charges vary with loan amount? Title charges rise with loan amount but the 

strength of the relationship depends on the state. In some states, the relationship is strong while 

in others it is not significant. The cost of providing title services should not be a function of the 

value of the property. Thus, variation in title charges by loan amount is evidence of price 

discrimination. The analysis finds that title charges also rises with the down payment. This 

suggests there is some discretion exercised in determining charges. When the borrower is more 

strapped for cash, the charges are lower. When the borrower has more cash, the charges are 

higher. 

Do title charges vary by state? Average title charges vary significantly by state—from 

a low of $668 in North Dakota to a high of $2,094 in California (see Table 10-1, Urban Institute 

2008). Across the 50 states and the District of Columbia, seven states have average title costs of 

over $1,500 twelve and seventeen have title costs that average less than $1,000. The variation by 

state remains after controlling for loan and borrower characteristics. There is a $1,000 difference 

between the highest premium and the lowest. New York, Texas, California, and New Jersey 

emerge as the highest-cost states (premiums greater than $1,000) while North Carolina is the 

lowest-cost state (a premium of $0). Attempts to explain the differences with the type of title 

insurance regulation used by different States succeeded in explaining only a small portion of 

additional variation. Nonetheless, it seems that many State title insurance regulation regimes are 

not serving their citizens very well. 

Do title charges vary with other fees paid by the borrower? There is one more 

finding of concern in title charges: title charges are higher when the fees to the broker/lender 

and the real estate agent are higher. These effects are present even when all of the other loan and 

borrower characteristics are also taken account of, and they are measured with high precision. 

With respect to lender/broker fees, title fees are higher by 2.5 percent of the cash fees to 

lender/brokers, and higher by 1.2 percent of the YSP. This elevation of fees does not reflect 

merely that all fees are higher on larger loans, because loan amount (as well as down payment 

and neighborhood property values) is already accounted for as part of the same measurement. 

Although title charges rise with both lender/broker charges and realty fees, there is no 

relationship between the fees paid to lender/broker and fees paid to real estate agents once loan 

and borrower characteristics after taking account of loan and borrower characteristics. In other 

words, when either the lender or the real estate agent makes more on a deal, so does the title 

company. The fees of lender/brokers and real estate agents have no similar relation. Title fees 

rise faster with lender/broker and realty fees when only non-subsidized loans are analyzed. 

The implication of a fee elevation of 2.5 percent is substantial and the Urban Institute 

(2008) includes the following example: “lender/broker fees on non-subsidized loans average 

about $3,100 per loan among these FHA loans. The variation is large, and the 25th and 75th

percentiles are roughly $1,950 and $4,350, a difference of $2,400. If these fees are split into half 

cash and half YSP, the title company makes an additional $100 on the 75th percentile loan as 

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compared to the 25th percentile loan. This extra amount is in addition to the fees related strictly 

to loan amount, down payment, and neighborhood property values.” 

V.B.3.b. HUD’s Analysis of Title and Settlement Charges by State and Metropolitan Area 

HUD used the same FHA data base of approximately 7,600 HUD-1’s (see earlier 

discussion of Urban Institute Study) to examine the distribution of title and settlement fees across 

and within States. Title and settlement fees include title insurance, title search, attorney fees, and 

any other fees (e.g., binder fees) associated with obtaining title insurance and closing a mortgage. 

For each State, Table 2.11 provides the mean loan amount, the mean title and settlement fee, the 

first (25%) and third (75%) quartiles, and the standard deviation. Also provided in Table 2.11 

are: title and settlement fees expressed as a percentage of the loan amount; the inter-quartile 

dollar difference (third minus first quartile); the inter-quartile difference expressed as a 

percentage of fees; and the standard deviation expressed as percentage of fees. 

Interstate Variations in Title and Settlement Fees. The FHA data show substantial 

variation in title and settlement fees across states. Some of the main points from Table 2.11 

include the following: 

• Title-settlement fees are substantial in some states. Fees are over $1,600 in the 

States of Texas ($1,717), New York ($1,789), New Jersey ($1,931), California 

($2,063), and Connecticut ($1,752), to name a few. This compares with fees less 

than $900 in 12 States; for example $732 in North Carolina. 

• The large interstate differences in title and settlement fees are not simply due to 

differences in the average loan amount across States. Title and settlement fees 

express as a percentage of loan amount are as follows in these high-cost states: 

Texas (1.82%), New York (1.67%), New Jersey (1.54%), California (1.49%), and 

Connecticut (1.37%). In 20 States, title and settlement fees are less than one 

percent of the loan amount. For example, title and settlement fees are only 0.67% 

of the average loan amount in North Carolina. 

It is implausible to think such large interstate differences are due to differences in actual costs. 

Why does it take 1.82% of the loan in Texas to obtain title insurance and close a loan, as 

compared with only 0.67% in North Carolina?

Within State Variations in Title and Settlement Fees. Title fees not only vary across 

States but they also exhibit substantial variation within States. As noted above, several measures 

of within State variation are provided in Table 2.11. Some of the main points are as follows: 

• In four States, the inter-quartile dollar difference is approximately one thousand 

dollars: New York ($1,119), New Jersey ($999), California ($1,010), and Illinois 

($959). This compares with inter-quartile differences of less than $225 in 16 

states; for example, only $138 in North Carolina. 

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• Large within State variations in title and settlement fees are not explained by 

differences in the absolute magnitude of title and settlement fees. The interquartile dollar difference expressed as a percentage of title and settlement fees 

were as follows in these selected states: Illinois (69.1%), Utah (68.3%), New 

York (62.6%), New Jersey (51.7%), Virginia (49.6%), California (49.0%), Ohio 

(44.4%), and Florida (37.9%). In 8 States, the inter-quartile dollar difference was 

less than 20% of title and settlement fees. For example, the inter-quartile dollar 

difference was 19% of the average title and settlement fees in North Carolina. 

• The same within State information is shown by expressing the standard deviation 

of title and settlement fees as a percentage of the average fee in each state. 

Selected States with a high percentage (indicating highly variable fees) include: 

New York (52.5%), West Virginia (48.9%), Wyoming (47.6%), Illinois (47.3%), 

Nebraska (43.9%), Maine (40.9%), Ohio (37.6%), Florida (34.2%), Michigan 

(33.9%), Utah (33.8%), New Jersey (32.5%), Virginia (31.6%), and California 

(30.9%). In 9 States, the standard deviation was less than 20% of title and 

settlement fees. 

The individual State charts in the Appendix A to this chapter also indicate the wide variability in 

title and settlement fees for given loan amounts. 

Individual Metropolitan Area Table and Charts. The data were also analyzed for 

selected metropolitan areas. Table 2.12 provides data on title fees for 16 metro areas in the same 

format as the State data in Table 2.11. In addition, Appendix B to this chapter plots title fees 

against loan amounts for each of these 16 metropolitan areas areas. The advantage of looking at 

title costs within a metro area is that there will be fewer potential reasons for costs to differ as 

compared to across an entire state. Nevertheless, just as above with States, there are many 

examples of huge variations. As shown in the Appendix charts, Albuquerque varies between 

$800 and $1600, Chicago between $800 and $2,500, Dallas-Fort Worth between $1,100 and 

$2,300, Las Vegas between $600 and $1,800, and Washington, DC between $1,000 and $2,500, 

just to mention a few. Most of the rest show similar large variations for title and settlement 

work. As shown in Table 2.12, the standard deviation is more than 20 percent of the average fee 

in several metro areas, including Chicago, St. Louis, and Hartford. 

The metropolitan area data reinforce the above State data, the findings of similar surveys 

(e.g., the Consumer Union survey showing wide variation in California title charges), the 

anecdotal information about overcharging by title companies that has appeared recently in the 

press, the numerous recent court cases involving kickbacks among title and other real estate 

service companies, and the recent reports (such as that by GAO) concluding that the title industry 

is characterized by non-competitive conditions. Like other borrowers, cash-constrained FHA 

borrowers are paying a wide range of fees to our nation’s title and closing companies. Claims by 

ALTA and others that there is “no fat in title fees” do not carry much weight in light of these 

data. 

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V.B.3.c. Other Analyses of Title and Third-Party Fees 

Additional evidence suggesting third-party settlement costs can be reduced is provided by 

analysis of mainly conventional loans supplied to HUD by Susan Woodward (these are the courtcase loans analyzed in Woodward, 2003). The analysis shows that, even after controlling for 

factors that are expected to affect the price of third-party settlement service, prices are extremely 

variable having a standard deviation of $726 around a mean of $1,229. The laws of statistics 

suggest that third-party settlement services costs will be reduced in concert with the reduced 

variability in prices brought about by consumers increased ability to meaningfully compare 

prices under the new rule. This is separate from any other influences that may result in a 

lowering of costs. 

The total of third-party settlement service costs in a mortgage loan transaction can be 

described as a random variable from a lognormal119 distribution. Estimates of the parameters (μ, 

σ) of the lognormal distribution of third-party settlement services costs from a sample of 2,726 

loan transactions from 8 states are 6.963685 for μ and 0.592342 for σ. This implies that thirdparty settlement services costs have a mean of $1,260 and standard deviation of $817120. After 

using a model to control for various aspects that should have a bearing on third-party settlement 

services costs such as State, loan size, and whether or not the loan was a refinancing, the 

estimator of σ is reduced to 0.547760. Since the parameter μ is unchanged by the model, the 

price of third-party settlement services after controlling for known factors has a mean of $1,229 

and standard deviation of $726. Thus there is a large amount of variability, or price dispersion, 

that remains unaccounted for – this variability in third-party prices is similar to the variability 

found in lender and broker prices found by Jackson and Berry (2001) and Guttentag (2002). 

Assuming the RESPA rule changes the distribution of third-party settlement services 

prices to one where the parameter σ is 25 percent lower (0.41082), the standard deviation of 

third-party settlement services costs after controlling for known factors would be $493 and the 

mean would be $1,151, $78 or about 6.4 percent lower than before the rule. If the new 

distribution had σ half as large as the old distribution (σ = 0.27388) the new standard deviation 

would be $306 and the new mean $1,098, $131 or about 10.6 percent lower than before the rule. 

The reductions in average price and in price dispersion will benefit consumers by reducing their 

expenses and assuring them they have received a fair deal. Note that this reduction in average 

prices is simply the result of third-party settlement services prices coming from a post-rule 

distribution, created by consumers’ increased ability to shop, with less variability than the prerule distribution. It is apart from any general price reductions achieved through increases in 

efficiency brought about by new business arrangements possible under the rule. 

Woodward (2003b) has conducted her own analysis of title charges. She studies a unique 

set of data compiled from the entries in the 1100 lines of approximately 2800 HUD-1 settlement 

 

119 A lognormal random variable always has a value greater than zero. The natural logarithm of a lognormal random 

variable with parameters μ and σ has a normal distribution with mean μ and standard deviation σ. See Mood, 

Alexander M., Franklin A. Gaybill, and Duane C. Boes, Introduction to the Theory of Statistics, McGraw-Hill, 1974. 

120 The mean of the lognormal distribution with parameters μ and σ is exp[μ + 1⁄2σ2

], and the standard deviation is 

the square root of {exp[2μ + 2σ2

] – exp[2μ + σ2]}. See Mood, et al., op cit. 

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statements for loans made over the period 1996-2001, all either funded (if brokered) or made (if 

retail) by a single large national wholesale lender. The basic findings are that for brokered loans, 

the cost of title insurance averages $910 with a standard deviation of $550, an enormous amount 

of variability. The total amount paid to the title insurer is systematically (and directly) related to 

only three measurable features of the transaction: 1) the number of individual line items payable 

to the title insurance company, 2) the amount paid to lawyers involved in the closing, and 3) the 

yield spread premium on the loan. That is, the total amount of title charges increases with the 

number of separate title charge line items, the amount paid to lawyers in the transaction and the 

size of the yield-spread premium. These factors explain about 20 percent of the variation in title 

charges. Retail loans have title charges that average $200 less than those for brokered loans. 

Neither the amount of the loan, nor the value of the house, nor any geographic or socio-economic 

status variables bears any statistical or economic relation to title insurance charges. Title charges 

do not vary systematically by state where States with more requirements and more complex 

requirements (and possibly poorer property ownership records) might cause there to be higher 

charges or a larger number of charges for more individual items, and thus for the State in which 

the house is located to be important in determining total title insurance costs. In fact, the number 

of charges is unrelated to the State in which the property is located. The number of charges is 

significantly related to title costs in and of itself. In another test of transaction complexity, title 

insurance costs for purchase and refinancing loans were compared and found to be statistically 

indistinguishable. 

V.C. Will Savings in Third-Party Costs Be Passed Through to Consumers? 

Subsection II.C explained that the mortgage origination market became more 

concentrated during the 1990s with the growth of large lenders that not only originated loans 

themselves on a retail basis but also purchased loans from brokers and loan correspondents on a 

wholesale basis. LaMalfa (2002), the Joint Center for Housing Studies (2002), Woodard (2003), 

and others have concluded that these lenders operate in a highly competitive market 

environment. Several of the commenters on the 2002 proposed rule had a different view about 

the competitiveness of the mortgage market, arguing that any third-party savings might be 

retained, rather than passed through to consumers. While many of the comments focused on 

packaging, the same market dynamics are for this proposed rule. 

ALTA, for example, argued that HUD’s proposals would increase concentration in the 

mortgage industry and would allow larger lenders to retain any price discounts obtained from 

third-party providers (p. 28). Similarly, the National Association of Realtors (NAR) said that 

HUD’s packaging proposal “can lead to increase concentration with the industry and reduce 

competition” and lenders will have “no obligation to pass along discounts to borrowers” (NAR, 

2002, p.4). The NAR-funded paper by Ann Schnare, entitled “The Downside Risks of HUD’s 

Guaranteed Mortgage Package” (dated October 24, 2002) reached conclusions exactly opposite 

to those reached by LaMalfa (2002) and the Joint Center for Housing Studies (2002). Schnare 

identifies the same concentration trends as these studies: 

[T]he mortgage industry is increasingly characterized by the dominance of a few 

large national originators. In 2001, for example, the top ten lenders accounted for 

over 50 percent of total loan originations and 48 percent of total servicing. The 

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degree of concentration within the lending industry has been increasing steadily over 

time, reflecting a wave of mergers and acquisitions that have transformed the 

financial service industry as a whole (page 15). 

Schnare goes on to say the HUD’s packaging proposal will accelerate this concentration 

trend and that gives her “some reason for concern” that packagers will not pass through any 

savings to consumers but rather retain any savings for themselves. She writes, “more important, 

perhaps, there is no reason to conclude that any cost savings that do arise [from packaging] will 

be passed through to consumers” (p. 10). Schnare asserts that the mortgage market has become 

less competitive over the last ten years, a conclusion that is soundly contradicted by most 

industry observers (Olson, LaMalfa, the Joint Center, Morgan Stanley, etc.). Schnare assumes 

that the above-mentioned trends in concentration are associated with changes in pricing 

dominance. But, LaMalfa (2002) disputes this view: 

[H]owever--and let us underscore this point--market “dominance” is not market 

power, in the sense of pricing power, of which a perfectly competitive market like 

mortgage banking has none. (p. 58) 

Commenters such as Schnare, NAR, and ALTA contend that increasing the concentration 

ratio (say from 50 percent to 55 percent in her example) would directly reduce the 

competitiveness and adversely influence pricing behavior in the market. But according to Inside 

Mortgage Finance (January 24, 2003), the share of the top five (25) originators increased from 

28 percent to 47 percent (from 54 percent to 79 percent) between 1998 and 2002. By all 

evidence, firms are competing today as fiercely as they competed in 1998, not less so. 

Commenting on these trends, the Joint Center for Housing Studies (2002), which views larger 

lenders as competing in a highly competitive environment, noted that these trends will persist 

with continued technological change and that low marginal costs will spur competition “as large 

firms seek to identify and exploit competitive advantage in their pursuit of customers in an 

increasingly competitive marketplace”(p. 17). Woodward (2003a) echoes the same sentiments, 

when she states “the wholesale lending market is highly competitive” (p. 38) and “competing 

wholesale lenders are surely setting rate sheets so as to leave themselves indifferent as to which 

rate/point cells the broker and/or borrower select. It would not be profit maximizing for the 

wholesale lender to do otherwise” (p. 39). 

The structure of nearly all sectors of the impacted industries (see Chapter 5 of this 

Analysis for details on the structure of these industries) suggests that there are few barriers or 

costs to successful entry so that exit involves little loss of sunk costs; and that average costs of 

production are constant over a wide range of output including quantities below market 

equilibrium. These are the necessary conditions for a “perfectly contestable” market as defined in 

Baumol, et. al. (1988)121. 

In a contestable market, even a monopoly will produce output at the socially optimal 

(perfectly competitive) level where price equals marginal (equals average) cost because any 

attempt by the incumbent to raise prices will be met (contested) by the entry of a competitor who 

 

121 William J. Baumol, John C. Panzar, and Robert D. Willig, Contestable Markets and the Theory of Industry 

Structure, 1988, Harcourt Brace Jovanovich, Inc. 

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can profitably undercut the incumbent’s price. Today, if one “dominant” lender raised prices in 

its local market, then one or more other lenders would immediately enter the market and take 

market share away from the price-increasing lender. As LaMalfa (2002) states, “‘dominance’ is 

not pricing power.” Today’s wholesale mortgage lending market is highly contestable, and most 

of the other settlement services industries are highly competitive, for reasons that have nothing to 

do with current RESPA rules. There is no reason to expect RESPA reform to change these 

conditions. Even large players in the mortgage market will have to pass on savings to consumers 

in order to maintain market share. Any exertion of “monopoly” power by attempting to keep 

reduced costs from being passed to consumers would not be sustainable in the market without 

illegal collusive agreements among providers. Schnare’s concern (p. 17) about some lasting 

monopoly power that allows lenders to increase their prices (after initially lowering their prices 

to gain market share) is simply invalid in today’s mortgage market. 

It is interesting that a year prior to her report for NAR, Schnare expressed a completely 

different view of the effects of consolidation. In a June 2001 report associated with the 

Standard-Heartland YSP case, she described the market trend toward consolidation and then 

stated: 

Despite this consolidation both lending and servicing are industries in which no firm 

is sufficiently large enough to have market power, and thus are well described by 

what economists call “perfect competition.” (p.5) 

Schnare goes on to note that the movement to larger lenders “has helped to reduce the 

average homeowner’s mortgage costs” (p. 5). In this report, she also notes: 

Intense competition in the mortgage market makes mortgage funds flow to the low 

cost provider. This occurs at all points in the value chain. Mortgage 

brokers...actively compete for borrowers. Mortgage wholesalers...actively compete 

in the origination and servicing of loans. (p. 10) 

In this case, Schnare concludes that intense competition tends to lower mortgage interest 

rates by putting downward pressure on origination fees. These views about the competitive 

nature of our mortgage market are similar to those expressed by LaMalfa (2002), the Joint Center 

for Housing Studies (2002), Woodward (2003) and others. 

VI. Subprime Market 

The subprime market provides loans to borrowers who can not qualify for prime loans 

because of their poor credit records and high levels of debt. Subprime loans are defined as loans 

made to borrowers with impaired credit, typically with credit ratings of A-minus to D, whereas 

prime loans have a credit rating of A.122 The problems discussed above regarding complex 

mortgage transactions and barriers to consumer shopping are only heightened in the subprime 

market. 

 

122 Often a FICO score of 620 corresponds to the dividing line between prime and subprime, though the use of 

automated underwriting models have blurred the dividing line.

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Trends in Subprime and Non-Traditional Markets. As shown in the table below, total 

residential mortgage originations increased from $2,215 billion in 2001 to $3,945 in 2003 as the 

drop in interest rates and strong house price appreciation spurred a wave of refinancing. But as 

the refinancing wave receded and increases in housing costs continued, the conventional 

conforming and government-insured market shares declined sharply, while the subprime, 

Alternative A (Alt A) and home-equity loan (HEL) products greatly expanded. In particular, the 

subprime loan share more than doubled from 8.6 percent in 2001 to 20.1 percent in 2006, 

although most of these gains were lost in 2007 as its market share returned to its 2003 level of 

7.9 percent. 

The growth in the subprime market up until 2007 is often attributed to two major 

innovations: credit scoring and securitization. Credit scoring techniques, first developed in 

making subprime auto loans, provided a standardized way of assessing risks. Securitization had 

allowed for expanding credit for prime borrowers since the eighties, but required an additional 

innovation to make the subprime mortgage-backed securities attractive to investors. The 

collateralized debt obligation (CDO) is a derivative designed to protect investors against the risks 

of default. This innovation allowed firms to sell subprime mortgage-backed securities at prices 

that were competitive with the lower-risk prime mortgage-backed securities of the GSEs. The 

growth of the subprime market was fueled further by a global demand for high-yield securities. 

Subprime securities were perceived to be safe by many who assumed that housing prices in the 

U.S. would continue to grow faster than income. 

This expansion of the subprime market reversed itself dramatically beginning in late 

2006. Delinquencies among subprime adjustable rate borrowers rose to 15 percent in late 2007, 

a level three times that only two years earlier. Indeed, adjustable-rate mortgages originated in 

late 2005 and in 2006 performed the worst, with some defaulting after only or two payments 

(Bernanke, 2007). A slowdown in the housing market has and will motivate many other defaults 

as subprime borrowers, whose downpayments were lower than prime borrowers, find themselves 

“underwater.” In addition, borrowers with adjustable rate mortgages, who had planned to 

refinance before their rates reset, will find that option less attainable as the asset value of their 

home declines. 

Besides housing market trends, there are structural aspects of the market that have 

contributed to the recent and dramatic collapse of the subprime market. Poor underwriting 

standards are often blamed as a root cause. Much, if not all of the risk of a loan is passed on to 

loan purchasers, so the incentive for ensuring loan quality is weak. According to Bernanke 

(2007), fees tied to loan volume, but not the long-run performance of the loans, contributed to 

the decline in underwriting standards. The consequences of easing credit standards were realized 

in early 2007 as delinquency rates on nonprime mortages soared (DiMartino and Duca, 2007). 

Enormous losses have been incurred by investors in the subprime market leading to the 

failure of Bear Sterns and Lehman Brothers, two of the most aggressive participants in the 

subprime securitization process,. The rise in subprime mortgage defaults became a significant 

burden on those financial institutions that had invested heavily in the subprime market. 

Consequently, the cost of subprime loans has risen and the underwriting standards for subprime 

loans have become more rigorous. The result is a significant decrease in market share of the 

subprime market. 

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The product type with the greatest initial expansion over the last five years is Alternative 

A or “Alt A.” The Alt A product share increased by a factor of 5, from 2.7 percent in 2001 to 

13.4 percent in 2006. Alt A are loans made to borrowers with limited income or asset 

verification, often preferred by self-employed workers and those with non-traditional 

circumstances. Alt A are sometimes referred to as non-prime or near prime in that they generally 

have higher credit ratings than the B, C and D loans in subprime, but do not qualify as prime 

loans, which require full documentation of income and employment. The low documentation is 

often offset by relatively higher credit scores and a higher interest rate on the loan. More 

recently, however, the Alt-A has been used increasingly by consumers for whom the loan is at 

the limit of their financial means. Lenders even have the incentive to encourage potential 

borrowers to exaggerate their income and wealth in order to receive a loan. The market has 

receded slightly from its 2006 share to 11.3 percent in 2007 as a result of higher interest rates in 

this market.. 

Mortgage Originations by Product 

A. Dollars (in Billions) 

Conv/ 

Conf FHA/VA Jumbo Subprime Alt A HEL TOTAL 

2001 $1,265 $175 $445 $160 $55 $115 $2,215 

2002 $1,708 $176 $571 $200 $67 $165 $2,885 

2003 $2,460 $220 $650 $310 $85 $220 $3,945 

2004 $1,210 $135 $515 $540 $190 $330 $2,920 

2005 $1,090 $90 $570 $625 $380 $365 $3,120 

2006 $990 $80 $480 $600 $400 $430 $2,980 

2007 $1,162 $101 $347 $191 $275 $355 $2,430 

Source: Inside Mortgage Finance, 2008 Mortgage Market Statistical Annual (p. 4). 

B. Percentage Shares

 

Conv/ 

Conf FHA/VA Jumbo Subprime Alt A HEL TOTAL 

2001 57.1% 7.9% 20.1% 7.2% 2.5% 5.2% 100.0% 

2002 59.2% 6.1% 19.8% 6.9% 2.3% 5.7% 100.0% 

2003 62.4% 5.6% 16.5% 7.9% 2.2% 5.6% 100.0% 

2004 41.4% 4.6% 17.6% 18.5% 6.5% 11.3% 100.0% 

2005 34.9% 2.9% 18.3% 20.0% 12.2% 11.7% 100.0% 

2006 33.2% 2.7% 16.1% 20.1% 13.4% 14.4% 100.0% 

2007 47.8% 4.2% 14.3% 7.9% 11.3% 14.6% 100.0% 

Another product with substantial increase during the last five years is the home-equity 

loan (HEL), which holds a junior position relative to the first mortgage. HELs are frequently 

piggyback loans in which the second lien is taken out at the same time as the first and allows the 

borrower to avoid payment of mortgage insurance, and so has contributed to the decline in 

market shares for conventional conforming and government insured loans. HEL loan share has 

increased from 4.6 percent in 2001 to 14.4 percent in 2006. 

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As noted above, the subprime market allows borrowers who can’t qualify for 

conventional loans (or even FHA loans) to receive a loan by paying a higher interest rate to 

offset their higher credit risk; essentially, the growth in subprime lending has represented the 

first real expansion of risk-based pricing in the mortgage market. Without the subprime market, 

many lower-income, credit-impaired borrowers would not have been able to obtain funds during 

the 1990s (Gramlich, 2002). Because they face higher interest rates and origination fees due to 

questions about their creditworthiness, borrowers in the subprime market are precisely the people 

who need the simplification and shopping advantages offered by the types of reform outlined in 

the proposed RESPA rule. As noted below, there exists some inefficiency in the subprime 

market, which places a premium on consumers shopping in order to obtain useful information 

regarding mortgage options and prices.123 

Concerns About Market. The joint HUD-Treasury report, Curbing Predatory Home 

Mortgage Lending (2000), explains the origins of this market, the factors behind its substantial 

growth, and the characteristics of borrowers served by that market. The report also discusses 

some of the concerns that have come with the growth in this market. First, there is evidence of 

inefficiency in pricing, which is not entirely surprising given the heterogeneous nature of 

borrowers served by this market and the rapidity with which the market has grown. Analysis by 

Freddie Mac economists suggests that some borrowers in this market are paying higher interest 

rates than would be predicted by their credit scores and other loan characteristics.124 Both 

Fannie Mae and Freddie Mac have said that a significant number of subprime borrowers could 

qualify for conventional prime loans. This points to the importance of consumers shoppin

qualifications among a number of lenders so as to gain information about the full range of 

mortgage options available to them.

g their 

125

Second, HUD studies have documented that minority borrowers and neighborhoods rely 

heavily on subprime lenders for their refinance mortgages.126 In 2000, subprime lending 

 

123 The largest channel in subprime is the broker channel, which increased from 47.6 percent in 2003 to 59.3 percent 

in 2005 before shrinking to 54.9 percent in the first half of 2006. 

124 See Howard Lax, Michael Manti, Paul Raca, and Peter Zorn, “Subprime Lending: An Investigation of Economic 

Efficiency” (unpublished paper), February 25, 2000. Also, analyses by Fannie Mae and Freddie Mac suggest that 

some portion of subprime lending is occurring with borrowers whose credit would qualify them for loans sold to the 

GSEs. Freddie Mac staff estimate that 10-35 percent of subprime borrowers meet Freddie Mac’s purchase 

guidelines for conventional loans. Fannie Mae has stated that half of all mortgage borrowers steered to the high-cost 

subprime market are in the A-minus category, and therefore are prime candidates for Fannie Mae. See “Fannie Mae 

Vows More Minority Lending”, Washington Post, March 16, 2000, page EO1. 

125 Consumer advocates have also highlighted many cases in which the loan pricing appears to go far beyond the risk 

of the loan. Opportunity pricing means the lenders or brokers takes advantage of their greater familiarity with the 

market to set loan prices much higher than the borrower’s risk would warrant. Through yield-spread premiums, the 

broker can turn the overage pricing into broker profit at the expense of the borrower. Profit-based pricing 

recognizes that pricing is not based on costs or risks, but rather set to maximize the profit of the lender. The key 

distinction is that borrowers with inelastic demand should be charged a higher price. From the borrower’s 

perspective, inelastic demand means the borrower has few alternative offers, either because other lenders are 

unwilling to make offers or the borrower has not sought out alternatives. This may be the situation in the subprime 

market. 

126 The Unequal Burden report published by HUD (April, 2000) reported data on a neighborhood basis -- subprime 

lending accounted for 51 percent of the refinance loans in predominantly black neighborhoods, compared to only 9 

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accounted for 50 percent of refinance loans in majority African American neighborhoods – 

compared with only 21 percent in predominantly white areas (less than 30 percent of population 

is African American). It does not seem likely that these high market shares by subprime lenders 

in low-income and African-American neighborhoods can be justified by a heavier concentration 

of households with poor credit in these neighborhoods. Calem, Gillen and Wachter (2002) 

examined neighborhoods in Chicago and Philadelphia and concluded that about half of the 

increase in subprime lending could be explained by differences in neighborhood measures of 

credit quality. However, even after controlling for differences in neighborhood measures of 

credit quality and a variety of other neighborhood effects, there still was a strong concentration 

of subprime loans in African American neighborhoods.127 128 It appears that subprime lenders 

may have attained such high market shares by serving areas where prime lenders do not have a 

significant presence. Belsky and Calder (2003) discuss other factors besides credit quality that 

affect the types of financial services available in low-income neighborhoods and state that the 

lack of mainstream lenders in lower-income communities is also related to the actual or 

perceived differences in the profitability of mortgage lending in lower-income communities.129

Finally, there is evidence that predatory lending has been an unfortunate part of the 

growth in the subprime market. Predatory lending is characterized by several abusive and 

horrendous lending practices – excessive interest rates, extraordinary origination fees and points 

rolled into the mortgage, pressure tactics to refinance so that another set of high upfront fees can 

be charged, and so on. Predatory lenders target the elderly, women, and minorities who need 

money quickly to pay for medical expenses, pay off credit cards or make needed house repairs. 

There is no quantitative information on the magnitude of predatory lending (i.e., the number of 

loans with predatory characteristics), and there are questions about how exactly to define it. 

However, there is ample anecdotal information from victim testimonies and various court cases 

to indicate the seriousness of this problem and the variety of forms it can take. There is also 

evidence that the growing incidence of abusive practices has been stripping borrowers of their 

 percent in predominantly white neighborhoods. The Unequal Burden work is updated in Scheessele (2002), which 

is the source of the 2000 data reported in the text. 

127 Paul Calem, Kevin Gillen, and Susan Wachter. “The Neighborhood Distribution of Subprime Mortgage 

Lending.” Zell/Lurie Real Estate Center at Wharton, Working Paper 404. 2002. 

128 Similarly, Pennington-Cross, Yezer and Nichols (2000) estimated the probability that an individual borrower 

selected a subprime mortgage and concluded that while borrower income, debt, credit history, and neighborhood 

factors significantly influence whether a borrower receives a subprime loan, race and ethnicity were also key factors 

in explaining why minorities are less likely to have prime loans than white borrowers. Anthony Pennington-Cross, 

Anthony Yezer, and Joseph Nichols. Credit Risk and Mortgage Lending: Who Uses Subprime and Why? 

Arlington, VA: Research Institute for America. 2000. 

129 Eric Belsky and Allegra Calder. Credit Matters: Low-Income Asset Building Challenges in a Dual Financial 

Service System. Presentation at Joint Center for Housing Studies Conference: Building Assets, Building Credit: A 

Symposium on Improving Financial Services In Low-Income Communities. November 18-19, 2003. See also John 

Caskey. Bringing Unbanked Households into the Banking System. Report for the Brookings Institution. 2002; 

Michael S. Barr. Banking the Poor. Report for the Brookings Institution. 2003; and Constance R. Dunham. “The 

Role of Banks and Nonbanks in Serving Low- and Moderate- Income Communities,” in J.L. Blanton, S.L. Rhine, 

and A. Williams, eds., Changing Financial Markets and Community Development: A Federal Reserve System 

Research Conference. Federal Reserve Bank of Richmond, pp. 31-58. 2001. 

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home equity, threatening families with foreclosure, and destabilizing neighborhoods.130 The 

problems associated with home equity fraud and other mortgage abuses are not new ones, but the 

extent of this activity seems to be increasing. The expansion of predatory lending practices 

along with subprime lending is especially troubling since subprime lending is disproportionately 

concentrated in low- and very-low income neighborhoods, and in African-American 

neighborhoods. 

Shopping in Subprime Market. Courchane, Surette, and Zorn (2004) found that 

subprime borrowers are less likely to shop for a mortgage than prime borrowers. For example, 

approximately 49 percent of prime borrowers in their survey searched for the best rate compared 

to approximately 32 percent for subprime borrowers. The authors concluded after controlling for 

underwriting factors, that borrowers who search less are more likely to obtain a subprime 

loan.131 There are a number of reasons that subprime borrowers are not as likely to shop for 

best mortgage ra

the 

te. 

 

First, subprime borrowers are not as financially sophisticated as prime borrowers.132 

Courchane, Surette, and Zorn (2004) found that prime borrowers were more likely to be very 

familiar with mortgage types, rates and costs, and how to qualify for a mortgage than subprime 

borrowers.133 The state: 

We find that subprime borrowers are less knowledgeable about the mortgage 

process, are less likely to search for the best mortgage rates, and are less likely 

to be offered a choice among alternative mortgage terms and instruments – 

possibly making them more vulnerable to unfavorable mortgage outcomes. 

130 In fact, high foreclosure rates for subprime loans provide the most concrete evidence that many subprime 

borrowers are entering into mortgage loans that they simply cannot afford. HUD and others have documented the 

high rate of foreclosures in the subprime market in recent research studies. For an overview of these studies, see 

Harold L. Bunce, Debbie Gruenstein, Christopher E. Herbert, Randall M. Scheessele, “Subprime Foreclosures: The 

Smoking Gun of Predatory Lending,” 2000. 

131 See Marsha J. Courchane, Brian J. Surette, and Peter M. Zorn, “Subprime Borrowers: Mortgage Transitions and 

Outcomes,” Journal of Real Estate Finance and Economics, Forthcoming, 2004. 

132 A United Kingdom research study found that financial sophistication limited shopping for a mortgage. See 

Financial Services Consumer Panel, “Mortgage Research Study,” United Kingdom, August 1999. 

133 According to the Joint Center for Housing Studies, “even the most sophisticated borrower will find it difficult to 

evaluate the details of a mortgage since the essence of mortgage pricing reflects decisions concerning repayment of 

debt over time.” The Joint Center report cites research that concludes that many borrowers use short-cut methods to 

comparison shop and these methods allow some brokers to exploit the weaknesses of these short-cut methods. 

Subprime borrowers are more vulnerable than prime borrowers because they have less financial sophistication, 

fewer resources to seek professional help, and because subprime loans may have features than are not characteristic 

of prime mortgages. See “Credit, Capital and Communities: The Implications of the Changing Mortgage Banking 

Industry for Community Based Organizations, Joint Center for Housing Studies, Harvard University, March 9, 2004. 

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The authors also determined that subprime borrowers are less satisfied with the terms of 

their loans.134 135 Similarly, a recent Joint Center for Housing Studies report found that areas 

with high shares of college-educated individuals have higher proportions of prime conventional 

loans even after controlling for neighborhood and family income.136 Second, subprime 

borrowers are more likely to have obtained loans through aggressive marketing by a mortgage 

broker. Mansfield (2003) observes that one feature of the subprime market that distinguishes 

itself from the prime mortgage market is brokers’ “push marketing” of loan products. Subprime 

borrowers are more likely than prime borrowers to obtain a mortgage from brokers who use 

telephone solicitation, direct mail, or door-to-door solicitation to seek out customers.137 A 

Fannie Mae Survey of credit-impaired borrowers also found that subprime borrowers were more 

likely to obtain a loan from lenders who used these marketing techniques.138 Among other 

reasons, push marketing is effective because it promises guaranteed loan approval or convinces 

homeowners to obtain a mortgage even though they were not searching for one.139

Third, the typical subprime borrower does not have as many resources to shop as the 

typical prime borrower. As stated in the last section, even after controlling for neighborhood 

credit measures, subprime lending is concentrated in low-income and minority neighborhoods.140 

Low-income and minority may not shop for a mortgage for a number of reasons. For example, 

 

134 Ultimately, however, the authors could not decide whether the subprime borrowers were made better off or worse 

off by their loans. On the one hand, the subprime market did make it possible for them to get a loan, but, on the 

other hand, the expensive terms of the loan and higher rates of default meant that some subprime borrowers were 

worse off having received the loan. 

135 In a borrower satisfaction survey by J.D. Power and Associates in November 2005, subprime borrowers were the 

least satisfied. The survey asked 4,498 recent borrowers about the application process, loan officer and closing 

process. ABN AMRO Mortgage got top marks with quick processing and ease of closing, followed by SunTrust, 

Wachovia, Countrywide and Wells Fargo. The highest volume subprime lenders, Ameriquest and Option One, both 

scored well below the industry average. Most of the respondents (61 percent) said they rely on word-of-mouth 

recommendations from family and friends, so reputation is important for future business. A common problem for 

subprime closings was a surprise increase in their monthly payment. “Borrowers may feel somewhat deceived when 

their monthly payment does not match what was quoted in the good faith estimate,” according to Jeremy Bowler, 

senior director of J.D. Power’s finance and insurance practice (Inside B&C Lending, 2/17/2006). 

136 See Joint Center for Housing Studies, op. cit. Also see Paul Calem, Kevin Gillen, and Susan Wachter, “The 

Neighborhood Distribution of Subprime Mortgage Lending,” Zell/Lurie Real Estate Center at Wharton, Working 

Paper 404, 2002. 

137 Cathy Lesser Mansfield, “Consumer Choice and Risk in Society,” Remarks for the 9th International Consumer 

Law Conference, Athens, Greece, April 10-12, 2003. 

138 See Fannie Mae, “Examining the Credit Impaired Borrower: 2001 National Housing Survey,” Washington DC, 

2001. 

139 See Eric Belsky and Allegra Calder, “Credit Matters: Low-Income and Asset Building Challenges in a Dual 

Financial Service System,” Building Assets, Building Credit: A Symposium on Improving Financial Services in LowIncome Communities, Joint Center For Housing Studies, Harvard University, November 18-19, 2003. 

140 For example, see Paul Calem, Kevin Gillen, and Susan Wachter, op. cit.; and Anthony Pennington-Cross, 

Anthony Yezer, and Joseph Nichols, “Credit Risk and Mortgage Lending: Who Uses Subprime and Why?” 

Arlington, VA, Research Institute for America, 2000. 

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low-income borrowers do not have as many resources to devote to shopping for a mortgage.141 

Also, borrowers rely on informal contacts for most of their information on mortgages and lowincome and minority borrowers may be less likely to have contacts that are as familiar with 

mortgage markets.142 Finally, households in low-income and minority neighborhoods may 

perceive that there are fewer opportunities to find a mortgage because of a lack of prime lenders 

in their neighborhoods. Belsky and Calder state, “Similarly, if there are few available choices in 

an area, family or peer referrals may continue to send new borrowers to the same institutions, 

regardless of their price structure.143 

Fourth, subprime borrowers may be more likely than prime borrowers to have different 

attitudes and objectives that contribute to less mortgage shopping. Belsky and Calder conclude 

that consumers often choose subprime mortgage lenders because they create a welcoming 

environment, have representatives that speak their language, and easier loan approvals.144 

Subprime borrowers may be more likely than prime borrowers to remain with the same lender 

because he understands their credit and financial circumstances.145 Subprime lenders may 

provide more help than prime lenders in completing the mortgage application. Subprime 

borrowers may need money more quickly, which limits their mortgage search. Subprime 

borrowers are more likely to believe that they have fewer opportunities because of their credit 

circumstances and brokers may reinforce these perceptions. In many cases the borrower is 

happy to be approved.146 The broker can reinforce the perception that the borrower may not be 

approved elsewhere by suggesting that the loan is hard to make and they are the only lenders 

who will make it.147 

Finally, there are differences in the amount of information that subprime and prime 

lenders provide publicly which may limit the amount of mortgage shopping by subprime 

borrowers. Prime loan rate quotes can be easily found in newspapers, on the Internet, and 

 

141 Mortgage research conducted by the Financial Services Consumer Panel highlighted that “consumers stretched 

by the house buying process are less likely to shop around or withdraw from a mortgage application at a late stage 

even if it is not a good deal; this made them more reliant on advisers and susceptible to poor advice.” See Financial 

Services Consumer Panel, “Financial Services Consumer Panel Warns That Stronger Protection Is Needed Now For 

Housebuyers,” United Kingdom, October 11, 1999. 

142 See John Caskey, “Keynote Speech for Alternatives Federal Credit Union,” May 16, 2002; Joint Center for 

Housing Studies, op. cit; and Financial Services Consumer Panel (August 1999), op. cit. 

143 Eric Belsky and Allegra Calder, op. cit. See also Randall M. Scheessele. “Black and White Disparities in 

Subprime Mortgage Refinance Lending,” Working Paper No. HF-014, Housing Finance Working Paper, April 

2002; and Daniel Immergluck and Marti Wiles, “Two Steps Back: The Dual Mortgage Market, Predatory Lending, 

and the Undoing of Community Development,” Chicago, IL, November 1999. 

144 Eric Belsky and Allegra Calder, op. cit. 

145 Financial Services Consumer Panel (August 1999), op. cit. 

146 A Fannie Mae survey finding that nearly one-third of credit-impaired borrowers did not care if the they received 

the lowest cost loan led Belsky and Calder to conclude “getting a yes is often the most important consideration.” 

See Eric Belsky and Allegra Calder, op. cit.; and Fannie Mae, op. cit.. 

147 David Reed, “It Pays To Shop Around,” www.realtytimes.com, October 10, 2003. 

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directly from the lender. But subprime lenders typically don't quote rates until after a consumer 

applies for a loan and the lender gets his or her credit score.148 Mansfield states, “The result of 

all of these realities taken together is that in the subprime mortgage market it is almost 

impossible to get accurate information about pricing and loan product features. This is true at 

almost any phase of the transaction – from direct marketing or advertising to closing of the 

loan.”149 

While RESPA reform will not eliminate the fraudulent practices that take place in the 

predatory lending market, it does have the potential to help borrowers in the high-cost and 

subprime markets. The proposed rule will simplify the process of obtaining a mortgage loan by 

allowing the consumer to shop based on a few summary numbers: the interest rate (or monthly 

payment) and the information on the summary page 1 of the GFE. Consumers who are less 

informed may be better off under the proposed rule since it is easier to understand a few numbers 

rather than a detailed list of charges.150 

VII. Comments by the NAMB Relating to Literature Review 

Comment. The June 12, 2008 comment letter from the National Association of 

Mortgage Brokers (NAMB) states, on p. 49 that: “the Proposed Rule fails to give proper 

consideration to much of the most relevant and authoritative research relating to the operation of 

mortgage markets, including but not limited to, the 2004 FTC study; the 2006 GAO Report; the 

2007 GAO Report; the Broker Regulations Analysis prepared by a staff member of the Federal 

Reserve Bank of Minneapolis and a professor at the University of Minnesota; the Mortgage 

Pricing Study prepared by researchers at George Washington, Georgetown, and Oklahoma State 

Universities; the Harvard Mortgage Markets Study; and other government and academic 

studies.” In the section that follows, HUD briefly discusses each one of those, how the NAMB 

feels that the results should be taken into consideration; and HUD’s conclusions. 

 

148 See http://www.in.gov/dfi/education/applycr.htm. See also Joint Center for Housing Studies, op. cit.. Subprime 

lenders argue that subprime credit is priced on an individual basis but Mansfield (2003) argues that subprime lenders 

have rate sheets that easily categorize borrowers and these rate sheets can be made available to consumers. See 

Mansfield, op. cit.. Others argue that not providing information is one way to prevent shopping around. For 

example, Consumers Union suggests that subprime lenders require that you pay an application fee, which tends to 

lock consumers into a relationship before they provide mortgage information. See Consumers Union, “Tips for 

Consumers To Avoid High-Cost Loans,” www.consumersunion.org, October 2002. 

149 Mansfield, op. cit.. Findings from Courchane, Surette, and Zorn also support this conclusion. They found that 

prime borrowers were twice as likely as subprime borrowers to have the opportunity to make choices about 

mortgage features. See Courchane, Surette, and Zorn, op. cit. 

150 This sentiment is reflected in the following comments by staff for the Federal Trade Commission (FTC). “Indeed, 

we believe that some of the problem practices in the high-cost loan market take advantage of the current complexity 

of mortgage transactions and the difficulty that consumers face in this market when shopping for a loan. Thus, the 

FTC staff believes that HOEPA loans should qualify for the guaranteed package safe harbor. This approach would 

enable HOEPA consumers to benefit from cost savings that may result from packages of settlement services. (page 

13) “Comments of the Staff of the Bureau of Economics, the Bureau of Consumer Protection, and the Office of 

Policy Planning of the Federal Trade Commission,” October 28, 2002. 

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Response. 2004 FTC Study: The FTC concluded that the disclosure of the YSP on GFE 

forms had two drawbacks. First, the disclosure of the YSP impaired the ability of borrowers to 

comparison-shop, leading many to choose the more costly alternative. Second, the disclosure of 

the YSP introduced bias in the selection process that favored lenders over brokers. Neither of 

these outcomes is a policy goal of the Department. Thus, with the help of a communications 

firm, HUD developed new forms and has performed two further rounds of testing since the 

publication of the 2004 FTC Study. The 2004 FTC study was informative but their 2004 test 

examined an incomplete and now obsolete version of the GFE form, which has been 

significantly revised and tested151. By being fully responsive to the FTC’s criticism, HUD has 

developed a form with which borrowers consistently identified the cheapest loan 90 percent of 

the time or more regardless of whether the broker or the lender was cheaper. 

2006 GAO Report: The only mention of the GAO (2006) report in the NAMB letter (p. 

44) refers to a comment made by the Federal Reserve concerning “how disclosures can be 

revised to reduce complexity and information overload (GAO, p. 47).” The advice that the Fed 

offers in achieving this goal is to “use design consultants to assist in developing model 

disclosures that are most likely to be effective in communicating information to consumers,” 

which HUD has done. HUD hired Kleimann Communications to help HUD design a form that 

provides critical information on the terms and settlement costs in an organized, easy-to-compare, 

and illuminating fashion. 

2007 GAO Report: The NAMB contends (pp. 19-20) that according to the 2007 GAO 

report, the recent foreclosure crisis and other problems in the mortgage markets can not be 

attributed to mortgage brokers or inadequate mortgage disclosures or the disclosures of 

originator compensation. Given this, NAMB argues that HUD should address the factors that the 

GAO blames for the current real estate crisis in its 2007 report rather than imposing an 

unnecessary regulatory burden on mortgage brokers. 

First, the GAO (2007) study should not be referred to as a study of whether effective 

disclosure has an impact on foreclosures because the GAO did not control for foreclosures. They 

statistically examined the correlation of state housing price appreciation and labor market 

conditions with foreclosures. For example, there are other issues that the GAO (2007) did not 

address, such as the impact of broker licensing laws (the costs of which are discussed at length 

by the NAMB elsewhere in their letter) but the fact that the GAO does not mention these laws 

does not imply that they would have no impact. 

Second, HUD did not propose RESPA reform as a solution to the current foreclosure 

crisis. The goal of the proposed RESPA reform is promote consumer savings whether the 

markets are doing well or poorly. By making homeownership more affordable, HUD would 

create more new homeowners. But HUD believes that the proposed RESPA reform would also 

increase the net homeownership rate by reducing foreclosures. 

 

151 Kleimann’s report, entitled Testing HUD’s New Mortgage Disclosure Forms With American Homebuyers 

Rounds 4 & 5 (dated March 19, 2004, http://www.huduser.org/Publications/PDF/GoodFaith_4and5vol1.pdf), 

provides information on the specific characteristics of the consumers tested, revisions that Kleimann made to the 

form and the reasons for those revisions, the specific cities where the tests were conducted, the testing protocols, 

testing conditions, and the main results from each round of testing.

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Third, despite the fact that the subject of the report is the effect of economic variables, the 

GAO mentions the following concerning complex loans: “Borrowers may not be well-informed 

about the risks of these products, due to their complexity and because promotional material by 

some lenders and brokers do not provide balanced information on the risks and benefits. (p. 44)” 

Thus, while HUD does not argue that effective disclosure would have had a greater impact on 

foreclosures than healthier labor and housing market conditions; it is not farfetched to argue that 

better informed consumers would have done a better job choosing more appropriate loan 

products for themselves. 

Kleiner and Todd (2007): As mentioned by the NAMB, this NBER working paper 

appeared while the proposed rule was in clearance, at which time HUD’s own analysis would not 

have been altered. The study is an empirically rigorous attempt to measure the impact of 

mortgage broker regulations (state licensing requirements) on both mortgage brokers 

(employment and earnings) and the outcome for borrowers (subprime mortgages, foreclosure 

rates, and high-interest rate loans). The authors of the study acknowledge that there may be a 

need to regulate the mortgage brokerage industry: “as of 2007 it appears that market responses 

have not eliminated concerns about bad outcomes caused by asymmetric information and 

incentive conflicts in the mortgage broker market (p. 9).” However, they caution against 

regulations that would act as barriers to mortgage brokers in providing low-cost loans to 

consumers. To offer empirical guidance on this question, they perform regression analyses, 

using a panel data set, of the effects of a state regulatory index on mortgage market and broker 

employment variables. 

Kleiner and Todd explore the effect of a dollar-valued measure of the bonding and net 

worth regulations. Note that “most aspects of mortgage licensing requirements, such as 

mandatory professional education, do not have a significant and consistent statistical association 

with market outcomes (p. 1)”. A higher measure of bonding and net worth regulation is 

associated with higher levels of earnings and a slight reduction in the number of brokers and 

subprime loans (from HUD-defined subprime lenders); which are phenomena consistent with the 

licensing requirement acting as a fixed cost of entry that would reduce the number of brokers 

overall as well as activity in the low-quality spectrum of the market. Better brokering should 

increase the quality of the matches. In fact, the authors find that regulations are associated with 

slightly higher foreclosure rates. The authors admit that the theoretical predictions of the effects 

of licensing requirements on the mortgage market when asymmetric information is present are 

less clear. However, a measure of the effectiveness of a regulation in protecting consumers 

would be whether the number high-priced loans are reduced because “brokers have short-term 

incentives to sell high-priced loans to consumers (p.28)” In their analysis, Kleiner and Todd find 

that the number of high-priced loans increased with the licensing requirement. It is evident that 

this type of regulation may not benefit consumers. The authors are cautious in interpreting their 

results and conclude that: “Without a deeper understanding of the causal linkages underlying our 

statistical associations, we cannot say that bonding requirements are a bad idea, but we think our 

results underscore the need for both more research on this topic and a cautious approach to 

imposing additional restrictions on entry into the mortgage broker business and occupation. 

How does the NAMB want this study to inform HUD’s proposed rule? The NAMB’s first 

reference to this study is to a discussion of a quotation (of the NAMB) concerning the difficulty 

of distinguishing brokers and lenders. It should be noted that this is not a finding of the NBER 

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study but part of the study’s literature review. The NAMB also cites the Harvard study and the 

Mortgage Pricing Study on this point. HUD understands there are different and reasonable 

definitions of what a mortgage broker is (see p. 2-14 of the RIA and Section II of Chapter 5 for a 

lengthier discussion). The difficulty of defining a broker is an issue of which HUD was very 

aware when developing its proposed rule. For example, on the proposed GFE, the distinction 

between “broker” versus “lender” never appears. Both are referred to as the “loan originator.” 

Our goal was to produce a GFE that was unbiased and that allowed consumers to select the least 

expensive loan regardless of the loan originator. This was finally achieved after five rounds of 

testing the proposed GFE. 

The second reference by the NAMB to the NBER study is on p. 2 where Kleiner and 

Todd are quoted: “Brokers have helped to shorten the loan process and to make it cheaper, and 

they have enabled the mortgage industry to meet the enormous fluctuations in demand (p.7).” 

These are not findings of the study, but part of the authors’ literature survey. On p. 17 of their 

letter, the NAMB quotes all of the other sentences from the above paragraph extolling brokers 

except for the concluding sentence, which reads: “However, the transformation of the mortgage 

industry created some new problems, and mortgage brokers are also blamed for some of these.” 

HUD agrees that mortgage brokers have performed a valuable role in expanding consumer 

credit. We also believe that if mortgage brokers continue to offer loans at a lower cost than other 

lenders, then the proposed rule should be a boon to mortgage brokers by making that information 

all the more transparent to consumers. The customer outreach function that mortgage brokers 

perform for wholesale lenders is not going to change with RESPA reform. Wholesale lending, 

which has fueled the rise in mortgage originations over the past ten years, will continue to 

depend on brokers reaching out to customers and supplying them with loans. Brokers play the 

key role in the upfront part of the mortgage process and this will continue with the proposed rule. 

RESPA reform is also not going to change the basic cost and efficiency advantages of brokers. 

Brokers have grown in market share and numbers because they can originate mortgages at lower 

costs than others. There is no indication that their cost competitiveness is going to change in the 

near future. Thus, brokers, as a group, will remain highly competitive actors in the mortgage 

market, as they have been in the past. 

The third reference by the NAMB is on p. 8, where they reference a quotation by Kleiner 

and Todd discussing consumer satisfaction with brokers: “It seems likely that many if not most 

of them [consumers] found value in the brokers’ services, which is what we would expect in 

honest, competitive markets (p. 3).” This is not a finding of the study but a part of their survey 

of the literature. The sentence following the one quoted above reads: “On the other hand, critics 

have argued that too many mortgage brokers or, more broadly, that market failures prevent 

competition from effectively disciplining brokers’ profits and quality of service.” The NAMB 

chose not to quote this particular finding of the literature review and many others like it. The 

main impact on brokers (both small and large) of the proposed rule will be on those brokers (as 

well as other originators) who have been overcharging uninformed consumers, through the 

combination of high origination fees and yield spread premiums. 

The fourth reference to the study by the NAMB is their discussion of the empirical results 

on pp. 8-9 of their letter, which are also summarized above. HUD agrees with the NAMB’s 

interpretation of the study that onerous regulation on mortgage brokers would have the end effect 

of hurting consumers. The proposed rule does not impose entry requirements on mortgage 

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brokers and is a different type of rule than what is analyzed by Kleiner and Todd. First, the 

proposed rule does not single out mortgage brokers. However, there is a concern expressed by 

brokers that the reporting of yield spread premiums would disadvantage them relative to lenders. 

HUD has redesigned the proposed GFE form to focus borrowers on the bottom-line numbers 

(while effectively communicating that choosing a higher interest rate should result in lower 

settlement costs, and vice versa) so that competition is maintained between brokers and lenders. 

The forms adopted in the proposed rule were tested on hundreds of subjects. The tests indicate 

that borrowers who comparison shop will have little difficulty identifying the cheapest loan 

offered in the market whether from a broker or lender. Thus, the problem of potential bias has 

been eliminated.152 Second, one could argue that by imposing compliance, the proposed rule 

costs could have the same effects as other types of regulation. The proposed rule would have 

imposed adjustment costs of $6,000 on every mortgage brokerage firm. This amount is much 

lower than the average bonding/net worth requirement for 2005, which is $27,479. Another 

significant difference is that the one-time compliance cost of the proposed rule is a burden only 

during the year of implementation. Unlike the bonding/net worth requirement that remains 

present as a cost of entry, brokers that enter the market after the rule is in effect will not bear the 

one-time compliance costs. The recurring compliance costs of the proposed GFE should also be 

a concern to mortgage brokers. The cost of the new GFE in the 2008 proposed rule is estimated 

at between $32.40 and $55.40 per loan. Assuming 125 loans per year for the median firm153

would imply an annual recurring compliance cost of between $4,000 and $7000 per broker firm. 

While not insignificant, this dollar figure is still much smaller than the average regulatory burden 

measured in Kleiner and Todd. More importantly, our estimate represents a worst case scenario 

and not what we expect to be the recurring compliance cost, which is closer to zero. 

HUD agrees wholeheartedly with the NAMB’s statement that: “if consumers have greater 

choice among vendors, and are given the tools to make informed choices about the relative 

merits of the products that vendors offer, consumers are certain to benefit. (p. 9). The goal of 

this RESPA reform is to produce substantial shopping and price reduction benefits for both 

origination and third-party settlement services by providing a GFE that increases transparency 

for consumers; including tolerances on final settlement costs; and allowing service providers to 

use average cost pricing for third-party services they purchase, making their business operations 

simpler and less costly. Competition among lenders will put pressure for these cost savings to be 

passed on to borrowers. 

The Mortgage Pricing Study: An earlier April 2005 version of the cited July 2005 paper 

by Anshasy, Elliehausen and Shimazaki was mentioned in the Regulatory Impact Analysis of the 

2008 proposed rule. Overall, the authors find that subprime borrowers using mortgage brokers 

save 53 basis points compared to those borrowing directly from lenders. HUD believes that this 

competitive advantage in the subprime market should be enhanced by the proposed rule that will 

encourage consumers to compare among different lenders. 

 

152 For more information on these testing results, see the summary of the fifth round of testing of the GFE form in 

Chapter 3 of the Regulatory Impact Analysis (pp. 42-45). 

153 According to Wholesale Access, in 2004 the median broker firm originated 200 loans in 1998 and 125 loans in 

2000 and 90 in 2004. 

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The Harvard Mortgage Markets Study: Apgar and Essene state four principal findings 

concerning the state of consumers in the mortage market (pp. ii-iv). They are: 1) Consumer 

Preferences Are Malleable, Not Fixed; 2) Consumers Often Lack Awareness of Mortgage Prices; 

3) Consumers Struggle with Choices that Involve Risks and Payments over Time; and 4) 

Consumers Often Struggle With Mortgage Shopping. HUD agrees with most of these 

characterizations of consumers and the mortgage market. The proposed rule is designed to 

increase mortgage pricing transparency and to assist consumers, for whom a mortgage purchase 

is a rare event, better understand complex loans. Apgar and Essene propose four 

recommendations for shaping policy directed at remedying this problem. 

NAMB wants HUD to pay more attention to the fourth key policy recommendation (see 

p. 10 of their letter), which is to “Establish Minimum Standards and Apply Rules Equally to the 

Marketplace,” by which the authors mean that government should: “Create effective and 

adequately funded enforcement strategies to ensure that all mortgage brokers, loan officers, and 

mortgage originators play by the same rules.” There are three specific policy recommendations 

under this category: expand the “Interagency Guidance on Nontraditional Mortgage Product 

Risks” (by the GAO) to cover all lenders, not just federally regulated deposit taking institutions; 

encourage the Federal government to assist states that carry a significant responsibility for 

regulating the mortgage market; and adopt a federal mortgage broker licensing law. These three 

specific policy recommendations cannot be pursued through RESPA reform. However, the 

general spirit of this policy principle has been applied. For example, HUD has been conscious to 

apply this principle in crafting the GFE and has gone to much effort to develop a Good faith 

Estimate that is not biased against either brokers or lenders. 

The Harvard Study contains some RESPA-specific policy discussions. The authors 

general view on the current state of affairs is that, while intended to be helpful; disclosures “do 

not ensure that the consumer receives the best price, nor does it overcome the lack of financial 

knowledge a consumer might have. Furthermore, the Good Faith Estimate is often not accurate 

and the TILA disclosure is typically not provided early enough for borrowers to easily change 

their mind (p. 17).” To address this specific concern, the authors propose their third principle for 

policy: “Enhance Information Transparency and Encourage Industry Self-Regulation.” One of 

their specific policy recommendations is that “the Good Faith Estimate be binding earlier in the 

application process. (p. vi)” By doing just that, through the addition of tolerances, the proposed 

rule would follow the recommendations of Apgar and Essene. In addition, the new GFE, by 

serving as an informative shopping document, would heighten borrowers’ financial knowledge 

and increase their chances of getting a better deal. HUD thanks the NAMB for suggesting that 

this study be included in our literature review, which supports the justification for our reform and 

the reform itself. 
CHAPTER 3 

THE ECONOMIC EFFECTS OF THE FINAL RULE 

I. Introduction and Main Findings .................................................................................................. 2 

I.A. Main Findings: Benefits of the Final Rule .......................................................................... 3 

I.B. Main Findings: Estimates and Sources of Consumer Savings.......................................... 10 

I.C. Main Findings: Summary of Market and Competitive Impacts on Small Businesses ..... 15 

II. The GFE Form ......................................................................................................................... 20 

II.A. The GFE Form in the Final rule ....................................................................................... 21 

II.B. Consolidating Categories on Page 2 of the GFE .............................................................. 27 

II.C. Trade-off of Interest Rate and Loan Charges ................................................................... 28 

II.D. Consumer Testing of the GFE Form ................................................................................ 30 

II.E. Shopping Benefits from the New Good Faith Estimate – A Summary............................ 51 

II.F. Comparing new GFE with the new HUD-1...................................................................... 52 

III. Treatment of Premiums and Discounts................................................................................... 56 

III.A. Background Discussion of Premiums and Discounts ..................................................... 56 

III.B. The 2002 Proposed Rule ................................................................................................. 58 

III.C. Summary of YSP Issue and Treatment in the Final rule................................................. 61 

IV. Permissibility of Average Cost Pricing and Negotiated Discounts........................................ 64 

V. Tolerances on Settlement Costs ............................................................................................... 66 

V.A. Zero and 10 Percent Tolerances....................................................................................... 66 

V.B. Tolerances: More Detailed Analysis ................................................................................ 67 

V.C. Impact of Tolerances........................................................................................................ 69 

V.D. Tolerances: Comments and Further Discussion.............................................................. 70 

V.E. Changed Circumstances ................................................................................................... 73

VI. Additional Topics ................................................................................................................... 76 

VI.A. Definition of an Application........................................................................................... 76 

VI.B. Trade Off Chart for Interest Rates and Costs.................................................................. 81 

VI.C. Opportunity to Cure ........................................................................................................ 81 

VI.D. Delaying Implementation of the New GFE .................................................................... 82 

VI.E. Other GFE Topics ........................................................................................................... 83 

VI.F. Required Use ................................................................................................................... 84 

VII. Market Effects: Consumer Shopping and Benefits ............................................................... 92 

VII.A. Consumer Shopping: Problems and Issues.................................................................... 92 

VII.B. The New GFE: Improved Ability to Shop..................................................................... 93 

VII.C. The New GFE: Benefits from Tolerances .................................................................... 95 

VII.D. Obtaining the Benefits through Shopping in a Competitive Mortgage Market ............ 96 

VII.E. Estimation of Consumer Benefits from the Rule........................................................... 98 

VII.F. Additional Shopping Benefits From the GFE and Other Market Impacts................... 128 

VIII. Loan Originators and Third-Party Providers: Small Business Impacts ............................. 132 

VIII.A. Mortgage Brokers: Small Business Impacts and Competitive Issues........................ 132 

VIII.B. Lenders: Small Business Impacts and Competitive Issues ........................................ 136 

VIII.C. Title and Settlement Industry: Small Business Impacts and Competitive Issues....... 140 

VIII.D Other Third-Party Providers : Small Business Impacts and Competitive Issues....... 147 

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IX. Summary of Transfers, Benefits, Efficiency Gains, and Costs ............................................ 153 

IX.A. Transfers ....................................................................................................................... 153 

IX.B. Efficiencies.................................................................................................................... 154 

IX.C. Costs of the Rule........................................................................................................... 154 

I. Introduction and Main Findings 

This chapter discusses the economic effects of the primary aspects of the final rule: the 

new Good Faith Estimate (GFE); the revisions to the HUD-1 to make it track more closely with 

the new GFE; and the comparison page for the revised HUD-1, which will help ensure that 

consumers get the loan and closing costs they shopped for and selected on the GFE. 

The rule changes the Good Faith Estimate settlement cost disclosure and related RESPA 

regulations to make the GFE simpler, firmer, and more usable to facilitate shopping for 

mortgages, to make mortgage transactions more transparent, and to help prevent unexpected 

charges to consumers at settlement. The new GFE includes a summary page that contains the 

key numbers for comparison-shopping. The new GFE includes a summary disclosure of the 

terms of the mortgage that will help consumers to ensure they are comparing similar loan offers, 

to let consumers know when they are being offered loans with potentially risky terms, as well as 

to know that the loan they were offered is the one they are getting at settlement. The new GFE 

also ensures that yield spread premiums are properly credited to borrowers in brokered 

transactions and includes a trade-off table that will assist consumers in understanding the 

relationship between higher interest rates and lower settlement costs. The new GFE includes a 

set of tolerances on originator and third-party costs that will encourage originators not only to 

lower their own costs but also to seek lower costs for third-party services. 

To increase the value of the new GFE as a shopping document, HUD is implementing 

revisions to the HUD-1 Settlement Statement form that will make the GFE and HUD-1 easier to 

compare. The revised HUD-1 uses the same language to describe categories of charges as the 

GFE and provides reference-back numbers for the GFE form. This makes it much simpler to 

compare the two documents. In addition, the rule requires as an additional comparison page to 

the revised HUD-1, which would: (1) compare estimates on the GFE to the charges on the HUD1 and show borrowers whether tolerances have been met or exceeded; and (2) verify that the loan 

terms summarized on the GFE match those in the loan documents, including the mortgage note. 

To assist in reducing the costs of settlement services, the final rule encourages 

discounting and allows firms to use average cost pricing. This final rule will lead to cost 

reductions by clarifying that settlement service providers can seek discounts for settlement 

services, providing the price charged on the HUD-1 is no more than the price paid to the thirdparty settlement service provider for the discounted service. This should lead to lower thirdparty settlement service prices. In addition, settlement service providers will be allowed to use 

average cost pricing for third-party services they purchase so long as the average is calculated 

using a documented method and the charge on the HUD-1 is no greater than the average paid for 

 3-2 
that service. This will make internal operations for the loan originator simpler and less costly 

and competition among lenders will put pressure for these cost savings to be passed on to 

borrowers as well.

Organization of Chapter. The remainder of this introductory section summarizes the 

chapter’s main findings around the following topics – benefits of the final rule (subsection I.A), 

estimates and sources of consumer savings (I.B), and competitive and market impacts of the final 

rule(subsection I.C). The impacts on small business are highlighted throughout this discussion 

of the chapter’s main findings. 

Sections II-VIII of the chapter explain in more detail the anticipated consumer benefits 

and other impacts of the final rule. That discussion is organized as follows: the new GFE form 

and HUD-1 form (Section II); treatment of premiums and discounts (Section III); discounting 

and average cost pricing (Section IV); tolerances in settlement costs (Section V); additional 

topics and alternatives related to the GFE (Section VI); consumer benefits, market effects, and 

estimates of industry and small business transfers (Section VII); and competitive impacts, with a 

focus on the market effects on small businesses (Section VIII). Section IX summarizes estimates 

of the benefits, costs, transfers, and efficiencies of the final rule. 

I.A. Main Findings: Benefits of the Final Rule 

I.A.1. Problems With the Mortgage Shopping Process and the Current GFE and HUD-1 

The current system for originating and closing mortgages suffers from several problems 

that have resulted in high prices for borrowers: 

1. There are many barriers to effective shopping for mortgages in today’s market. The 

process can be complex and can involve rather complicated financial trade-offs, 

which are often not fully and clearly explained to borrowers. Less informed and 

unsuspecting borrowers are particularly vulnerable in this market.1

 

2. Studies indicate that consumers often pay excessive fees for originating mortgages. 

Most observers believe that the market breakdown occurs in the relationship between 

the consumer and the loan originator -- the ability of the loan originator to price 

discriminate among different types of consumers leads to some consumers paying 

more than other consumers. The end result is that, on average, excessive fees are 

charged to originate loans. 

 

1

 But given the fact that a borrower may be more interested in the main transaction (the home purchase), even more 

sophisticated borrowers may not shop aggressively for the mortgage or may not monitor the transaction very closely. 

 3-3 
3. There is rather convincing evidence that yield spread premiums are not always used 

to offset the origination and settlement costs of the consumer. Studies (Jackson and 

Berry, 2001; Jackson, 2002; Woodward, 2002, 2003a; and Urban Institute, 2008) find 

that yield spread premiums are often used for the originator’s benefit, rather than for 

the consumer’s benefit. These studies point to serious problems of excess fees and 

overcharging consumers. 

4. The yield spread premium controversy has highlighted the fact that borrowers can be 

confused about the trade-off between interest rates and closing costs. It may be 

difficult for borrowers (even sophisticated ones but surely unsophisticated ones) to 

understand the financial trade-offs associated with interest rates, discount points, 

yield spread premiums, and upfront settlement costs. Available evidence suggests 

there are opportunities for unsuspecting shoppers to be taken advantage of by brokers 

and lenders – that is, they may be placed in a loan that not only has a high interest rate 

(which generates a yield spread premium) but also has high direct origination 

charges. 

5. Borrowers may not be aware of the potential for reductions in closing costs at higher 

interest rates. While many originators explain this to their borrowers, giving them an 

array of choices to meet their needs, some originators may only show borrowers a 

limited number of options. 

6. There is also evidence that third-party costs can be excessive and highly variable – 

there is much potential to reduce title, closing, and other settlement costs. There is 

not always an incentive in today’s market for originators to control these costs. Too 

often, high third-party costs are simply passed through to the consumer. And 

consumers may not be the best shoppers for third-party service providers due to their 

lack of expertise. They often rely on recommendations from the real estate agent (in 

the case of a home purchase) or from the loan originator (in the case of a refinance as 

well as a home purchase). 

7. The current GFE does not help the above situations, as it is not an effective tool for 

facilitating borrower shopping nor for controlling third-party settlement costs. The 

current GFE has no prescribed format. GFEs issued today typically contain a long 

list of charges that often overwhelms consumers and certainly does not inform them 

what the major costs are so that they can effectively shop and compare mortgage 

offers among different loan originators. Exhibits 1, 2, and 3 at the back of this chapter 

provide examples of the multitude of individual charges and fees that can be placed 

before consumers in today’s market. 

8. The current GFE does not provide information on important loan terms nor does it 

explain how the borrower can use the document to shop and compare loans. Also, the 

current GFE fails to make clear the relationship between the closing costs and the 

interest rate on a loan, notwithstanding that many mortgage loans originated today 

 3-4 
adjust up-front closing costs due at settlement, either up or down, depending on 

whether the interest rate on the loan is below or above “par.” 

9. Current rules do not assure that the “good faith estimate” is a reliable estimate of final 

settlement costs. There is little guidance and no meaningful standards for originators 

to adhere to in providing “good faith” estimates of settlement costs. As a result, 

under today’s rules, the estimated costs on GFEs may be unreliable or incomplete, 

and final charges at settlement may include significant increases in items that were 

estimated on the GFE, as well as additional surprise “junk fees” first appearing on the 

HUD-1, which can add substantially to the consumer’s ultimate closing costs. 

10. The current HUD-1 can include a array of charges with names that may be entirely 

unrelated to anything in the GFE making the consumer’s task of judging whether 

their GFE told them anything useful nearly impossible. 

I.A.2. Components and Benefits of the New GFE and HUD-1 

Development of the GFE. HUD conducted consumer tests over several years to develop 

the new GFE in this final rule. The new GFE is an easy to understand form that includes a 

summary page containing key information for shopping. In tests conducted by HUD, consumers 

found the summary page a useful addition to the GFE. The new GFE includes a trade-off table 

that tested consumers found particularly useful. To reduce consumer confusion, the new GFE 

consolidates settlement costs into a few manageable categories, and defines a set of tolerances 

that are aimed at controlling both originator fees and third-party settlement costs and at 

eliminating surprise charges at the settlement table. Consumers found the new GFE form to be 

clear and well written and, according the tests conducted, one that they can use to accurately 

determine the least expensive loan. 

The forms improvement project was an iterative process of working on the presentation 

of the information to be conveyed on the form and testing to see how the changes worked. The 

first three rounds of testing utilized in-depth interviews. Once the improvements suggested by 

the results of the first round of testing were incorporated into the forms, borrowers generally 

identified the cheaper loan 90 percent of the time or more in the next two rounds of testing. The 

end result of two additional rounds of testing (involving 600 subjects per round) was that 

borrowers consistently identified the cheapest loan 95 percent of the time regardless of whether 

the broker or the lender was cheaper. The final round of testing, Round 7, tested the forms that 

were developed in response to public comments, which also achieved high success rates. The 

Department believes that the forms adopted in the rule perform well resulting with borrowers 

having little difficulty identifying the cheapest loan offered in the market whether from a broker 

or a lender. In other words, it is a shopping tool that is a vast improvement over today’s GFE 

with its long list of junk fees that can change (i.e., increase) at settlement. 

More specifically, the rule with its new GFE form will address the problems of the 

current mortgage process in four ways. First, the rule will improve the existing RESPA 

 3-5 
disclosure regime by establishing a new required format for the Good Faith Estimate providing 

greater simplicity, accuracy, and usefulness for consumers. This framework will better inform 

mortgage borrowers of the costs of obtaining a mortgage loan from any originator, and will 

better protect borrowers from unnecessary surprise charges at settlement. It also will provide 

firmer and more usable estimated cost disclosures so borrowers can more effectively shop and 

compare the cost associated with mortgages to lower settlement costs. Specifically, the new GFE 

will: 

1. Inform the consumer that mortgage originators (brokers and lenders) cannot 

guarantee that their loan terms are the best in the market, and that the consumer is 

responsible for shopping for a mortgage; 

2. Include a summary page (on Page 1 of the new GFE) that provides the key elements 

needed for shopping, such as the interest rate quote and the bottom line settlement 

charges; and, 

3. Disclose settlement costs in major categories (including, for example, loan origination 

costs and title services). This will eliminate the proliferation of fees and allow 

consumers to focus on the major fees. 

Second, the rule will improve consumer shopping by revising the GFE to: 

1. Explain to the consumer the often complicated financial trade-off between settlement 

costs and interest rates, that is, the option of paying settlement costs through the use 

of higher interest rates (i.e., yield spread premiums) or reducing the interest rate by 

paying the lender additional amounts at settlement (discount points); and, 

2. Require, in transactions originated by mortgage brokers, that yield spread premiums 

(the amount the wholesale lender pays for the loan in excess of its par value) be 

accurately reported and explicitly credited to the borrower. Similarly, discount point 

payments (the difference between the par value and the price paid by the wholesale 

lender) must be accurately reported and charged on the GFE and the HUD-1 

Settlement Statement. 

These two changes are intended to assist consumers in receiving the full benefit of any 

payments from or to wholesale lenders, either (a) by reducing their up-front settlement costs by 

the yield spread premium in exchange for accepting a loan with a higher interest rate, or (b) by 

requiring the broker to pass on the full discount points to the wholesale lender in order to reduce 

the interest rate and monthly payments. The trade-off table and the disclosure will make it more 

likely that interest rate variations available will be used by the consumer to his advantage rather 

than by the originator to enhance profit at the consumer’s expense. 

The GFE front page disclosure of mortgage terms also has explicit questions disclosing 

whether there are some important deviations from the simplest traditional mortgage terms 

 3-6 
(versus non-traditional or exotic mortgage terms). It asks if the interest can rise (an ARM); if the 

loan balance can rise (negative amortization); if the monthly amount owed for principal, interest, 

or mortgage insurance can rise (not level payments) and how soon; the maximum possible 

monthly payment; if there is a balloon payment (not fully amortizing); or if there is a prepayment 

penalty (additional fee to terminate the loan). The “No” answers are in the first column and the 

“Yes” answers in a second column so that any “YES” answer sticks out. The “Yes” answers 

require the worst possible outcomes to be disclosed. All of this is designed to get the borrower’s 

attention in the event that any of these potentially detrimental loan features are present.

In addition, the front page of the GFE informs consumers about whether or not the loan 

on the GFE would include an escrow account for property taxes or other property-related charges 

in addition to the monthly amount for principal, interest, and mortgage insurance. It also notes 

that homeowners may be responsible for other obligations borrowers should keep in mind when 

deciding how high a monthly payment they can afford. The purpose of this disclosure is to warn 

consumers not to disregard these obligations if they are not covered by an escrow account. 

Third, the final rule will implement new rules that will lead to lower originator and thirdparty costs: 

1. Limit consumer fees for the GFE, if any, to the amounts necessary to the cost of a 

credit report; 

2. Establish tolerances that require that loan originators adhere to the amounts reported 

in the GFE regarding their own compensation (absent unforeseeable circumstances); 

3. Require that originators comply with upper limits or “tolerances” so that their total 

charges for other major settlement charge categories covered by the tolerances cannot 

exceed those stated on the GFE by more than 10 percent; and, 

4. Clarify that loan originators can make arrangements with third-party settlement 

service providers to lower prices for their customers, provided these prices or any fees 

on the GFE are not “marked up” or “up charged”. 

5. Clarify that settlement service providers may seek discounts for settlement services, 

providing the price charged on the HUD-1 is no more than the price paid to the thirdparty settlement service provider for the discounted service. This should lead to 

lower third-party settlement service prices. 

6. Allow service providers to use average cost pricing for third-party services they 

purchase so long as the average is calculated using a documented method and the 

charge on the HUD-1 is no greater than the average price paid for that service. This 

will make internal operations for the loan originator simpler and less costly and 

competition among lenders will put pressure for these cost savings to be passed on to 

borrowers as well. 

 3-7 
Tolerances: A Brief Explanation. The final rule contains a 10 percent tolerance on 

third-party fees where the borrower chooses a provider suggested by the loan originator.2

 The 

limited tolerances under the new GFE are intended to improve on today's current practices where 

consumers rely on referrals that may or may not be in their best interests. One purpose of the 

tolerances is to provide an incentive for the loan originator to come up with more accurate values 

for the Good Faith Estimate, or to put “good faith” into the estimate. Today, loan originators 

must have some idea of what these services cost in order to fill out the form currently, or they 

would be failing the “good faith” part of the requirement. If the total of these third-party fees 

(e.g., title, closing , appraisal, and survey fees) exceeded the total estimated, the loan originator 

would have to pay any amount in excess of the 10 percent tolerance. The new tolerances would 

apply only if the borrower used one of the providers identified by the loan originator. The 

tolerances will lead to well-informed market professionals either arranging for the purchase of 

the settlement services or at least establishing a benchmark that borrowers can use to start their 

own search. Under either set of circumstances, this should lead to lower prices for borrowers 

than if the borrowers shopped on their own since the typical borrower’s knowledge of the 

settlement service market is limited, at best. 

A significant benefit of this tolerance requirement is that third-party fees go into total 

estimated settlement charges, the bottom line on pages 1 and 2 of the new GFE. Higher third 

party fees raise this bottom-line figure in exactly the same way as higher loan originator charges. 

So, the loan originator has a powerful incentive to search for lower-priced services for the 

borrower. It makes his or her loan more appealing to the borrower. 

As noted above, tolerances put an experienced loan professional (i.e., the loan originator) 

in the position of being a shopper for third-party settlement services for the borrower. The 

experienced professional in the business is far more likely to be a good shopper for such services 

than individual borrowers who might not even know that the price of settlement services can 

vary drastically among providers. The over-priced third-party providers will not be considered 

by the professional loan originators because using their high prices as a basis for the numbers on 

the GFE will make the loan originator’s total estimated settlement charges less competitive. 

This need not expose the loan originator to large risk. And the additional costs associated 

with setting up these arrangements to provide tolerance protection are unlikely to be large on a 

per-loan basis. If the loan originator lines up the third-party providers in advance and has 

reliable pricing agreements, he or she is protected. And if the borrower goes off and uses 

somebody else, the tolerance protection does not apply. 

The 10 percent figure is one that consumers can easily remember and apply in order to 

calculate their tolerance amount; in addition, it seems reasonable as a basis for allowable 

adjustments by the loan originator to their initial third-party-fee estimates. It is also important to 

 

2

 The tolerance applies to lender-required-and-selected-third-party services as well as when the borrower uses a 

service provider identified by the lender; it does not apply if the borrower selects a service provider that is not 

identified by the lender. The 10 percent tolerance basis also includes government recording fees because these 

relatively small fees can be variable and not well known substantially before closing. 

 3-8 
remember that there is zero tolerance on the loan originator’s own fees, which account for the 

major portion of total settlement charges (net of transfer taxes and the various escrows). The 

loan originator is expected to know his or her own fees upfront and to stand by them exactly, 

with zero variation. 

HUD-1 Linked to GFE. The HUD-1 has been adjusted so that it is consistent with the 

new GFE. The new lines and labeling on the HUD-1 are designed to make comparisons between 

the GFE and the HUD-1 simpler so that borrowers can verify whether the HUD-1 charges have 

met the tolerances implied by the GFE figures or not. Page two of the final HUD-1 changes the 

existing layout by inserting a new line for each item listed separately on the final GFE. Each of 

these new lines has the exact name as on the GFE and has the block number from where the 

figure is on the GFE right after the name on the final HUD-1. Each itemized number from the 

GFE subtotals on the HUD-1 is also required to have a reference back to its source on the GFE. 

So the Final HUD-1 should work for any settlement using the existing HUD-1. 

Given that there has been no significant change in the basic structure and layout of the 

first two pages of the HUD-1, generating this new HUD-1 should not pose any problem for firms 

closing loans -- in fact, the closing process will be much simpler given borrowers and closing 

agents can precisely link the information on the initial GFE to the information on the final HUD1. 

New Page 3 of HUD-1Ties It All Together. The new page 3 of the HUD-1 serves as the 

final assurance that the terms of the GFE have been fulfilled, and that the borrower fully 

understands the obligations imposed by agreeing to the mortgage. Even with the revised HUD-1, 

which is designed to make comparisons to the GFE easier, the complexity of the final 

transaction, especially sales transactions (e.g., splitting of fees between buyer and seller both at 

and outside of closing), may require the application of some expertise to determine that the GFE 

tolerances have been met. The new page 3 means that a knowledgeable and experienced person, 

the closing agent, will assemble the elements of the transaction to ensure the borrower 

understands whether tolerances have been met or exceeded. 

The HUD-1 page 3 provisions of the rule require the lender to provide to the closing 

agent the necessary information from the GFE and the loan documents, including details on 

payment due dates, escrow estimates, and interest rate adjustment dates,, as well as the list of 

identified providers for purposes of calculating the tolerances. The closing agent would fill in 

the information that the lender could not provide from the remaining elements of the settlement, 

compute the difference between HUD-1 charges and the GFE estimates for the services included 

in the tolerances, and divide this difference (if positive) by the sum of the applicable estimates to 

calculate the tolerance ratio. 

By providing a verifiable means of comparing loan offers and allowing average cost 

pricing to be passed to consumers, the rule will lead to increased competition among settlement 

service providers and to lower costs for consumers. The rule includes tolerances aimed at 

controlling third-party fees as well as origination fees. Broader categories of fees replace the 

long list of excessive, third-party fees that too often characterizes today’s market. 

 3-9 
I.B. Main Findings: Estimates and Sources of Consumer Savings 

The section presents the estimates of consumer savings from the rule and explains the 

reasons for these savings. The major industry groups that contribute these consumer savings are 

also identified. In addition, efficiencies and costs associated with the rule are summarized. 

I.B.1. Estimates of Consumer Savings 

Section VII discusses the consumer benefits of the rule and provides dollar estimates of 

consumer savings principally deriving from improved shopping for both originator and thirdparty services. Consumer savings were estimated under a variety of scenarios about originator 

and settlement costs. In the base case, the estimated price reduction to borrowers comes to $8.35 

billion, or 12.5 percent of the $66.7 billion in total charges (i.e., origination fees, appraisal, credit 

report, tax service and flood certificate and title insurance and settlement agent charges).3

 Thus, 

there is an estimated $8.35 billion in transfers from firms to borrowers from the improved 

disclosures and tolerances of the rule. Sensitivity analysis was conducted with respect to the 

savings projection in order to provide a range of estimates. Because title fees account for over 

70 percent of third-party fees and because there is widespread evidence of lack of competition 

and overcharging in the title and settlement closing industry, one approach projected third-party 

savings only in that industry. This approach (called the “title approach”) projected savings of 

$200 per loan in title and settlement fees. In this case, the estimated price reduction to borrowers 

comes to $8.38 billion, or 12.6 percent of the $66.7 billion in total charges – savings figures that 

are practically identical to the base case mentioned above. If the savings in title and settlement 

closing fees due to RESPA reform were only $150, then the estimated price reduction to 

borrowers comes to $7.76 billion, or 11.6 percent of the $66.7 billion in total charges. Other 

projections also showed substantial savings for consumers. As explained in Section VII, 

estimated consumer savings under a more conservative projection totaled $6.48 billion, or 9.7 

percent of total settlement charges. Thus, while consumer savings are expected to be $8.35 

billion (or 12.5 percent of total charges) in the base case or $8.38 billion (12.7 percent of total 

charges) in the title approach, they were $6.48 billion (or 9.7 percent of total charges) in a more 

conservative sensitivity analysis. This $6.48-$8.38 billion represents the substantial savings that 

can be achieved with the final rule. 

The analysis in Section VIII of this chapter disaggregates the sources of consumer 

savings into the following major categories: originators with a breakdown for brokers (VIII.A) 

and lenders (VIII.B.), and third-party providers with a breakdown for the title and settlement 

industry (VIII.C.) and other third-party providers (VIII.D).4

 In the base case, originators (brokers 

and lenders) contribute $5.88 billion, or 70 percent of the $8.35 billion in consumer savings. 

This $5.88 billion in savings represents 14.0 percent of the total revenue of originators, which is 

 

3

 Government fees and taxes and escrow items are not included in this analysis, as they are not subject to 

competitive market pressures.

4

 Readers are referred to Chapter 5 for a more detailed examination of the various component industries (e.g., title 

services, appraisal, etc.) as well as for the derivations of many of the estimates presented in this chapter. 

 3-10 
projected to be $42.0 billion.5

 The $5.88 billion is divided between brokers, which contribute 

$3.53 billion, and lenders (banks, thrifts, and mortgage banks), which contribute the remaining 

$2.35 billion. The shares for brokers (60 percent) and lenders (40 percent) represent their 

respective shares of mortgage originations. 

In the base case, third-party settlement service providers contribute $2.47 billion, or 30 

percent of the $8.35 billion in consumer savings. This $2.47 billion in savings represents 10.0 

percent of the total revenue of third-party providers, which is projected to be $24.738 billion.6

 

The $2.47 billion is divided between title and settlement agents, which contribute $1.79 billion, 

and other third-party providers (appraisers, surveyors, pest inspectors, etc.), which contribute 

$0.68 billion. Title and settlement agents contribute a large share because they account for 72.5 

percent of the third-party services included in this analysis. In the title approach, title and 

settlement agents account for all third-party savings, which total $2.5 billion if per loan savings 

are $200 and $1.88 billion if per loan savings are $150. 

Section VIII of this summary section will present the revenue impacts on small 

originators and small third-party providers. 

I.B.2. Sources of Savings – Lower Origination Fees Due to Improved Consumer Shopping 

Lower origination fees are a major source of the consumer savings. The new GFE format 

in the final rule will improve consumer shopping for mortgages, which will result in better 

mortgage products, lower interest rates, and lower origination costs for borrowers. The revised 

HUD-1 will serve as a check to ensure that these savings are realized. 

• The new GFE format simplifies the process of originating mortgages by 

consolidating costs into a few major cost categories. This is a substantial 

improvement over today’s GFE, which contains a long list of individual charges 

that encourages fee proliferation and junk fees, and can often overwhelm and 

confuse consumers. The simpler presentation of the new GFE will improve the 

ability of the consumer to shop. The consolidation of fees is carried forward to 

the revised HUD-1. 

• With fees firmer under the new GFE, shopping is more likely to result in 

borrowers saving money when they shop. A GFE with a summary page will 

make it simpler for borrowers to shop. The higher reward for shopping along 

 

5

 This assumes a 1.75 percent origination fee for brokers and lenders, which, when applied to projected originations 

of $2.4 trillion, yields $42.0 billion in total revenues from origination fees (both direct and indirect). See Steps (3)-

(5) of Section VII.E.1 for the explanation of origination costs. Sensitivity analyses are conducted for smaller 

origination fees of 1.5 percent and larger fees of 2.0 percent; see Step (21) in Section VII.E.4. 

6

 See Step (7) of Section VII.E.1 for the derivation of the $24.738 billion. 

 3-11 
with its increased ease with which borrowers can compare loans should lead to 

more effective shopping, more competition, and lower prices for borrowers. 

• The new GFE contains a statement that urges consumers to shop and compare 

loan offers because only the consumer can find the best loan for her 

circumstances. This will put all borrowers on notice that they should protect their 

interests by shopping. The form includes a shopping chart to be filled out by the 

consumer where the terms and total settlement costs of 4 GFEs can be compared, 

a strong suggestion that consumers should shop for loans from more than one 

originator. Tests of the GFE form indicate that the statement and shopping chart 

increase the probability that a borrower will shop around before selecting an 

originator. 

• The new GFE also makes cost estimates more reliable by applying tolerances to 

the figures reported. The sum of the originator’s fees on the HUD-1 may not 

exceed the loan originator’s fee on the GFE. Once the borrower locks the interest 

rate, the discount points or yield spread premium is also fixed. The sum of the 

third-party fees on the HUD-1 where the originator either selects the provider or 

refers the borrower to the provider may not exceed the sum of these estimates on 

the GFE by more than 10 percent. This will reduce the all too frequent problem of 

borrowers being surprised by additional costs at settlement. 

• The new GFE will disclose yield spread premiums and discount points in 

brokered loans prominently, accurately, and in a way that should inform 

borrowers how they may be used to their advantage. Both values will have to be 

calculated as the difference between the price of the loan and its par value. Their 

placement in the calculations that lead to net settlement costs will make them very 

difficult to miss. That placement should also enhance borrower comprehension of 

how yield spread premiums can be used to reduce up-front settlement costs. Tests 

of the form indicate that consumers can determine the cheaper loan when 

comparing a broker loan with a lender loan. 

• The new GFE will better inform consumers about their financing choices by 

including a table where originators can explain the different interest rate and 

closing cost options available to consumers. All originators with automated 

systems for issuing GFEs will have an incentive to fill in the table to avoid having 

to spend extra time with consumers that ask about the blank table. In addition, 

this table will be especially helpful to mortgage brokers in explaining the 

mechanics of the required YSP disclosure and ensuring consumers accurately 

assess the prices offered by mortgage brokers. 

• Altogether, the simplicity and certainty offered by the new GFE should improve 

comparison-shopping for mortgage loans, reduce interest rates and settlement 

prices for borrowers, and eliminate surprises at settlement. There will be less of 

the sub-optimal consumer shopping that often characterizes today’s mortgage 

 3-12 
market. In addition, originators will be less able to take advantage of uninformed 

shoppers. 

• As reported in Section IV of Chapter 2, studies indicate that consumers often pay 

excessive origination fees and that a substantial portion of the yield spread 

premiums paid indirectly by borrowers does not result in lower closing costs for 

borrowers – but rather results in extra compensation for brokers and lenders. 

I.B.3. Sources of Savings: Lower Settlement Service Prices 

Chapter 2 reports evidence that consumers are overcharged for third-party services, 

particularly for the large category of title, closing and related settlement services. In today’s 

market, it appears that high third-party costs are too often simply passed through to the 

consumers – there is not enough incentive for originators to monitor and control these costs for 

consumers. And, as noted earlier, consumers may not be the best shoppers for third-party service 

providers, often relying on real estate agents and lenders for recommendations. Thus, third-party 

fees are an important source of potential consumer savings from the final rule. 

• The imposition of tolerances on fees will encourage originators to seek discounts, which 

should lower settlement service prices. The rule clarifies that loan originators can make 

arrangements with their third-party settlement service providers (appraisers, settlement 

service agents, etc.) to lower prices for their customers (i.e., borrowers), provided these 

prices or any fees on the GFE are not “marked up” or “up charged.” 

• The final rule would allow service providers to use average cost pricing for third-party 

services, which should make internal operations for the loan originator simpler and less 

costly. 

• The tolerances will lead to well-informed market professionals either arranging for the 

purchase of the settlement services or at least establishing a benchmark that borrowers 

can use to start their own search. Under either set of circumstances, this should lead to 

lower prices for borrowers than if the borrowers shopped on their own since the typical 

borrower’s knowledge of the settlement service market is limited, at best. In addition to 

lower prices, the prices quoted are likely to be more reliable, without surprises at 

settlement. 

• The shopping advantages of the new GFE and the volume discounting provisions will 

increase competition among third-party providers, which will lead to lower prices, 

particularly for title and closing services, which are probably the most excessive in 

today’s market. 

• In HUD’s new GFE and revised HUD-1, single entries for various settlement service 

providers or groups of providers are substituted for the detailed itemizations currently 

 3-13 
required. This will also lead to improved consumer shopping of third-party services and 

easier verification of compliance with tolerances. 

• Section V of this chapter estimates that $24.7 billion in third-party fees would be subject 

to increased price pressure as a result of the imposition of tolerances, expanded shopping 

by originators, and the competitive effects of discounting. This figure provides a base on 

which the expanded shopping and competitive effects of the final rule will be felt. The 

estimates reported above project that third-party fees would fall from $1.9 billion to $2.5 

billion. Title and settlement agents contribute a large share ($1.35 billion to $1.79 

billion) of the savings because they account for almost 73 percent of the third-party 

services included in this analysis. As note above, analysis was conducted with all the 

consumer savings in third-party costs coming from the title and settlement industry; 

evidence suggests there are more opportunities for price reductions in that industry, as 

compared with other third-party industries. In this case, consumer savings in title and 

settlement costs totaled $2.5 billion ($200 savings per loan) or $1.9 billion ($150 savings 

per loan). 

The lower upfront costs and the user-friendly nature of the new GFE will lead to 

additional homeowners entering the market, as well as making it more likely that existing 

homeowners will refinance their loans when market rates fall below their contract rates. 

Therefore, there should be an increase in both home purchase and refinance business as the 

lending process becomes more palatable to the average borrower. There will be an increase in 

access to the capital market, and the relatively low mortgage rates at which mortgages are made. 

I.B.4. Savings and Transfers, Efficiencies, and Costs 

Transfers. It is estimated that borrowers would save $8.35 billion in origination and 

settlement charges. This $8.35 billion represents transfers to borrowers from high priced 

producers, and constitutes 12.5 percent of total charges. 

• The assumption that consumers will benefit by a reduction of settlement costs of at least 

$668 per loan has not been challenged. 

• Indeed, results from a recent statistical analysis of FHA data imply that the savings to 

consumers may be as much as $1,200 per loan. 

Efficiency Benefits. There are efficiencies associated with the rule for consumers, 

industry, as well as far-reaching social benefits. 

• Mortgage applicants and borrowers realize $1,169 million of savings in time spent 

shopping for loans and third-party services. This amount is derived from a time savings 

worth $55 per applicant (75 minutes at $44 per hour) over 21.25 million applications. 

 3-14 
• If half the borrowers’ time saved comes from less time spent with originators and thirdparty settlement service providers, then originators and borrowers will spend 37.5 

minutes less answering borrowers’ follow-up questions. 

• The value of the time savings from dealing with follow-up questions is $956 million 

(37.5 minutes at $72 an hour multiplied by 21.25 applications). Loan originators receive 

a saving of $765 million (30 minutes per application) and third-party settlement $191 

million (7.5 minutes per application). 

• There will be reductions in compliance costs from average cost pricing. It is estimated 

that the benefits of average cost pricing will lead to a reduction in originator costs of 0.5 

percent, or $210 million. 

• Some or all of industry’s total of $1,161 million in efficiency gains have the potential to 

be passed through to borrowers through competition. 

• The lower profitability of seeking out vulnerable borrowers for non-competitive and 

abusive loans should lead to a reduction in this non-productive activity. If, for example, 

the decline in this activity represented one percent of current originator effort, this would 

result in $420 million in social surplus. 

• One social benefit of the rule is its contribution to sustainable homeownership. 

Consumers who understand the details of their loans are more likely to avoid default and 

thus foreclosure. There are substantial negative economic externalities of a foreclosure to 

neighboring properties and local governments; as well as private costs to the borrower 

and lender. The size of this social benefit is not estimated, but would be in addition to the 

other benefits enumerated here. 

Costs. The total one-time compliance costs to the lending and settlement industry of the 

GFE and HUD-1 are estimated to be $571 million, $407 million of which is borne by small 

business. Total recurring costs, in the high-cost scenario, are estimated to be $918 million 

annually or $73.40 per loan. The share of the recurring costs on small business is $471 million. 

I.C. Main Findings: Summary of Market and Competitive Impacts on Small Businesses 

The impacts on small brokers and small lenders of the rule are reported below and are 

discussed throughout this chapter. As also reported below, settlement service providers who are 

small businesses would also be impacted by any reduction in settlement service prices arising 

from the tighter tolerances on settlement fees and from the increased competition among thirdparty providers associated with RESPA reform. 

It is estimated that $4.13 billion, or 49.5 percent of the $8.35 billion in consumer savings 

comes from small businesses, with small originators contributing $3.01 billion and small third-

 3-15 
party firms, $1.13 billion.7

 Within the small originator group, most of the transfers to consumers 

come from small brokers ($2.47 billion, or 82 percent of the $3.01 billion); this is because small 

firms account for most of broker revenues but a small percentage of lender revenues. Within the 

small third-party group, most of the transfers come from the title and closing industry ($0.68 

billion, or 60 percent of the $1.13 billion), mainly because this industry accounts for most thirdparty fees. In the title approach, small title and settlement closing companies account for $0.95 

billion of the $2.5 million in savings. Section VII.E.2 of this chapter explains the steps in 

deriving these revenue impacts on small businesses, and Section VII.E.4 reports several 

sensitivity analyses around the estimates. In addition, Chapter 5 provides more detailed revenue 

impacts for the various component industries.8

The summary bullets in Section I.B above highlight the mechanisms through which these 

transfers are expected to happen. The improved understanding of yield spread premiums, 

discount points, and the effect of the interest rate chosen on net upfront costs along with 

improved consumer shopping among originators, more aggressive competition by originators for 

settlement services, and the increased competition associated with RESPA reform will lead to 

reductions in both originator and third-party fees. There is substantial evidence of excessive fees 

and overcharging in the origination and settlement of mortgages. Originators (both small and 

large) and settlement service providers (both small and large) that have been charging these high 

prices will experience reductions in their revenues as a result of the final rule. There is no 

evidence that small businesses have been disproportionately charging high prices; for this reason, 

there is no expectation of any disproportionate impact on small businesses from the final rule. 

The revenue reductions will be distributed across firms based on their non-competitive price 

behavior. Section VIII examines the competitive and market impacts of the rule on small 

brokers, small lenders, and small third-party providers. The main findings from that analysis are 

discussed next. 

Small Brokers. The main issue raised by the brokers concerned the treatment in the 

2008 proposed rule of yield spread premiums on the proposed Good Faith Estimate. This was 

also the main small business issue with the proposed GFE since practically all brokers qualify as 

small businesses. Section I.B above explained that the final rule addresses the concern expressed 

by brokers that the reporting of yield spread premiums in the 2008 proposed rule would 

disadvantage them relative to lenders. The Department hired forms development specialists, the 

Kleimann Communication Group, to analyze, test, and improve the forms. They reworked the 

language and presentation of the yield spread premium to emphasize that it offsets other charges 

to reduce up-front charges, the cash needed to close the loan. The subjects tested liked the table 

on page 3 of the form that shows the trade-off between the interest rate and up-front charges. It 

illustrates how yield spread premiums can reduce upfront charges. There is the summary page 

 

7

 In the more conservative scenario of $6.48 billion in consumer savings, small businesses would account for $3.21 

billion of the transfers to consumers, with small originators accounting for $2.36 billion, and small third-party 

providers, $0.84 billion. 

8

 In Chapter 5, see Section II for brokers, Section III for the four lender groups (commercial banks, thrifts, mortgage 

banks, and credit unions), Section IV for the various title and settlement groups (large insurers, title and settlement 

agents, lawyers, and escrow firms), Section V.A for appraisers, Section V.B for surveyors, Section V.C for pest 

inspectors, and Section V.D for credit bureaus. 

 3-16 
designed to simplify the digestion of the information on the form by including only total 

estimated settlement charges from page two. This is the first page any potential borrower would 

see. It contains only the essentials for comparison-shopping and is simple: a very simple 

summary of loan terms and the bottom line cost of the loan. Yield spread premiums are never 

mentioned here. Lender and broker loans get identical treatment on page 1. A mortgage 

shopping chart is on page 3 of the final GFE to help borrowers comparison shop. Arrows were 

added to focus the borrower on overall charges, rather than one component. All of these features 

work to keep the borrower from misinterpreting the different presentation of loan fees required 

of brokers vis-à-vis lenders. 

HUD has redesigned the new GFE form to focus borrowers on the right numbers so that 

competition is maintained between brokers and lenders. The forms adopted in the rule were 

tested on hundreds of subjects. The tests indicate that borrowers who comparison shop will have 

little difficulty identifying the cheapest loan offered in the market whether from a broker or a 

lender. Brokers, as a group, will remain highly competitive actors in the mortgage market, as 

they have been in the past. There is substantial evidence that brokers are highly efficient 

producers of mortgages and that will not change with the final rule. The important customer 

contact function that brokers perform in the origination market also will not change with the rule. 

While there is no evidence to suggest any anti-competitive impact, there will be an 

impact on those brokers who are charging non-competitive prices. And there is convincing 

evidence that some brokers (as well as some lenders) overcharge consumers (see studies 

reviewed in Chapter 2). As emphasized throughout this chapter, the rule will lead to improved 

and more effective consumer shopping, for many reasons -- the new GFE is simple and easy to 

understand, it includes reliable cost estimates, it effectively discloses yield spread premiums and 

discounts in brokered loans, it facilitates consumers being shown options, and it explains the 

trade-off between closing costs and yield spread premiums; the revised HUD-1 will ensure that 

consumers know when their GFEs are accurate. This increased shopping by consumers will 

reduce the revenues of those brokers who are charging non-competitive prices. Thus, the main 

impact on brokers (both small and large) of the final rule will be on those brokers (as well as 

other originators) who have been overcharging uninformed consumers, through the combination 

of high origination fees and yield spread premiums.9 As noted above, small brokers are expected 

to experience $2.47 billion in reduced fees. 

Section VIII.A discusses other concerns raised by brokers about the GFE in the 2008 

proposed rule. Brokers primarily objected to the YSP disclosure requirements saying that HUD 

should either require similar disclosures in non-brokered loans, or not require the YSP disclosure 

at all. As for other issues, brokers raised many of the same implementation issues voiced by 

lenders in their comments. Brokers supported a generic trade-off table but the Department 

concluded, based on consumer testing, that a customized trade-off chart was essential for 

increasing consumer understanding of the complex yield spread premium issue. The changes 

 

9

 As explained throughout this chapter, it is anticipated that market competition, under this new GFE approach, will 

have a similar impact on those lenders (non-brokers) who have been overcharging consumers through a combination 

of high origination costs and yield spread premiums. 

 3-17 
that HUD made in the rule will make the GFE more workable for small brokers and small 

lenders. 

Small Lenders. Lenders include mortgage banks, commercial banks, credit unions, and 

thrift institutions.10 There are approximately 10,000 lenders that would be affected by the 

RESPA rule, as well as almost 4,000 credit unions that originate mortgages. While two-thirds of 

the lenders qualify as a small business (as do four-fifths of the credit unions), these small 

originators account for only 23 percent of industry revenues. Thus, small lenders (including 

credit unions) account for only $540 million of the projected $2.35 billion in transfers from 

lenders.11 Section VIII.B of this chapter provides a detailed discussion of the anticipated impacts 

of the rule on lenders. 

In general, there was less concern expressed by lenders (as compared with brokers) about 

potential anti-competitive impacts of the GFE on small businesses. Small lenders -- relative to 

both brokers and large lenders -- will remain highly competitive actors in the mortgage market, 

as they are today. Small mortgage banks, community banks and local savings institutions benefit 

from their knowledge of local settlement service providers and of the local mortgage market. 

Nothing in the rule changes that. 

In commenting on the 2008 proposed rule, lenders wanted to delay the new GFE while 

packaging was given a chance to work. HUD recognizes that an adjustment period will be 

needed and establishes a 12-month implementation period during which the current GFE could 

be used, which should give lenders time to adjust their computer systems and train employees to 

the new GFE and other aspects of the rule (see Chapter 6). 

Lenders had numerous comments on most aspects of the 2008 proposed GFE form – 

some of them dealing with major issues such as the difficulty in predicting costs within a three 

day period and many dealing with practical and more technical issues such as the need for 

“opportunity to cure” provisions to handle harmless errors. HUD responded to many of the 

issues and concerns raised by lenders; Sections V, VI, and VIII of this chapter discuss lenders' 

comments and HUD's response. 

Some lenders were concerned about their ability to produce firm cost estimates (even of 

their own fees) within a three-day period, given the complexity of the mortgage process. 

Lenders wanted clarification on their ability to make cost adjustments as a result of information 

they gain during the full underwriting process. The tolerances in the final rule require that 

lenders play a more active role in controlling third-party costs than they have in the past. 

 

10 While it is recognized that the business operations and objectives of these lender groups can differ – not only 

between the groups (a mortgage banker versus a portfolio lender) but even within a single group (a small community 

bank versus a large national bank) – they raised so many of the same issues that it is more useful to address them in 

one place. 

11 Section III of Chapter 5 describes the characteristics of these component industries (number of employees, size of 

firms, etc.), their mortgage origination activity, and the allocation of revenue impacts between large and small 

lenders. That section also explains that the small business share of revenue could vary from 20 percent to 26 percent 

 3-18 
However, some lenders emphasized that they have little control over fees of third-party 

settlement providers, while others seem to not anticipate problems in this regard. As explained 

in I.B above, the rule made several adjustments to the information collection and tolerance rules, 

which should make them workable for lenders. In addition, the rule allows average cost pricing, 

which should help lenders reduce their costs. Practically all lenders wanted clarification on the 

definition of application, and HUD did that, along the same lines that lenders suggested in their 

comments. Lenders wanted an opportunity to cure harmless errors. HUD has added such a 

provision to the final rule. In addition, preparation the new page 3 of the HUD-1 should allow 

for the correction of errors, or reduction of charges, that might otherwise cause a violation of 

tolerances on the GFE. These and other changes address a number of practical and 

implementation problems raised by lenders and others about the GFE and tolerances. They 

particularly address the day-to-day business problems that are likely to be face by small lenders, 

such as the difficulty of predicting third-party costs. These changes will make operating under 

the final rule easier for small lenders. Given their knowledge of local markets, small mortgage 

banks, community banks, credit unions, and local thrift institutions will continue operating in a 

competitive manner under the rule. 

There will be an impact on those lenders (both large and small) who are charging noncompetitive prices. Improved consumer shopping with the final rule will reduce the revenues of 

those lenders who are charging non-competitive prices. Thus, as with brokers, the main negative 

impact on lenders (both small and large) of the rule will be on those lenders who have been 

overcharging uninformed consumers. 

Title and Settlement Industry. The title and settlement industry -- which consists of 

large title insurers, title agents, escrow firms, lawyers, and others involved in the settlement 

process -- is expected to account for $1.79 billion of the $2.47 billion in third-party transfers 

under the rule. Within the title and settlement group, small firms are expected to account for 

38.1 percent ($0.68 billion) of the transfers, although there is some uncertainty with this 

estimate.12 Step (8) of Section VII.E conducts an analysis that projects all of the consumer 

savings in third-party costs coming from the title industry; evidence suggests there are more 

opportunities for price reductions in the title industry, as compared with other third-party 

industries. In this case, consumer savings in title costs ($150-$200 per loan) ranged from $1.88 

billion to $2.50 billion. To a large extent, the title and closing industry is characterized by local 

firms providing services at constant returns to scale. The demand for the services of these local 

firms will continue under the rule. 

Section VIII.C of this chapter summarizes the key competitive issues for this industry of 

the final rule. As noted there, the overall competitiveness of the title and closing industry should 

be enhanced by the RESPA rule. Chapter 2 and Section VIII.C of this chapter provide evidence 

that title and closing fees are too high and that there is much potential for price reductions in this 

industry. Increased shopping by consumers, as well as increased shopping by loan originators to 

stay within their tolerances, will reduce the revenues of those title and closing companies that 

 

12 Section IV of Chapter 5 describes the component industries and estimates the share of overall industry revenue 

going to small businesses. 

 3-19 
have been charging non-competitive prices.13 Excess charges will be reduced and competition 

will ensure that reduced costs are passed through to consumers. 

The title industry argued that greater itemization was needed in order for consumers to be 

able to adequately comparison shop among estimates. HUD’s view is that the consolidated 

categories on the new GFE form provide consumers with the essential information needed for 

comparison-shopping. Itemization encourages long lists of fees that confuse borrowers. 

It is important to emphasize that the services of the title and closing industry, as well as 

other third-party industries (appraisers, surveyors, and pest inspectors), are local in nature and 

are performed near or at the site. Local firms have advantages of knowledge and networks of 

clients, as well as transportation cost advantages. These advantages of small, locally based firms 

will not be negatively impacted by the new rule. In fact, RESPA reform should open up 

opportunities for efficient third-party firms to expand their operations. 

II. The GFE Form 

Today’s GFE is not an effective tool for facilitating borrower shopping. Today, no GFE 

is required until 3 days after the borrower submits a full application to an originator, a practice 

that frequently results in borrowers paying a significant fee before they receive a GFE, 

effectively preventing the possibility of shopping beyond the provider with whom the applicant 

applies. The current GFE is typically comprised of a long list of charges, as today’s rules do not 

prescribe a standard form and consolidated categories. The lack of a standard format makes 

GFEs from different originators difficult to compare even if the use similar names for the vast 

arrays of fees. The result is a proliferation of all sorts of fees on today’s GFE, making it virtually 

impossible to shop and compare the charges of various originators and settlement service 

providers. The current GFE does not provide information on important loan terms nor does it 

explain how the borrower can use the document to shop and compare loans. Also, the GFE fails 

to make clear the relationship between the closing costs and the projected interest rate on a loan, 

notwithstanding the fact that many mortgage loans originated today adjust up-front closing costs 

due at settlement, either up or down, depending on whether the interest rate on the loan is above 

or below “par.” Finally, current rules do not assure that the “good faith estimate” is a reliable 

estimate of final settlement costs. There is little guidance and no meaningful standards for 

originators to adhere to in providing “good faith” estimates of settlement costs. As a result, 

under today’s rules, the estimated costs on GFEs may be unreliable or incomplete, or both, and 

final charges at settlement may include significant increases in items that were estimated on the 

GFE, as well as additional surprise “junk fees,” which can add substantially to the consumer’s 

ultimate closing costs. 

 

13 The reasons why the new GFE and its tolerances will lead to improved and more effective shopping for thirdparty services by consumers and loan originators has already been discussed, and need not be repeated here. 

 3-20 
The new GFE of the final rule is designed to solve these problems with today’s GFE. 

The remainder of this section describes the new GFE form, changes made to the GFE of the 2008 

final rule, and the results of consumer tests of the new GFE form. The final GFE is an easy-tounderstand form that includes a summary page (page 1 of the GFE) containing key information 

for shopping, including an array of indicators describing the type of loan priced. The forms have 

been changed to limit the potential for the treatment of yield spread premiums to confuse 

borrowers and thereby put brokers at a competitive disadvantage relative to lenders. First, the 

summary page contains the sum of all origination and settlement charges: it makes no mention 

of the yield spread premium. Those who use the summary page to comparison shop cannot be 

biased by the yield spread premium since it is not there. Second, the description of the yieldspread premium on page 2 of the GFE emphasizes that the YSP reduces settlement charges, 

lessening the likelihood that its disclosure will confuse borrowers. Third, the trade-off table, a 

component of the new GFE that consumers find most useful, should increase consumers’ 

understanding of the financial trade-off between interest rates and settlement costs and of their 

available options. To reduce consumer confusion, the new GFE continues to consolidate 

settlement costs into a few manageable categories. Information on tolerances has also been 

improved. The end result is a form that consumers find to be clear and well written and, 

according the tests conducted, one that they can use to determine the least expensive loan. In 

other words, it is a shopping tool that is a vast improvement over today’s GFE with its variable 

formats, and long list of fees that can change (i.e., increase) at settlement. 

II.A. The GFE Form in the Final rule 

In order to effective develop the format and language used in the final rule forms, the 

Department hired forms development professionals (Kleimann Communication Group) to assist 

it in developing forms for the rule. Starting with the form in HUD’s 2002 proposed RESPA rule, 

Kleimann simplified the 2002 proposed GFE form and tested revisions on members of the 

public; their results with respect to the GFE are summarized in Section II.D below. Having 

considered the results of these tests, and comments received on the proposed GFE, HUD 

determined that a standardized GFE, containing major cost categories along the lines of the 2002 

proposed rule, will serve as an effective yield spread premium and cost disclosure that will 

facilitate borrower understanding of major categories and their costs; and will empower 

borrowers to shop, compare and achieve major cost savings where possible. The final GFE 

reflected changes in both basic content and style with a major emphasis on maintaining 

competitive balance between brokers and lenders so that borrowers can effectively compare the 

cost of loan from one source to the cost of a loan from the other. The final GFE form is little 

changed from the 2008 proposed GFE. The remainder of this section describes the final GFE. 

II.A.1. Page 1 of the GFE 

The first page of the final GFE includes a few basic facts about the loan and three key 

numbers to make it easy for the borrower to comparison shop (thus it is essentially a “summary 

page” and will often be referred to as such). 

 3-21 
Overview. The top of page one of the final form continues to include blank spaces for 

the loan originator’s name, address, phone number and email address as well as the borrower’s 

name, the property address and the date of the GFE. In addition, the top of the revised page one 

includes a statement about the purpose of the GFE and information about how to contact the loan 

originator and how to shop for a loan offer. While the revised page one also continues to include 

information about important dates such as how long the interest rate is available and how long 

the estimate for all other settlement charges is available, the rate lock period information that was 

included in the loan summary chart on the proposed GFE was moved from the summary chart to 

the “important dates” block on the revised form in order to consolidate all the information about 

dates in one section of the form and to minimize potential borrower confusion. 

The revised page one also includes a summary chart of the loan on which the GFE is 

based but this section of the form is now referred to as “summary of your loan” instead of 

“summary of your loan terms” as proposed. The revised summary continues to include key 

terms and information about the loan for which the GFE was provided but certain changes were 

made to headings on the chart to address specific comments. In addition, in response to 

comments that the proposed form was too lengthy, HUD has shortened and merged with a 

question about the presence of an escrow account with the loan the information that was on page 

4 of the proposed GFE regarding other financial responsibilities of the homeowner. This section 

now alerts the borrower to the fact that in addition to principal, interest and any mortgage 

insurance, there are other costs associated with homeownership that will have to be paid such as 

property taxes and homeowner’s insurance, and whether any of these expenses are included in an 

escrow account for the loan. This separate section also alerts the borrower that there may also be 

other costs that have to be paid such as homeowners’ association fees, condominium fees or 

other charges and these fees should be kept in mind when deciding how high a monthly payment 

the borrower can afford. (See section 4 below for a full discussion of changes made to the loan 

summary chart.) 

The bottom of the first page of the GFE includes the settlement charges subtotals and 

directs the borrower’s attention to the overall settlement charge total. More specific explanations 

of the GFE page 1 sections follow. 

Purpose, Shopping for a loan offer, and Important dates. The first page of the GFE 

form begins with the name, address, and phone number, and email of the originator, the 

borrower’s name, the property address, and date of the GFE. This is followed by a section 

“Purpose.” It includes a first statement of what a GFE is. A second statement, labeled 

“Shopping for a loan offer,” explains that it is up to the borrower to find the best loan in the 

market and tells the borrower to shop by comparing GFEs from multiple originators and 

referencing the shopping chart on page 3 for that purpose. Next, the “Important dates” section 

notes the date through which the interest rate, and interest-related payment estimates are valid, 

the business 10-day period for which the terms and condition of the GFE are valid, specifies the 

rate lock period as well as the number of days before settlement the rate must be locked. These 

dates were gathered from various places on the 2008 proposed GFE. 

Summary of your loan terms. The next section on page 1 of the new form is the 

“Summary of Your Loan Terms.” The first table here (Your Loan Details) contains a description 

 3-22 
of the loan product including the loan amount, the loan term, the initial interest rate, the monthly 

amount owed (including principal, interest, and any mortgage insurance), whether the monthly 

payment can rise and how soon, and the maximum possible monthly payment. The table 

continues with more information about the type of loan offered, specifically indications of 

whether: the interest rate can rise (an adjustable rate or hybrid loan), the loan balance can rise 

provided all payments are timely (a payment option loan), the monthly payment can rise 

provided all payments are timely , the loan has a prepayment penalty, or a balloon payment. The 

next part of the table starts with a question about the presence of an additional monthly payment 

for an escrow account to cover property taxes and other obligations. For an answer of “No”, the 

form includes a warning that the borrower will have to cover these expenses separately. For an 

answer of “Yes”, a checklist of the items included in the escrow account is provided. 

Escrow account information. This section, referred to as “escrow account information” 

informs the borrower that some lenders require an escrow account to hold funds for paying 

property taxes or other property related charges in addition to the monthly payment. The section 

includes a disclosure as to whether an escrow account is required for the loan described in the 

GFE. If no escrow account is included for the loan, this section informs the borrower that the 

additional charges must be paid directly when due. If the loan includes an escrow account, the 

section informs the borrower that it may or may not cover all additional charges. 

Summary of your settlement charges. The last lines on page 1 contains a consolidated 

presentation of the settlement costs. It includes the subtotals of adjusted origination charges” 

and “charges for all other settlement service,” as well as the Total Estimated Settlement Charges. 

This figures will be identical in otherwise identical loans from brokers or lenders. This page 

avoids differences in presentation that arise merely from the kind of originator involved, broker 

or lender, enhancing a “level playing field” between brokers and lenders. The summary page 

provides the key number for determining the least expensive loan (see below). 

Comments on Page 1 (the Summary Page). The “Summary of your loan” table on 

page 1 has only minor changes from the 2008 proposed GFE made in response to public 

comments. These include expanding the questions about whether the monthly amount owed and 

the loan balance can rise if payments are made on time because, as commenters pointed out, loan 

delinquencies can result in increases in monthly payments and loan balance. 

Some of this information describes the loan product. This is important for two reasons. 

First, it tells the borrower if there might be any changes or special circumstances that could arise 

in the future. With an adjustable rather than a fixed rate loan, the interest rate and monthly 

payment could change. With a payment option loan that allows “negative amortization” the 

principal balance can rise eventually leading to higher monthly payments. A prepayment penalty 

could result in a large charge, in addition to the unpaid principal balance, when payoff occurs 

prior to the full term of the loan. A balloon payment results when a loan is not fully amortizing 

so that a large principal payment is due at the “end” of the loan. This information is disclosed to 

eliminate surprises that could result from the terms of the loan chosen. 

 3-23 
Second, all of these loan terms can have an impact on wholesale loan pricing at a 

particular interest rate affecting the YSP or discount points on otherwise identical loans, and 

thereby the total settlement cost. For example, the presence of a prepayment penalty increases 

the expected time period over which the higher payments on an above-par loan would be 

collected compared to the same loan for the same amount at the same interest rate without a 

prepayment penalty. In a brokered transaction, the loan with the pre-payment penalty would 

carry a higher YSP than the otherwise identical loan without the pre-payment penalty. For a 

direct lender, the pre-payment penalty loan would have a similarly higher present value. In 

either the broker or lender case, the loan with the pre-payment penalty should have lower 

settlement costs. If the two loans had the same settlement costs, the borrower would be clearly 

worse off choosing the loan with the prepayment penalty. Consumers need to know about such 

differences in loan products to make accurate comparisons of settlement costs. 

The first page includes only total settlement costs for this loan. Page 2 of the new GFE 

contains a list of eleven figures that relate to loan charges. Thus, the consolidation on page 1 

focuses the borrower on the total estimated cost of the loan and settlement. This simplifies the 

presentation for the borrower and makes comparison shopping easier, but still allows the 

borrower to go to Page 2 for any details he or she thinks are relevant. Note that loans from 

mortgage brokers are treated exactly the same as loans from lenders on page 1. The form is 

designed to focus the borrower on loan features and a summary of costs in order to help the 

comparison shopper evaluate alternative loan features and bottom line costs. Yield spread 

premiums are not mentioned on page 1. This is done to minimize the possibility that the 

borrower will make an error in comparing a loan from a broker with a loan from a lender. 

The borrower who wants to comparison shop could line up the first (summary) page of 

several GFEs and easily compare some of the major loan features including the costs, to see what 

is different and make a choice. If the borrower simplified the process and shopped for the same 

loan product among originators, there are fewer things to compare. In the extreme, a borrower 

could get loan offers for loans with the same loan amount, interest rate, term, and other features 

except the upfront fees. Then comparison-shopping is simple regardless of whether some of the 

offers are from brokers and others are from lenders. The type of loan originator has no impact 

on the page 1 presentation. The borrower can just pick the loan with the lowest up-front fee, 

since that is the only difference. Page 1 is intended to provide the necessary summary 

information that a borrower needs to find the lowest cost loan. More cost details can then be 

found on Pages 2, and an explanation of tolerances on page 3. 

With fees firmer under the new GFE, shopping is more likely to result in borrowers 

saving money when they shop. The creation of a summary page is designed to make it simpler 

for borrowers to shop. The higher reward for shopping along with its increased ease with which 

borrowers can compare loans should lead to more effective shopping, more competition, and 

lower prices for borrowers. 

II.A.2. Page 2 of the GFE 

Page 2 of the GFE provides more details on the charges and information on tolerances. 

 3-24 
Understanding Your Estimated Settlement Charges. The second page begins with 

“Understanding Your Estimated Settlement Charges” which presents the main components of the 

settlement charges. This section consolidates settlement charges into 11 categories – a 

significant improvement over the long lists of fees that consumers face on today’s GFEs. 

Subsection II.C below provides a further discussion of the consolidation of settlement charges. 

The top of the second page continues to require that the origination charge be listed, and 

the credit or charge for the specific interest rate is required to be subtracted or added to the 

origination charge to arrive at the adjusted origination charge. However, this portion of the 

second page includes some minor changes from the proposed form. First, block 1 is now titled 

“Our origination charge”, and the text description is shorter. Block 2 now references “points” 

after the “charge” in the heading rather than at the end of the sentence to better inform the 

borrower. The heading now reads “Your credit or charge (points) for the interest rate chosen. In 

addition, to draw the borrower’s attention to the “credit” in box 2 and the effect of the credit, the 

terms “credit” and “reduces” are now bolded in box 2. To draw the borrower’s attention to the 

“charge” in block 3, the terms “charge” and “increases” are now bolded in box 3 of the second 

block. Finally, the second sentence in box 2 and box 3 in block 2 refers to “settlement” charges 

rather than “upfront” charges in order to be consistent with other language on the form. 

Page two of the final GFE, like the second page of the proposed GFE, also contains an 

estimate for all other settlement services. While the categories from the proposed form have 

generally been retained on the final form, certain changes have been made to the categories to 

streamline the form in response to comments. Block 10 of the proposed form “optional owner’s 

title insurance” is now block 5 of the final form and provides the following information: “You 

may purchase an owner’s title insurance policy to protect your interest in the property.” In Block 

4, “Title services and lender’s title insurance,” the loan originator states the estimated total 

charge for third party settlement service providers for all title related services, including closing 

services, and, when such services are required by the loan originator, for lender’s title insurance 

premiums, regardless of whether the providers are selected or paid for by the borrower, seller, or 

loan originator. 

Block 6 of the final form, “Required services that you can shop for” is the same as block 

5 of the proposed form. While block 6 of the proposed form included both government 

recording charges and transfer taxes, in response to comments, government recording charges are 

now listed in Block 7 of the final form with the explanation that “these charges are state and 

local fees to update records of ownership and mortgages.” Block 8 now lists transfer taxes with 

the explanation that “these charges are state and local fees on mortgages and home sales.” This 

change was made in response to comments so that these two different types of government fees 

could be treated differently with respect to tolerances. 

Block 7 of the proposed form, “Reserves or escrow” is now block 9 of the final form. 

The sentence below the title has been revised to include check boxes to indicate whether the 

reserves or escrow includes all property taxes, all insurance or other payments. The “other” 

category may include non-tax and non-insurance escrowed items, and/or specify which taxes or 

insurance payments are included in the escrow if the escrow does not include all such payments. 

 3-25 
Block 8 of the proposed form, “Daily interest charges” is now block 10 of the final form. 

Block 9 of the proposed form, “Homeowner’s insurance” is now block 11 of the final form. 

The final GFE requires the charges in blocks 3-11 to be subtotaled at the bottom of page 

two. The sum of the adjusted origination charges and the charges for all other settlement 

services are required to be listed on the bottom of page two. This figure will also be listed on the 

bottom of page one, in the block “Total Estimated Settlement Charges.” 

II.A.3. Page 3 of the GFE 

Understanding Which Charges Can Change at Settlement. Located at the top of Page 

3, is a section with a table titled “Understanding Which Charges Can Change at Settlement” 

covers the tolerances. There is a brief introduction and the charges are broken down into four 

categories. “cannot increase” includes three items: our service charge (which is subject to zero 

tolerance), the charge for the interest rate chosen (which cannot change if the borrower locks in 

the interest rate), and transfer taxes. The second heading is “cannot decrease” and includes the 

credit for the interest rate chosen (which cannot change if the borrower locks in the interest rate). 

The next heading sis “cannot increase more than 10% if you use companies we identify” and the 

last is “can increase”. The table identifies the appropriate fees for each heading. This is a more 

compact presentation than on the proposed GFE to consolidate space. 

Page 3 also contains the trade-off table. 

Using the tradeoff table. This section on Page 3 compares the loan for which this GFE 

is filled out with two alternatives that the borrower could have obtained from this loan originator. 

The form has a sentence that explains that if a borrower wants one of the alternatives, the 

borrower must ask for a new GFE for that loan. Because HUD determined that it could not 

legally require the alternatives to be presented, there is a statement informing the borrower that 

filling out the form is optional on the part of the originator. It also advises the borrower to ask 

for more information if the form is incomplete. If the originator chooses to fill out the tradeoff 

table, it is required to include alternative loans that differ only by the interest rate and up-front 

costs from the loan offered as part of the GFE. All other terms must be similar.14

Finally, page 3 contains: a section on getting more information on loans and settlement 

services; the shopping chart and instructions for its use, which allows a borrower to compare 

loan terms and total estimated settlement costs among different GFEs; and a disclosure about the 

potential for lenders to receive additional compensation if the loan is sold in the future. 

 

14 It may not be possible for originators to offer loans with different interest rates and otherwise identical terms. For 

example, the maximum interest rate on an adjustable rate loan may depend upon the initial interest rate, although the 

difference between the original and maximum rates on the two loans may be the same. 

 3-26 
II.B. Consolidating Categories on Page 2 of the GFE 

Your Estimated Settlement Charges. There are eleven categories of charges in the 

“Your Estimated Settlement Charges” section on Page 2 of the 2008 proposed GFE. Single 

entries for various settlement service providers or groups of providers are substituted for the 

detailed itemizations currently required. The goal of the new GFE is to simplify and summarize 

the information to make it easier to comparison shop. It will lead to the elimination of the fee 

itemization that is often pointless and overwhelming and that goes beyond that required by law, 

sometimes referred to as “junk fees,” that can lead to higher loan costs. Exhibit 1 provides an 

example of the fees and charges from an actual Good Faith Estimate of Settlement Services. We 

include only the items payable in connection with the loan (800 series) and the title charges 

(1100 series). Exhibits 2 and 3 list fees collected from a sample of approximately three thousand 

HUD-1 forms. Exhibit 2 provides lists examples of fees in connection with the loan and Exhibit 

3 lists title charges. The eleven categories are as follows. 

(1) Our Origination Charge. Originators will no longer produce a list of fees itemizing 

lender charges. All originator fees except the charge or credit for the specific interest rate chosen 

will be included in one charge called “Our Service Charge.” 

(2) Your charge or credit (points) for the specific interest rate chosen . This is where the 

yield spread premium (credit) or discount points (charge) are disclosed. Brokers must put down 

the exact figure that results at closing. Lenders have no such requirement. 

(3) Required services that we select. The next category is non-title, lender-required thirdparty services where the providers are selected by the originator. These would often include 

appraisal, credit report, flood certificate, and tax service, which are usually selected by the 

originator. They might include a pest inspection or a survey. Non-title services that the 

borrower has no choice about are lumped together in this section on the GFE. 

(4) Title services and required title insurance. The settlement agent and title insurance 

are next as one figure rather than a potentially long itemized list of fees that relate to them. 

These are grouped together because these charges are usually the result of making one choice of 

who is to provide these services. The detailed breakdown into a long list of fees is unnecessary 

and confusing. 

(5) Owner’s title insurance. Borrower’s title insurance coverage is optional in any 

transaction since the originator only requires that it be protected from title defects. If the 

borrower does purchase borrower’s coverage when the house is first purchased, no borrower’s 

coverage would be purchased in any refinance transaction since the initial coverage does not 

expire: new coverage would be largely redundant and pointless. It is listed here despite the fact 

that it is optional since borrowers often get coverage at purchase and the price of borrower’s title 

is often lower if it is tied to the purchase of lender’s coverage. In some transactions, sellers 

purchase owners’ title coverage for buyers. In certain transactions, particularly foreclosures, the 

lender requires the purchase of an owner’s title policy. In such a case, the estimate for owners 

title is included in item 4 of the GFE. Checkboxes indicate which of these three situations 

 3-27 
applies to the GFE.(6) Required services that you can shop for. Lender-required third-party 

services where the borrower selects the providers are separate since the borrower must choose 

the providers of these services or the loan cannot close. Examples could be a pest inspection or a 

survey. Such services can either be selected by the lender and appear in category (2), or be 

selected by the borrower and appear in category (5). 

(7) Government recording charges. Government charges for the recording of loan and 

title documents are estimated here. In response to public comments, these are separated from 

transfer taxes because, while generally small charges, they are frequently variable and 

unpredictable at the GFE stage, so they are included in the charges to which the 10 percent 

tolerance applies. 

(8) Transfer taxes. State and local taxes on mortgages and home sales are included here. 

Because these can be large, and are highly predictable, they are subject to zero tolerance. Taxes 

and other fees on the transaction are separate from other costs since they are not discretionary, 

are equal for identical loans, and are, for the most part, not for any service rendered. 

(9) Reserves or escrow. Escrow is separate for several reasons. One is that the borrower 

has to pay these charges eventually anyway. Another is that differences could result from one 

originator using a low cushion relative to another originator, but that low cushion could 

disappear as soon as the loan is sold to another servicer who could charge to make up the full 

cushion after settlement. Borrowers who are comparing loans would want to make any 

necessary adjustments so that the escrow account charges are comparable. 

(10) Daily interest charges. Per Diem interest is itemized because it depends on the date 

of settlement. In some cases, the borrower might want to compare loans as if the settlement date 

were the same. Another point is that this charge is for the use of money to own the home for the 

remainder of a payment period (part of a month, for example) until the regular amortization 

begins. In return for a higher fee, the homebuyer also gets to move in earlier in the month. 

(11) Homeowner’s insurance. Homeowner’s insurance is a separate item since the price 

is dependent on the coverage selected on the homeowner’s policy. It could vary according to the 

tastes of the borrower. Coverage could vary according to whether it is an umbrella policy, 

whether it includes jewelry coverage, boat coverage, contents coverage, and a host of other 

considerations. Other than basic coverage required by the lender, these are all up to the borrower 

and might be the same regardless of the originator chosen.

II.C. Trade-off of Interest Rate and Loan Charges 

An important objective of the final GFE is to highlight the trade-off that borrowers can 

make between interest rates and loan charges. Chapter 2 and Section III of this chapter explain 

that it is important that consumers fully understand the various options that are available to them 

when considering trade-offs between interest rates and loan charges. Because these financial 

 3-28 
concepts are complicated, some consumers may not fully understand them, placing them in a 

vulnerable position when negotiating terms with originators. Brokers and lenders may not 

always inform consumers that there are alternative products with different combinations of 

interest rates, points, and settlement charges. 

For the most part, originators usually offer a variety of interest rate and point 

combinations on any loan product. Higher points compensate for a lower interest rate and vice 

versa. If the rate goes high enough, the borrower can get the originator to pay some or all of the 

closing costs. Many originators explain this to their borrowers, giving them an array of choices 

to meet their needs. However, as noted above, this is not always the case. Some borrowers are 

shown only one of the combinations, so the borrower is unaware of the potential for reductions 

in closing costs at higher interest rates. This inhibits their ability to shop. As explained in 

Section IV of this chapter, the yield spread premium controversy has highlighted the importance 

of borrowers understanding the trade-off and its potential for covering closing costs. The new 

GFE is intended to ensure that the trade-off is explained to each borrower.

The section of the GFE on Page 3 – entitled “Understanding the tradeoff table” -- shows 

the inverse relationship between interest rates and monthly payments on the one hand and total 

estimated settlement charges on the other. The originator has the option give two alternative 

rates for the loan presented on the GFE and show the impact on monthly payments and the net 

upfront fee. The idea is that the originator would, as is the practice of some originators today, do 

more than simply fill out these two examples and explain how the higher (lower) income stream 

resulting from the higher (lower) rate is worth more (less) in the market and how that generates 

yield spread premiums (discount points). The originator would go over all the options available 

and help the borrower compare the alternatives so that the borrower has a rational basis for 

making a decision about what is best for him or her. 

In addition, so long as the borrower has had even one originator explain the relationship 

between the interest rate and net fees, the borrower will be aware of this and expect that any 

other loan offer would reflect the tradeoff. The borrower would expect that other originators 

would have an array of rates available and that each had associated with it a different net upfront 

fee that varied inversely with the rate. The basis for the existence of yield spread premiums and 

discount points would be better understood by the borrower, making it more likely that interest 

rate variations available would be used by the consumer to his advantage rather than by the 

originator to enhance profit at the consumer’s expense. With this trade-off table on the form, 

there would be a substantial increase in information about the nature of the trade-off between 

interest rates and upfront cash payments. The studies reviewed in Chapter 2 suggest that 

consumers are most confused about loans involving upfront cash payments and above-market 

interest rates – fees are particularly excessive on these loans meaning that originators are taking 

advantage of borrowers by not only charging them excessive direct origination fees but also 

placing them in high-interest-rate loans. The information gained from the trade-off table (as well 

as the anticipated publicity surrounding the table) should highlight these financial trade-offs to 

consumers and encourage them to consider all their options. 

 3-29 
To conclude, the trade-off section on Page 3 of the new GFE provides an option for the 

originator to show the borrower two of the options that were available to the borrower, but not 

chosen as the basis for the loan terms disclosed in this GFE. While originators can choose to 

show one option and nothing else to a borrower, the borrower is encouraged to ask for more 

information when none is initially provided. The form itself seeks only to alert the borrower that 

options are available, especially if none have been presented before that point. HUD expects that 

originators will usually fill out the tradeoff table to present options as well as continue to use 

more sophisticated worksheets to help borrowers decide which interest rate/fee option is best for 

them. 

Comments on the Trade-off Table. In their comments, many lenders noted the 

usefulness of the trade-off table but felt it should be placed in the Settlement booklet, rather than 

in the GFE. Among other things, they said it would be difficult to program in the characteristics 

of the current loan transaction, and compare that transaction with two alternatives that had been 

available to the borrower, but not chosen, when the interest rate and points on which the GFE is 

based were chosen. These comments were carefully reviewed. As explained above, consumers 

must be fully informed of their options and must understand the trade-off issue in order to 

effectively shop in today’s market. The trade-off table on Page 3 is intended to assist in doing 

this. As reported in Subsection II.D.1 below, 90 percent of the consumers in the tests conducted 

by the Kleimann Communication Group understood how the trade-off table worked, that is, they 

knew that if they wanted a lower interest rate, they had to pay more at settlement, or vice versa. 

In the second round of testing, consumers stated that the trade-off table was the most useful 

aspect of the GFE. According to Kleimann, the trade-off table appears to be very important to 

many consumers.

II.D. Consumer Testing of the GFE Form 

At the simplest level, the goals for the final GFE were to facilitate shopping for 

mortgages; distinguish items homebuyers can shop for; make basic costs clear; show yield 

spread premiums and discount points to borrowers; make tolerances clear; and clearly convey 

loan terms including prepayment penalties and balloon payments. In a more sophisticated sense, 

these goals are not about the content of the GFE, but rather about how consumers use the GFE to 

inform their decisions about how to finance one of the largest purchases made by most 

consumers—buying a house. Consumer testing provides a means of collecting data from the 

public for two purposes: (1) to fine-tune and develop a form that ensures that consumers can use 

the GFE in the way intended (often known as qualitative testing); and (2) to validate with 

objective measures the performance of consumers as they use the GFE (often known as 

quantitative testing). 

Because of the feedback following the 2002 proposed rule, input from HUD’s RESPA 

Roundtables, and because of the complex nuances of the information that the Department 

wanted to include in the GFE form, the Department contracted with Kleimann Communication 

 3-30 
Group, Inc.15 to help revise the proposed GFE and to conduct consumer tests of the usability of 

the final form. The testing of the GFE form was conducted in two phases. In Phase 1, the 

Department used three rounds of one-on-one testing interviews to collect data about what 

worked in the forms under development and what misled or miscued the consumers about the 

information in the form. In the second stage, FTC conducted one round of objective testing on an 

extracted portion of the 2002 proposed GFE form, and HUD conducted two rounds of objective 

testing on final and improved versions of the complete GFE form to validate the ability of 

participants to use the form to select the least expensive loan offer. 

II.D.1. Phase 1. Qualitative Consumer Testing 

In this phase, the goal of the testing is to fine-tune and develop the GFE form and ensure 

that consumers can use the GFE in the way intended. As a result, testing in this phase solicits 

consumer feedback through individual interviews with consumers as they actually use the GFEs 

in the simulated task of buying a home and needing to select between several loan offers. Data 

are qualitative and not intended to be statistically significant, but rather provide guidance about 

problems consumers have and the reasons for those problems. This phase consisted of three 

rounds of testing.

First Two Rounds of Testing. Each of the first two rounds of testing involved 

interviews with a total of 45 consumers in three cities. New homebuyers and experienced 

homebuyers were part of the groups tested. The groups included members from diverse racial 

and ethnic groups, the elderly, and low-education and low-income groups. 

Kleimann made several format and language changes to improve the readability and 

clarity of the form. Kleimann then developed a comprehensive testing protocol that addressed the 

key objectives of the GFE form for consumers, such as the following: facilitate shopping for 

mortgages; distinguish items homebuyers can shop for; make basic costs clear; show yield 

spread premium and discount points to borrowers; make tolerances clear; and clearly convey 

prepayment penalties and balloon payments. 

The interviews with each participant lasted for an hour and a half with a 10-minute break. 

The interviews had two parts, one unstructured and one structured. In the unstructured portion of 

the interview, participants were asked to think aloud as they looked at each form for the first 

time. This unstructured and unprompted portion of the interview allowed Kleimann to capture 

users’ initial reactions—including areas that they responded well to, areas they did not 

understand, and areas they questioned. In addition, the unstructured portion ensured that the 

testers did not influence the comments of the participants by leading them to discuss information 

they would not have noticed on their own. In the structured portion of the interview, Kleimann 

gave each consumer completed GFEs16 and asked targeted questions to determine how well 

 

15 Kleimann Communication Group, Inc. is a woman-owned, small business that specializes in developing, 

designing, testing, and researching consumer-based forms. 

16 Updated versions of the forms developed for Guaranteed Mortgage Package Agreements, or as they were 

renamed, Mortgage Package Offers (MPOs), were also tested as these regulatory alternatives were still under 

consideration at the time. 

 3-31 
participants understood certain areas of the forms, whether the consumers could determine the 

least expensive loan, and how Kleimann might improve the forms.17 The study design focused 

on how the forms performed as stand-alone documents. The interviewer neither helped th

participant understand any of the information on the forms nor answered any questions the 

participant asked to clarify information. 

e 

 

Because the GFE form was revised between the first and second rounds in response to 

weaknesses identified in the first round, the results reported below are often from the second 

round of testing: 

• In rounds 1 and 2, approximately 90 percent of the participants said they would shop and 

would get different GFEs from other lenders. 

• Ninety-three percent of the participants chose the least expensive loan (out of three 

possibilities), indicating that the GFE was helpful in facilitating consumer choice. The 

three possibilities included a GFE from a broker, a GFE from a lender, and an MPO.18

• About two-thirds of the participants could distinguish between items they (as consumers) 

could shop for and items for which they would use the broker’s or lender’s providers. 

• Essentially all participants could identify the basic loan costs (interest rate, monthly 

payment and interest, settlement charges) and basic loan features (loan amount, balloon, 

prepayment penalty, etc.). Practically all (91 percent in round 1 and 97 percent in round 

2) could identify the total estimated settlement charges. 

• Ninety percent of the participants understood the trade-off table, that is, they knew that if 

they wanted a lower interest rate, they had to pay more at settlement, or vice versa. 

• In round 2, almost two-thirds of the participants could explain the adjusted origination 

charge. 

• Seventy percent of participants were able to identify the tolerances correctly (after the 

form had been improved in round 2). 

17 For the first round of testing (45 consumers in Baltimore, Birmingham, and Chicago), Kleimann developed two 

versions of the GFE. One of the major issues they wanted to collect data about was whether participants found it 

easier to use the GFE that had a summary page or one that did not. Half of the participants received one version of 

the GFE with the summary page and half of the participants received a version without the summary page. As a 

result of this testing a summary page was added to the form. For the second round of testing (45 consumers in 

Austin, San Diego, and Portland, Oregon), Kleimann was concerned with different issues. They developed a 

crosswalk from the GFE to the HUD-1 and wanted to test it with participants (see Chapter 6). Kleimann had only 

one version of the GFE and the Mortgage Package Offer (MPO) to test; however, Kleimann still wanted to vary the 

order of presentation of the GFE and the MPO, so Kleimann decided to have two-thirds of the participants work 

with copies of the GFE and MPO. Of these 30 participants, half received the GFE first and then the MPO and half 

had the reverse order. The other third of the participants received copies of the GFE, but worked primarily with the 

crosswalk to the HUD-1. 

18 Consumers were initially asked to select the best deal between the lender GFE and the broker GFE – the 

percentage of consumers picking the best deal increased from 73 percent in round 1 to 90 percent in round 2. 

 3-32 
During the testing, Kleimann asked participants a number of questions about how they 

felt about the forms—how comfortable or uncomfortable they felt with the forms, what they 

liked and disliked, and how they perceived the information and the level of writing. An overview 

of participants’ perceptions is as follows (in some cases including round 1 as well as round 2): 

• In both rounds, participants found the most useful types of information to be those that 

gave them facts about the money they would have to pay or options about the amount that 

they would have to pay. They were able to use the form to identify key information that 

would help them in making decisions—the costs they can expect and ways to manipulate 

those costs to their own benefit. 

• In round 1, participants found the summary page on page 1 most useful and in round 2, 

the trade-off table most useful. Asked to identify the most important or useful pieces of 

information, many consumers chose the trade-off table to be very important. Participants 

also found the breakdown of charges on page 2 useful. 

• When commenting on what they liked most about the GFE, participants in both rounds 

reacted strongly to the GFE’s simple language and clear layout as well as the clear 

delineation of charges. 

• When asked what they liked least about the GFE, many did not mention any aspect of the 

form. In round 2, the form was generally clear to participants so they were able to focus 

on specific aspects of the GFE (e.g., references to other sections). Kleimann reports that 

most participants in round 2 said “nothing” when asked what they disliked about the 

form. 

• In round 2, 86 percent said the GFE had the right information for them, almost 90 percent 

said the GFE was written at the right level for them, and about two-thirds of participants 

said they were comfortable with the forms. 

According to Kleimann, the changes made to the form between rounds 1 and 2 worked 

quite well, and almost all indicators improved. After round 2, Kleimann made some additional 

minor changes to improve the clarity of the GFE (see pages 36–37 of Kleimann’s Report). 

This testing was designed to see how the GFE form would perform as a stand-alone 

document. The interviewer neither coached nor led the participant by asking questions before the 

participant could work alone with the document. While this technique identifies how well 

participants use the GFE form as a stand-alone in a testing situation, consumers using these 

forms in actual situations, that is, within a context, may perform even better. First, this testing 

involved no interaction at all between the potential borrower and a loan originator. In an actual 

situation, a loan originator would be able to answer borrower questions about the information on 

the forms and improve the borrower’s understanding of it. Of course, some originators might try 

to confuse the borrower in order to collect higher fees, but a competitor might be more than 

willing to clear up that confusion since doing so might get him the borrower’s business. In 

addition to the help coming from the originator, borrowers could always ask someone else for 

help: a spouse, friend, their real estate agent, etc. Moreover, local consumer groups that focus on 

lending issues will also assist borrowers in understanding the new, streamlined GFE form. Since 

 3-33 
none of these sources were available during the testing, the Kleimann results should be viewed as 

underestimates of how much the new forms will help consumers once the forms are placed in an 

actual context of obtaining financing to purchase a home or refinance an existing loan. 

Third Round of Testing. The third round of testing consisted of 60 participants with 15 

each in four cities.19 As in the first two rounds, the participants covered a diverse range of 

demographic characteristics. The tests followed the same procedures as in the first and second 

rounds (one and a half hours, “think-aloud” protocol, and closed questions) and addressed the 

same issues. 

The GFE form, however, was changed for the third round of testing in order to consider 

whether an alternative presentation of the discount points and yield spread premium would 

increase consumer understanding. (1) The yield spread premium (YSP) and discount point 

disclosure was removed from the top of page two, where it had been integrated into the 

calculations of total upfront charges to the borrower, and moved to page three. As a 

consequence, page two included only the adjusted origination charge at the top.20 Thus, 

otherwise identical loans from a broker and a lender would have identical figures on page two as 

well as on page one, the summary. Page three contained the YSP and discount points. The form 

did not include a full calculation of total broker compensation as was presented in the 2002 

proposed rule and rounds one and two. (2) The section, “Understanding which charges can 

change at settlement,” was moved to the bottom of page 2, was presented as a paragraph rather 

than a column, and was relabeled “Charges that can change.” 

With the exceptions noted below, the GFE forms worked well, consistent with the 

performance in round two. Some of the more interesting findings include: 

• The shopping language at the beginning of the form (stating that originator cannot 

guarantee best rates and encouraging consumer to compare other offers) seems to have an 

impact. About half of the respondents said they would shop around before they saw the 

forms. However, after reading the shopping language, 80 percent said they would shop 

around. This result supports that looking at the GFE influences the attitude of consumers 

toward shopping for and comparing other offers. 

• Participants were given two GFEs and asked to compare the two loans and identify the 

one that was cheaper. In this test, the lender loan had zero for the points, while the broker 

loan had a credit that resulted in the adjusted origination charge being lower for the 

broker loan. The charges for the rest of the categories were the same for both loans. Thus, 

someone who could use the form correctly would identify the broker loan as the cheaper 

loan. Those who were confused by the differential disclosure requirements and misled by 

the higher broker service charge would pick the lender loan as the cheaper alternative. Of 

 

19 The cities were Wilmington (Delaware), Tulsa, Minneapolis, and Los Angeles. 

20 This charge was labeled “Our Service Charge” in round three, but it is the equivalent of the adjusted origination 

charge in the other rounds. 

 3-34 
course, anyone could make mistakes for any number of other reasons. The results showed 

that 93 percent of the participants selected the broker loan as the cheaper loan as opposed 

to 90 percent in round two. In round three, 89 percent of participants would have chosen 

the cheaper broker loan as opposed to 86 percent in round two. None of the differences 

between these percentages in round two and round three is statistically significant. 

• As in the first two rounds, participants generally liked the form and would use it to 

comparison shop. They could identify the basic terms of the mortgage and the estimate of 

total settlement costs, and 86 percent understood the trade-off table (if they want a lower 

interest rate, they will pay more at settlement and vice versa). The material seemed to be 

presented at the right level and to be clearly laid out. Participants again identified the 

trade-off table, the breakdown of charges (on page 2), and the summary page as useful. 

• On the other hand, participants had problems with some aspects of the GFE. While the 

participants seemed to understand the trade-off table (see above), they had trouble 

understanding the concepts of yield spread premium and discount points.21 Only 3 

percent and 30 percent, respectively, of the participants could paraphrase what yield 

spread premiums and discount points represented leaving over two-thirds of the 

participants unable to paraphrase. Participants did not understand how these two concepts 

(located on page 3) related to other settlement charges (on page 2). Essentially, placing 

these terms outside the calculation (that is, on page 3 instead of page 2 as in the first two 

rounds) seems to decrease participants’ understanding of how the yield spread premium 

and discount points fit into total loan costs. Since there was no sizeable improvement in 

participants’ ability to determine the cheapest loan, and most participants did not 

understand the concept of YSP, the Department decided to keep the YSP on page two in 

the calculation as in the 2002 proposed rule. 

• Another concern was the decline in the ability of the participants to identify the charges 

on the GFE that could not increase on the HUD-1. Only 7 percent knew that the service 

charge was fixed once the rate was locked. The presentation of the tolerances in the threepart column (as in round 2) seems to work better than the presentation of this information 

in a paragraph form. The GFE in the proposed rule presents this information in the 

column approach. 

II.D.2. Phase 2: Quantitative Consumer Testing 

In this phase, the goal of the testing is to validate the performance of consumers using the 

GFE. As a result, testing in this phase limits the testers’ interactions with the participants to 

asking a few objective questions and the answers can be summed to indicate a level of 

performance. Some open-ended questions can be combined with the objective questions in order 

to document the rationale behind answers. This phase consisted of three rounds of testing.

 

21 These results are consistent with the work of Jackson and Berry (2001) and Woodward (2003a). 

 3-35 
FTC Testing. During the same period that the Department was developing the GFE, FTC 

tested the effect of yield spread premium disclosure to see if it had an adverse effect on the 

consumer’s ability to comparison shop. FTC extracted and tested only a portion of the 2002 

proposed GFE form. The first page of extract consisted of an abbreviated form of the Summary 

Table from page 1 of the GFE. The second page of the extract contained the “Your Charges for 

Loan Origination” Box and an abbreviated form of the “Your Charges for All Other Settlement 

Services” box from page 2 of the GFE. As a control, they took these same two extracts and 

eliminated the YSP and service charge producing a second set of extracts. Thus the FTC isolated 

elements of the proposed GFE and created two variations of their extracts: with the YSP and 

without the YSP. 

FTC testers gave each participant a pair of loan extracts to evaluate: one was a lender 

loan and the other a broker loan. The broker loan was $300 less than the lender loan. They asked 

participants which loan was cheaper and also which loan the participant would choose. Each 

participant also received a second set of extracts in which each loan offer was the same cost. The 

participants were asked the same two questions: which loan was cheaper and which loan would 

the participant choose. 

FTC tested five groups with 103 or 104 participants per group. The first group received 

the extract of the proposed GFE without the YSP disclosed (control) and the second group 

received the extract with the YSP disclosed. Group three received an extract based on round two 

forms without the YSP disclosed (another control) and group four received the same extract with 

the YSP disclosed. Finally, a fifth group received the extract based on round two forms with the 

YSP disclosed, but with modified language that the FTC thought might work better. 

The results of the round two control and the round two form that discloses the YSP are 

reported below, since the other results support the same conclusions.22 

• When the YSP was disclosed and the broker loan offer was cheaper, 72 percent of 

participants could correctly identify the broker loan as the cheaper loan; 17 percent 

incorrectly identified the lender loan as cheaper. Asked to identify which loan offer they 

would choose, 70 percent of participants would have chosen the cheaper broker loan; and 

16 percent would have chosen the lender loan. 

• In contrast, when the form extract did not disclose the YSP, 90 percent correctly 

identified the broker loan as cheaper, and 85 percent would have chosen it. Disclosing the 

YSP caused an 18 percent drop in participants correctly identifying the cheaper loan and 

a 14 percent drop in the number who would choose it in the market. 

 

22 FTC test results and the Department test results varied considerably because conditions of the FTC test and the 

Department’s testing in the first three rounds were substantially different. First, in the Department’s testing, 

participants were given the complete GFE, while the FTC gave participants only an extract from the form. Second, 

participants in the Department’s testing worked extensively with the GFE, reading it and commenting on it for about 

20 minutes before making their choices while the FTC testing took about 10 minutes. 

 3-36 
• When costs of the broker and lender loans were the same on GFE forms that contained 

the YSP, participant performance decreased. Fifty-three percent reported that the loan 

costs were a tie; 30 percent believed the lender was cheaper; 11 percent believed the 

broker was cheaper. When asked to identify which loan offer they would choose, 25 

percent of the participants chose either the lender or the broker loan offers; 46 percent 

selected the lender loan offer; and 17 percent selected the broker offer. 

• In contrast, when the form omitted the YSP, 96 percent correctly identified the tie, and 78 

percent chose one or the other as their preference. 

The FTC concluded that the disclosure of the YSP on GFE forms had two drawbacks. 

First, the disclosure of the YSP impaired the ability of borrowers to comparison shop leading 

many to choose the more costly alternative. Second, the disclosure of the YSP introduced bias in 

the selection process that favored lenders over brokers. Neither of these is a policy goal of the 

Department. 

Fourth Round of Testing. The radically different results FTC reported served as a 

catalyst for the Department to undertake additional testing. For round 4, the Department asked 

Kleimann Communication Group to parallel aspects of the FTC study, including the questions 

asked, the difference between the amounts of each offer, and the length of the test situation.23

However, because the Department thought that the context of the entire form might provide a 

more accurate measure of participants’ understanding of the GFE, the study design used a full 

length GFE rather than the extract from the FTC study. For each site, 120 participants were 

selected for demographic diversity.24

For round four, 600 participants were given full length GFEs. The control group (285 

participants) received GFEs which omitted the YSP disclosure, while the experimental group 

(315 participants) received GFEs with the YSP disclosed. Each participant was given two pairs 

of loans: one in which the broker loan was $300 less than the lender and one in which the broker 

and lender loan offers were the same cost. Each participant was asked three questions for each 

set of GFEs: (1) which offer was cheaper or if they cost the same, (2) which offer would they 

choose, and (3) why they made that choice. 

The results of this testing showed both consistency and divergence with the FTC results. 

 

23 Kleimann’s report, entitled Testing HUD’s New Mortgage Disclosure Forms With American 

HomebuyersRounds 4 & 5 (dated March 19, 2004, 

http://www.huduser.org/Publications/PDF/GoodFaith_4and5vol1.pdf), provides information on the specific 

characteristics of the consumers tested, revisions that Kleimann made to the form and the reasons for those 

revisions, the specific cities where the tests were conducted, the testing protocols, testing conditions, and the main 

results from each round of testing. 

24 The five cities for round 4 included Atlanta, Boston, Denver, Seattle, and Tulsa. 

 3-37 
• When the YSP was disclosed, 83 percent of the participants correctly identified the 

broker loan as cheaper, and 8 percent incorrectly identified the lender as cheaper. These 

results are an improvement over the FTC results of 72 percent and 17 percent. In this 

GFE scenario, 72 percent of the participants said they would choose the broker offer and 

11 percent said they would choose the lender. Similarly in the FTC study, 70 percent of 

the participants chose the broker offer and 16 percent chose the lender offer. 

• When the YSP disclosure was removed, 92 percent correctly identified the broker loan as 

cheaper, and 1 percent incorrectly identified the lender as cheaper. These results are quite 

similar to FTC’s results of 90 percent and 4 percent. When asked to choose a loan, 88 

percent of participants chose the broker offer, while 1 percent chose to the lender loan. 

These results compare to 85 percent and 3 percent respectively in the FTC testing. 

• When given same cost loan offers with a YSP, 81 percent correctly identified both loans 

as costing the same; 15 percent incorrectly identified the lender as cheaper; and 3 percent 

incorrectly identified the broker as cheaper. In contrast, in the FTC study, only 53 percent 

correctly identified the offers as costing the same; 30 percent incorrectly identified the 

lender as cheaper; and 11 percent incorrectly identified the broker as cheaper. In this GFE 

scenario, 50 percent of participants would have chosen either offer; 39 percent chose the 

lender offer; and only 5 percent chose the broker’s. In contrast in the FTC study, only 25 

percent chose either offer; 46 percent chose the lender offer; and 17 percent chose the 

broker’s offer. 

Of particular concern was the difference between participants who could identify the 

cheapest loan offer, but did not choose it. Analysis of the participant responses to the open-ended 

question of “why did you choose that offer” led to further modifications of the GFE to address 

this concern and to a fifth round of testing. First, in many comments, participants stated that they 

chose a particular offer because they did not want the “higher interest rate” indicated on page 2 

of the GFE. They concluded from the language on the YSP disclosure that the interest rate was 

higher than the rate cited on page 1 “Loan Details.” Second, many comments reflected that 

participants felt that the broker YSP disclosure was not straightforward and perhaps 

manipulative. Third, several participants chose a loan based on the loan origination fee as 

opposed to the overall adjusted charges. Finally, many of those who had no preference for the 

cheaper broker loan indicated that $300 was not a big enough difference to be a deciding factor. 

Fifth Round of Testing. As a result of the testing and analysis, revisions to the GFE 

included the following: (1) The language in box 2 on page 2 of the GFE referring to the “higher 

interest rate” and “lower interest rate” was modified to reduce the possibility of borrowers’ 

misinterpreting that the interest rate had changed from what was reported on the first page. (2) A 

third option was added to the YSP/discount points section on page 2 so a lender could indicate 

that their credits or charges were already included in “Our Service Charge.” This addition was 

designed to mitigate the sense of some participants that credits and charges were not 

straightforward. (3) Arrows were added on pages one and two to focus the borrower’s attention 

on the subtotals and the total estimated charges rather than individual components. In addition, 

 3-38 
the font size in the Total Estimated Settlement Charges on the bottom of page 1 was increased to 

further draw attention to the bottom-line. 

For purposes of testing, three other changes were made to the GFEs. First, the difference 

in the total cost was changed to $500 to increase the likelihood that the difference would be a 

deciding factor. Second, another pair of loan options was added in which the lender offer was 

$500 less than the broker offer. This addition was intended to identify any bias for or against the 

broker and lender options. Finally, we added a set of four loans to verify whether the comparison 

across more than two offers increased or decreased participant performance. No version was 

tested without the YSP and discount points language. 

For round five, 600 participants were divided into two groups, both of which received the 

GFE.25 The first group (315 participants) received the GFE with changed language and with the 

addition of a third option so lenders could indicate that YSP and discount points had been 

included in “Our Service Charge.” The second group (285 participants) received the identical 

GFE, but the third option box was removed. All participants received three pairs of loans, one 

with the broker offer being lower by $500, one with the lender offer being lower by $500, and 

one in which both offers were the same. In addition, each participant received a set of four offers 

to compare. 

The three-option GFE and the two-option GFE performed quite similarly with the threeoption form consistently getting slightly better results. As a result, the following discussion is for 

the three-option form only and reflects a general trend of improved performance. 

• In the GFE in which the broker was cheaper, 92 percent of the participants correctly 

identified the broker as the cheaper loan offer. This result represents an improvement 

over the 72 percent reported by the FTC study and the 83 percent reported in round four 

results. Only three percent of the participants incorrectly identified the lender as the 

cheaper loan offer, but again an improvement over the 17 percent reported by the FTC 

and eight percent in round four. When asked to choose a loan, 87 percent of the 

participants chose the cheaper broker loan as compared to 70 percent of the participants 

in the FTC study and 72 percent of the participants in round four. The success rates for 

the two option form are almost as good, just a percentage point or two below the three 

option form. These results of round five of testing are dramatically better than the FTC’s 

results and are based on a much larger sample. 

• In the GFE in which the lender was cheaper, 92 percent of the participants correctly 

identified the lender as the cheaper loan offer. A mere one percent incorrectly identified 

the broker as cheaper. When asked to choose a loan, 89 percent of the participants chose 

the lender loan and less than one percent (0.3) chose the broker. Again, the two-option 

form results are very close to the three-option results. 

 

25 Participants were chosen for demographic diversity in the same five cities: Atlanta, Boston, Denver, Seattle, and 

Tulsa. No participant from round 4 was permitted to participate in round 5. 

 3-39 
• The purpose of testing the case in which the lender was cheaper than the broker was to 

test for bias by seeing if the GFE forms performed equally well when either the lender or 

broker was the cheaper loan. A comparison of the results (92 percent vs. 92 percent, 3 

percent vs. 1 percent, 87 percent vs. 89 percent, and 3 percent vs. 0.3 percent) provides 

no support for the charge of anti-broker bias when the loans have different borrower 

costs. And these results reflect a large sample of loans. 

• In the GFE in which the broker and lender loan offers were of equal cost, 90 percent of 

the participants were able to correctly identify that fact. This result compares very 

favorably with the 53 percent reported by FTC and the 81 percent from round four. 

Participants in round five with equal-cost loans misidentified the lender as cheaper seven 

percent of the time, a large improvement over 30 percent in the FTC results and 15 

percent in round four. Participants misidentified the broker as cheaper one percent of the 

time as compared to 11 percent in the FTC study and three percent in round four. 

Participants said they would choose either loan 70 percent of the time, a dramatic 

increase over the 25 percent in the FTC study and the 50 percent in round four. Twentyone percent would choose the lender as compared to 46 percent in the FTC study and 40 

percent in round four. Four percent of participants chose the broker compared to 17 

percent in the FTC study and five percent in round four. The two-option form results in 

round five show the same basic sizeable trend in success rates and reduction in bias. 

To further test whether increased context improved or decreased consumer performance 

with the GFE, the Department asked Kleimann to give the participants a four-loan comparison as 

well. For this four-way comparison, the Department included a blank worksheet to aid 

participants in comparing the loans. The worksheet contained spaces for the originator’s name, 

loan amount, interest rate, term, monthly payment, adjusted origination charge, charges for all 

other settlement services, and total estimated settlement charges. On page one of the GFE, a 

sentence telling participants to use the table to compare offers was inserted. Additionally, half of 

the participants were given explicit verbal directions to use the worksheet. 

The 300 participants who had received the three-option GFE were included in this fourway comparison. Half of them were given a set in which a broker loan offer of $6,100 was the 

cheapest. The other three GFEs reflected a lender loan offer of $6,400 and a lender and a broker 

loan offers in which both cost $6,500. The other half were given a set in which a lender and a 

broker loan offers cost the same and were the cheapest at $6,500. In this same set, participants 

received a broker loan offer of $6,900 and a lender loan offer of $6,600. In addition, only 150 

participants received explicit verbal instructions to use the worksheet in their comparison, while 

half received no instructions. 

Participant performance on the four way comparison is impressive. 

• In the comparison in which the broker loan offer of $6,100 is the cheapest, 92 percent of 

participants who were not verbally reminded to use the comparison worksheet correctly 

reported the $6,100 broker loan as the cheapest. Three percent incorrectly identified the 

$6,400 lender loan as the cheaper loan. These results are the same as for the paired 

 3-40 
comparison discussed earlier where the broker was $500 less. Interestingly, very few of 

the participants who were not verbally reminded to use the comparison worksheet used 

it.26 When instructed to use the comparison sheet, many participants did, and 97 percent 

correctly identified the $6,100 broker loan as the cheapest, and none wrongly picked the 

$6,400 lender loan. The overall success rate for correctly identifying the correct loan as 

the cheapest for both those getting and those not getting the verbal instructions to use the 

comparison worksheet was 95 percent, with only one percent misidentifying the lender as 

cheaper.27 

• In the case where one broker loan and one lender loan cost the same and no verbal 

instructions were given to use the comparison sheet, 41 percent picked the broker loan as 

cheaper and 49 percent picked the lender loan. With verbal instructions to use the 

worksheet, 57 percent picked the broker at $6,500 and 35 percent picked the lender at 

$6,500. The combined average was 49 percent for the broker and 41 percent for the 

lender. 

Sixth Round of Testing The sixth round of consumer testing consisted primarily of 

qualitative tests of the GFE and an initial qualitative test of the closing script (referred to in 

testing as “the summary”). Compared to previous rounds of testing, the testers found that 

participants were more aware, due to recent intensive media coverage of mortgage market 

difficulties, of the issues facing a consumer choosing a loan. The modifications to the GFE for 

round 6 included changes in the language on timeframes, new language on additional 

compensation lenders may receive after closing for selling the loan, changes in the title and 

description of government recording and transfer charges, and an expansion of disclosed loan 

terms to alert the borrower to potentially unfavorable changes in their obligations. 

• The modifications in the loan terms disclosure worked well with consumers. 

• Ninety percent of participants were able to correctly identify the highest and lowest cost 

loans. 

• Participants stated that they liked the form length, the language of the GFE, and the 

layout of pages 1 and 2. 

• Participants appreciated the trade-off table and used it to compare loans. 

 

26 This lack of use may be attributed in part to the constraints of being in a testing situation and thus concerned about 

doing only the tasks requested. 

27 A success rate of 95 percent may be as high as one could expect in this kind of testing. This is the same success rate 

the FTC got when they gave borrowers two equally costly loans, one from a broker and one from a lender, without the 

YSP disclosed. In other words, where borrowers got two identical forms with identical loan data on them, only 95 

percent could figure out they were the same. 

 3-41 
The language on the timeframes did not work well so the final GFE uses a language 

closer to what resulted after round 5 of testing. The new language on additional compensation 

lenders may receive after closing for selling the loan created concerns that there could be more 

borrower charges. To mitigate this perception, this language in the proposed GFE was moved out 

of the YSP disclosure area on page 2 to the end of page 4, and the explanation was rewritten to 

avoid the impression that borrower charges could rise after closing. Finally, the terms 

“government recording and transfer charges” confused some borrowers and the terms were 

eliminated from the explanation part of #6 on page 2, “Government recording and transfer 

charges.” After round six, the GFE information was rearranged. In addition, information on the 

existence of an escrow account was added in the loan terms section on page 1 and in a more 

expanded section on page 4. Finally, the tolerance presentation was changed from a list of 

headings and bullets to three columns according to the tolerance that applied and bullets within 

each column to provide details. . 

Testers conducted settlement/closing simulations to test the idea of the closing script. 

Half of those participants worked with a summary (script). They used the summary in 

conjunction with other documents to answer questions and sometimes even used it as a primary 

information source. Participants thought the loan details were clear and understandable and 

reacted positively to having the summary read aloud. 

• Participants to whom the script was read were more attentive to loan details than 

participants who reviewed the documents independently. 

• Participants to whom the script was read were more aware of the tolerance categories and 

how they related to charges. Four out of 10 summary participants mentioned tolerances, 

compared to none of the non-summary participants. 

• Participants to whom the script was read were able to identify tolerance violations. When 

asked to identify the actual percent increase, 8 out of 10 summary participants correctly 

identified the 25% violation. 

Seventh Round of Testing. This round of testing tested the GFE and HUD-1 that 

resulted from HUD’s response to the public comments. To summarize, the changes to the GFE, 

which was tested in round 7, from responses to public comments are as follows

• Page 1 summarized key loan information (including escrow), but the Total Estimated 

Settlement Costs line at the bottom of page 1 was reduced to one line to make room for 

the “other financial responsibilities” disclosure from the top of page 4 of the proposed 

rule GFE that was incorporated into an expanded escrow account disclosure on page 1. 

• Page 2 retained the YSP disclosure as in the proposed rule in Item 2, and increased the 

categories of All Other Settlement Charges to nine by separating “Government recording 

and transfer charges” into two separate items in response to public comments. 

 3-42 
• Page 3 was condensed to include a very abbreviated tolerance chart, the trade-off table, 

the shopping chart, and the post-settlement sale of loan disclosure. 

• Page 4 of the proposed GFE was deleted. 

Implementation of Round 7 Testing. The primary purpose of the Round 7 testing was 

to validate these changes to the GFE based primarily on public comment and reduction of the 

length of the GFE from four pages to three. HUD conducted Round 7 of testing consisting of 28 

individual qualitative interviews, and 120 participants in focus groups to quantify performances. 

The quantitative testing also tested the performance of page 3 of the HUD-1 added to replace the 

closing script. Round 7 was divided into a pre-test of 7 qualitative interviews and 30 quantitative 

focus group participants in Denver, with the remaining 21 qualitative interviews and 90 

quantitative focus group participants in 3 separate cities, Minneapolis, Washington, and Atlanta.. 

Further details of the testing are provided below. 

• HUD’s decision to allow loan originators the option of filling out columns two and three 

of the trade-off table with similar loans with different interest rates and settlement 

charges was tested in the qualitative interviews. 

• One set of GFEs in which one GFE was for an adjustable rate loan, was included in the 

qualitative tests because of earlier criticism that HUD’s previous testing varied only 

settlement costs. 

• Participants in the quantitative study reviewed four sets of GFEs: two GFEs with lender 

(no YSP) settlement costs lower than the broker (YSP disclosed): two with the broker 

loan lower; two with the same settlement costs but different loan interest rates; and a 

four-loan test with one lender and one broker tied with the lowest settlement cost. 

Participants were asked the standard questions used in prior rounds of testing: (1) Which 

loan costs less? (2) Why? (3) Which loan would you prefer? (4) Why? The “why” 

questions allowed for additional qualitative insights into the numbers generated in the 

quantitative tests. 

• In the Denver pretest, two elements did not perform well: the escrow information on page 

1 and the tolerance table on page 3. For the escrow information, participants needed more 

details and were unclear how the information on page 1 related to the escrow item on 

page 2. 

• Since escrow language had been added to the GFE in response to public comment and 

had not been previously tested, HUD anticipated needing to modify the language for the 

remaining tests. 

• More importantly, the tolerance table, which had worked well in Round 5 of testing, did 

not work well in the abbreviated version introduced to reduce the length of the GFE from 

 3-43 
4 pages to 3. Participants had difficulty looking at the item number in the chart on page 3 

and matching it to the description on page 2. 

• For the remaining three test sites, HUD modified the escrow language and drastically 

reworked the design of the tolerance table. We embedded zero-tolerance information in 

the description of the items on page in Block 2 on page 2, added graphic elements on 

page 2 to “flag” other tolerances, and shifted the tolerance language on page 3 to focus on 

the items with a 10% tolerance. 

• However, in the final three test sites, neither set of changes was successful. See Form 

Improvement Section on page 3. 

Results of Round 7 Testing. The qualitative results were positive. Participants 

comprehended the information in the GFE, compared information across GFEs, and identified 

and chose a loan based on lowest cost whether a broker-originated or lender-originated loan. 

Participants were easily able to identify the adjustable rate loan offer, and no one selected it. The 

qualitative results concerning the trade-off table were that participants far preferred to have the 

trade-off table filled out than to have it blank. Participants tended to choose the loan offer that 

had a completed trade-off table, expressing some suspicion when it was not completed. The 

qualitative results suggested form improvements. Participants did not fully understand the items 

around the escrow disclosure on page 1 of the GFE tested. Participants were also not able to 

accurately identify zero-tolerance and no-tolerance items as a result of the changes to the 

tolerance table at the top of page 3 made to reduce the length of the GFE from four pages. 

Quantitative Results – Two-Loan Comparison. The table below compares Round 5 

and Round 7 results when consumers were given two loan offers: 

When participants compared two different loans with only interest rates different, 84.4% 

identified the lower interest rate and 86.7% chose the loan offer with the lower interest rate. The 

percentages are somewhat lower than the results from Round 5, and are attributable to two major 

differences in presentation on the GFE: (1) efforts to add zero-tolerance language to Items 1 and 

2 that complicated the presentation of these elements of the form and was misinterpreted by 

many consumers, and (2) the replacement of the three-line settlement cost summary on page 1 

with a 1-line summary. In Denver, where the GFE did not include the tolerance language on 

page 2, the results closely approximated the Round 5 testing. 

 3-44 
Results of Identification and Choice Questions for Task 1, Two-Loan Comparison in 

Rounds 5 and 7 

Different Cost Loan 

Comparison (broker lower) 

Round 5 

3-option YSP 

(Percent) 

Round 7 

Denver 

(Percent) 

Round 7 

3 sites 

(Percent) 

Which loan costs less? 

Broker (correct) 91.6 86.7 82.2 

Lender (incorrect) 4.3 10.0 4.4 

Same (incorrect) 2.7 3.3 8.9 

Which loan would you prefer? 

Broker (correct) 87.3 96.7 82.2 

Lender (incorrect) 6.7 3.3 3.3 

Either (incorrect) 3.7 — 11.1 

Different Cost Loan 

Comparison (lender lower) 

Round 5 

3-option YSP 

(Percent) 

Round 7 

Denver 

(Percent) 

Round 7 

3 sites 

(Percent) 

Which loan costs less? 

Lender (correct) 92.3 90.0 82.2 

Broker (incorrect) 1.0 6.7 4.4 

Same (incorrect) 6.0 3.3 8.9 

Which loan would you prefer? 

Lender (correct) 88.6 90.0 80.0 

Broker (incorrect) 0.3 10.0 1.1 

Either (incorrect) 8.1 — 14.4 

Quantitative Results, Four-Loan Comparison. In the four-loan comparison, GFEs with 

one lender and one broker tied with the lowest settlement cost were presented. In total, 95.0% 

correctly identified loans with lower settlement charges. 

Form Improvement as a Result of Integrated Qualitative and Quantitative Analysis. 

While nearly all of the participants chose a lower cost loan, the answers to the question “Why did 

you make that choice” of a lender or broker originated loan suggested three elements of the GFE 

form that could be improved. 

• In the tested Round 7 form, language about tolerances was inserted into Items 1 and 2 

that complicated the overall presentation of the difficult concepts communicated in this 

section, and led some participants to believe that their origination charges would not 

change with a lender loan when these charges may in fact change until the interest rate is 

locked. While this suggests that tested consumers should behave differently with lender 

and broker loans, this did not happen. Rather the introduction of tolerance information 

on page 2, the most significant design difference between Round 5, Denver Round 7, and 

the remainder of Round 7, caused a general decline in performance by adding 

information to page 2 extraneous to determining which was the lowest cost loan. 

• Another change from Round 5 was the removal of the summing lines for Total Estimated 

Settlement Charges at the bottom of page 1. Without a reminder that cost is determined 

by the sum of all settlement charges, some participants went to the “Our Origination 

 3-45 
Charge” in Item 1, page 2 to assess lowest cost and made their choice based on that cost 

without considering the Other Settlement Charges on page 2. 

• In addition, based on the information in Item 2, at the top of page 2, some participants 

thought that lenders did not have similar charges or credits for a selected interest rate 

because the language in Box 1 of Item 2 was not parallel to the other two boxes. 

The HUD-1 and Closing Script after Public Comment. The closing script was withdrawn, 

but a new page 3 to the HUD-1 was designed to help consumers compare loan details between 

the GFE and the HUD-1. In addition, page 3 of the HUD-1 included a table devised to identify 

the percentages of change between estimated and actual charges and to identify if the total is 

within the tolerance limits. 

Round 7 Testing of the HUD-1. Participants in the Round 7 quantitative testing were 

asked to compare a GFE and HUD-1 which contained the page 3 in the draft final rule submitted 

to OMB. The HUD-1 mirrored the details of the GFE exactly except for one these four details: 

• The prepayment penalty increased from $2,000 to $4,000. 

• The interest rate and monthly payment increased from 6.5% ($632.07 per month) to 

6.75% ($648.60 per month). 

• Charges for items 3 through 7 increased 11%. 

• Charges for items 3 through 7 increased by 8% 

Participants were asked to identify (1) if there was a change between the two documents, 

(2) what the change was, (3) if that change was allowed, and (4) if they would move forward 

with the HUD-1 at settlement and why. 

Quantitative Results for the HUD-1. The comparison between the GFE and HUD-1 

clearly showed that participants were concerned if they noticed a change in any of the loan 

details or settlement charges. 

• Of the participants, 89% noticed a change between the GFE and HUD-1, indicating that 

most participants could move easily from one document to the other. 

• A total of 70 participants received a HUD-1 with a change from the GFE that increased 

interest rate, added a prepayment penalty, or settlement charges rose above the tolerance 

level of 10%. Sixty three noticed the change and only 7 said they would still move 

forward with the settlement. 

• The difference between raising the charges $150 (up 8%) or $205 (up 11%) of items 3 

through 7 at settlement did not cause a difference in the decision making. Sixty-five 

percent in each group said they would not move forward with the HUD-1, and several 

mentioned being upset to find that charges had increased between the two documents. 

Recommendations for HUD-1. Based upon the Round 7 consumer testing, page 3 of 

the HUD-1 is retained in the form sent to OMB. However, because participants were not sure 

what to do once they had identified discrepancy, based upon a testing recommendation, HUD 

added a note to page 3 to suggest that consumers ask their lender if discrepancies occur.

 3-46 
Conclusions from Round 7 Testing. The extensive consumer testing across seven 

rounds with both qualitative and quantitative methodologies and analytic techniques has resulted 

in a consumer-focused Good Faith Estimate that consumers can understand and use. This 

research documents that the policy changes to HUD’s RESPA regulations and the accompanying 

changes to the GFE will not bias consumers in their choice of loan offers. The changes to the 

HUD-1 further ensure that consumers will be better protected against accidental and unwarranted 

changes between the estimates of the GFE and the actual charges on the HUD-1. In short, the 

key elements of the revised GFE and the HUD-1, page 3 are useful for consumers and the 

mortgage lending industry who serve the public: 

• The standardization of the design and language of the Good Faith Estimate facilitates 

loan comparisons. 

• Consumers can identify and select the lowest cost loan when asked to compare more than 

one GFE. 

• The summaries on page 1 of the GFE work. The “Summary of your loan” section allows 

consumers to identify variations in the loan details. The three-line summary of “Total 

Estimated Settlement Charges” enhances identification of lowest cost loan offers. 

• The details of the estimated settlement charges on page 2 of the GFE are clear to most 

consumers. Consumers understand the relationship of charges and credits to the interest 

rate. The inclusion of a box to identify the interest rate for lenders in the first box of 

“Item 2” further enhances their understanding. 

• The “Understanding which charges can change” (tolerance) table on page 3 of the GFE 

allows consumers to identify those items for which they can shop themselves or opt to 

take the assurance of no more than a 10% increase in the total. The table also helps 

identify those charges that cannot change, thus providing a level of confidence in the 

stability of the estimates. 

• The “trade-off table” on page 3 allows consumers to understand that alternative loan 

options are available. Most consumers far preferred to have the table filled out, 

expressing some suspicion when it was not completed. Importantly, the table enhanced 

understanding of the reciprocal relationship between interest rates and settlement costs. 

• The “shopping chart” on page 3 of the GFE helped consumers identify the key elements 

to consider when they compare offers. Further, the shopping chart suggests the 

importance of shopping for a loan offer that best meets a consumer’s needs. 

• The addition of page 3 to the HUD-1 allows consumers to compare and identify more 

easily the changes that may have occurred between the Good Faith Estimate and the 

actual charges at settlement. The addition of a brief note to remind consumers to ask their 

lenders if discrepancies occur provides the consumers with options and would increase 

communication. 

 3-47 
 Comment. The National Association of Mortgage Brokers characterizes Kleimann 

Communications’ testing of our form as “flawed” for several reasons (p. 49). (((reference))) The 

first is that Kleimann “failed to test the disclosures in actual transactions involving competing 

disclosures.” The second criticism of Kleimann’s methodology is that the communications firm 

“failed to test consumer understanding of loan terms and comparative shopping when YSP was 

not disclosed. Instead, the contractor assumed the answer to the most fundamental question, that 

is, whether YSP disclosure aided consumers in comparative shopping. Accordingly, the tests 

focused only on how, not whether, to disclose YSP.” 

Response. HUD disagrees that Kleimann Communications Group’s consumer testing of 

the GFE form was flawed. Independent reviews by experts in consumer testing and forms 

development found no flaws in the design of the tests. NAMB’s suggestion of testing forms in 

actual transactions is unworkable and an invalid basis for criticism. The hardest part of such a 

test would be finding loan originators (both brokers and lenders) willing to volunteer to test a 

form that is designed to improve consumer understanding and thereby reduce the originators’ 

information advantage and market power in the transaction. Perhaps as difficult would be 

keeping tested consumers from shopping outside of the experimental group of originators to keep 

the test valid, especially since the forms so strongly urge consumers to shop among different 

originators. 

The NAMB’s second criticism is also invalid because the third round of testing was 

exactly on the point of whether to disclose the YSP. The purpose of the YSP disclosure is to 

inform consumers about the full cost of originating loans through a broker and help them to 

understand the tradeoff between interest rates/monthly payments and origination costs so that 

consumers can use the relationship to their benefit. The third round of testing did not include the 

YSP disclosure, and the important finding was that, without the YSP disclosure, consumers did 

not understand the existence of the tradeoff between interest rates and origination charges as well 

as when the YSP was disclosed. Helping consumers to understand this tradeoff is a fundamental 

goal of HUD’s RESPA reform effort and of the design of the GFE form. The third round of 

testing confirmed that inclusion of the YSP disclosure helped consumers understand the tradeoff, 

and that if they take a loan with a relatively high interest rate, they should pay lower settlement 

charges. Since the need for the YSP disclosure to improve consumer understanding of the 

tradeoff was established in round 3, whether a YSP disclosure should be included was not the 

subject of later rounds of testing. Rather, later rounds of form development and testing were 

aimed at making the YSP disclosure free of anti-broker bias. This effort was successful. 

Comment. The Board’s letter makes the following statement: 

In July 2008 the Board withdrew its proposed rule regarding yield spread premiums, after 

limited consumer testing showed deep confusion about broker compensation and the 

incentives it creates. 

The Board of Governors of the Federal Reserve had proposed amendments to Regulation 

Z, which implements the Truth in Lending Act (TILA), to provide mortgage broker disclosures 

that would be clear and understandable to consumers. The Board contracted with Macro 

 3-48 
International (2008) to test their model language through a series of cognitive in-depth 

interviews with consumers. Macro conducted four rounds of consumer testing in March through 

May 2008: two in Washington, DC, and one each in Los Angeles, CA and Kansas City, KS. A 

total of 35 separate interviews were completed: 31 with individuals and 4 with couples who had 

jointly made mortgage decisions. Interviews lasted between 60 and 90 minutes. 

Participants for the interviews were recruited by telephone, and were selected because 

they had all obtained or refinanced a mortgage in the past two years. Potential participants were 

also screened to include a range of ethnicities, ages, and education levels. For each round of 

testing, Macro and Board staff developed an agreement for a fictional broker that included the 

information about broker compensation as required in the Board’s proposal. 

The language used in all rounds successfully communicated the amount of the broker’s 

commission to participants, as well as the fact that they would have to pay that commission. 

However, Macro’s testing showed that several other comprehension issues remained, despite 

repeated attempts to address them through revisions of the agreement. The Board describes 

these misunderstandings as: 

• Most participants who read the agreements did not understand how lender payments to 

brokers created a financial incentive for brokers to provide loans with higher interest 

rates. 

• In some cases, the broker agreement seemed to bias participants against working with a 

broker—particularly those who learned for the first time that brokers’ compensation 

depends on the interest rates of the loans they offer. 

• In some cases, the agreements being tested also led to an additional bias against brokers 

that was unrelated to any conflict of interest. Some participants were uncomfortable that a 

broker would discuss his or her commission in such detail before providing any services, 

and felt that this showed the broker was overly concerned with his or her own 

compensation. 

Several participants in different rounds commented that they found the broker agreement 

internally inconsistent in that it seemed to fix the commission at a certain amount but then stated 

that the broker received greater compensation for providing loans with higher interest rates. 

When asked how they would resolve this perceived contradiction, participants either ignored the 

text about increases in broker compensation and assumed that the amount was fixed, or assumed 

that the broker would receive a separate payment from lenders in addition to the amount shown. 

This latter belief—that the broker would receive two separate payments—often led to bias 

against the broker. 

Response. Based on the discussion of the withdrawal of the mortgage broker disclosure 

provision from the preamble of the Board’s final HOEPA rule, HUD maintains that the Board’s 

tested form may have been more successful than the Board was willing to give it credit for being. 

 3-49 
According to the preamble of the Board’s final HOEPA rule, the Board tested a mortgage broker 

compensation agreement form which was designed to accomplish two goals: (1) impart to the 

consumer an understanding that mortgage brokers have an incentive to steer borrowers into 

higher interest rate loans because of the possibility of indirect compensation through the yield 

spread premium (YSP); and (2) establish that the form was an agreement to fix the total 

compensation of the mortgage broker involved in the transaction regardless of the source of 

compensation (either borrower direct payment or lender indirect payment through YSP). 

The Board maintains that tested consumers were confused because they either (a) 

understood that mortgage brokers had an incentive to steer them into higher interest rate loans 

and did not believe that the broker compensation agreement was binding, or (b) they believed the 

agreement was binding, and that the mortgage broker did not have an incentive to steer the 

borrower into a higher interest rate loan. It is HUD’s view that this second group of consumers 

(group “b”) understood the form perfectly well. When a binding agreement on mortgage broker 

total compensation (no matter the source) is in place, something group “b” consumers accepted 

as fact, the broker who is party to the agreement no longer has an incentive to steer the consumer 

into a higher interest rate loan. Stated more simply, a mortgage broker who agrees to accept no 

more than a specified amount to originate your loan no longer has an incentive to steer you into a 

higher interest rate loan. He is indifferent to the source of compensation between direct fees paid 

by you and YSP. Group “b” consumers appeared to understand this clearly. 

While it is not clear from the statements in the preamble, perhaps the Board was troubled 

because group “b” consumers generalized from the context of the individual agreement a lack of 

incentive for brokers to steer consumers into higher interest rate loans at any point in the process. 

Such generalizations are understandable if group “b” consumers were considering a world where 

the mortgage broker compensation agreement was in place in every broker transaction. Then the 

incentive to steer only exists before the compensation agreement is issued. Perhaps if the Board 

had asked tested consumers why they thought a mortgage broker compensation agreement was 

important, they would have gotten a more satisfactory answer. 

The results for group “a” are more troubling in that these consumers failed to believe the 

validity of a binding agreement. Perhaps this is the primary reason the Board withdrew its 

mortgage broker compensation agreement provision from the final HOEPA rule. Be that as it 

may, it is no basis for the following statement in the Board’s comment on the RESPA rule: 

Based on our experience, we believe it is highly unlikely that consumers will recognize the 

GFE disclosure of a “credit for the interest rate chosen” as broker compensation, or that they 

will be able to use the information appropriately. 

HUD’s testing of its GFE forms at http://www.huduser.org/publications/hsgfin/goodfaith.html

which shows that HUD was able to develop, through a process sequential testing and 

improvement, a GFE form that consumers were indeed capable of using appropriately. The 

Board did not evaluate HUD’s GFE form, or language derived from it, in their own consumer 

testing. HUD’s primary goal in designing the GFE is not to disclose mortgage broker 

compensation, but to provide consumers with a disclosure that helps them understand the costs 

they will have to pay to get a mortgage loan, makes this estimate more reliable, helps consumers 

 3-50 
understand the tradeoff between interest rates and settlement charges, and allows easy 

comparison among offers to encourage shopping for mortgage loans. The GFE discloses total 

fees received by originators involved in the transaction without the unneeded distraction of how 

this fee might be divided up between broker and lender. HUD’s GFE also discloses the 

compensation the broker derives when the lender pays more for the loan than its face value (the 

YSP) in the context of total compensation for origination services. That is why the YSP is 

presented as a credit against the amount due for origination services from the borrower at 

settlement. 

II.E. Shopping Benefits from the New Good Faith Estimate – A Summary 

Our consumer testing yielded several important results. 

1. Participants are highly successful in identifying the cheapest loan with success rates 

as high as the 90+ percent range whether the broker loan is cheaper, the lender loan is 

cheaper, or the loans cost the same. 

2. Broker bias is not evident. The success rate for participants identifying the cheapest 

loan offer is the same whether the broker loan or lender loan offer is cheaper and the 

drop-off rate from identifying the cheaper loan to deciding which one to choose is 

about the same for brokers as it is for lenders. 

3. This success rate is maintained when the number of loan offers increases, thus 

showing that, to some extent, additional context eases the task of differentiating 

among the offers for consumers. Rather than being overwhelming, the additional loan 

offers help them to focus on the key information. 

4. The bias that does show up in comparisons in which broker and lender loans are 

otherwise completely identical. In which case, borrowers that do not think of the two 

loans as identical tend to favor the lender loan. The likelihood of borrowers getting 

two otherwise identical loans is extremely low however. 

The new GFE will improve the ability of the consumer to shop. The presentation is 

simpler, with a combined figure for each functional category, so that borrowers are less likely to 

be overwhelmed by detail. The additional graphic elements help to guide consumers to the 

bottom line rather than elements of the offer. Tolerances make the estimates on the GFEs more 

reliable, which will make it more likely that decisions based on this information will make the 

borrower better off. The trade-off table and language encouraging consumers to shop help 

consumers understand more clearly their options. These factors make it likely that consumers 

will obtain loans at lower cost. When borrowers do a better job shopping, are able to compare 

across offers knowledgeably and with confidence, and can select loans with more favorable 

terms, borrowers assume more control over their lives and their options. The final GFE helps to 

de-mystify the often confusing and overwhelming process of financing the purchase of a house. 

It empowers the consumer. 

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The final GFE front page disclosure of mortgage terms has explicit questions disclosing 

whether there are some important deviations from the simplest traditional mortgage terms 

(versus non-traditional mortgage terms). It asks if the interest can rise (an ARM); if the loan 

balance can rise (negative amortization); if the monthly amount owed for principal, interest, or 

mortgage insurance can rise (not level payments) and at which date; the maximum possible 

monthly payment; if there is a balloon payment (not fully amortizing); or if there is a prepayment 

penalty (additional fee to terminate the loan). The “No” answers are in the first column and the 

“Yes” answers in a second column so that any “Yes” answer sticks out. The “Yes” answers 

require the worst possible outcomes to be disclosed. All of this is designed to get the borrower’s 

attention in the event that any of these potentially detrimental loan features are present. 

Section VII.B of this chapter below will provide a more extensive discussion of the 

consumer and market benefits of the new GFE, covering how the new GFE can be used in both 

the prime and sub prime markets. Section II.E provides estimates of cost savings to consumers 

from the new GFE. 

II.F. Comparing new GFE with the new HUD-1 

One of the purposes of RESPA is to reduce unnecessarily high settlement costs. The 

final GFE promotes that goal in several ways. Through consolidation of loan and title fees, the 

presentation of GFE settlement cost figures is greatly simplified by eliminating fee proliferation 

that often serves little purpose and that can easily overwhelm the borrower. Comparison 

shopping by borrowers that promotes competition is made easier through standardization and 

clear presentation of fees on the GFE. The need to adhere to the tolerances means that there 

GFE cost estimates can be more reliable compared to today, providing the borrower with more 

incentive to comparison shop. Since the GFE figures will be more reliable, it is more likely that 

the borrower who shops will wind up getting the lower price they found by comparison 

shopping. 

In order for the borrower to become an enforcer of the figures presented on the GFE from 

the loan source selected, the borrower has to be able to compare the figures on the HUD-1 to the 

figures on the GFE and determine that the HUD-1 figures are within the tolerances placed on the 

figures from the GFE. The rule includes two methods for helping the borrower compare the 

HUD-1 to the GFE. First, the rule changes the HUD-1 so there is a line on the HUD-1 for each 

figure appearing on page two of the GFE and that line is labeled exactly as it is on the GFE. The 

borrower can then compare the figures on the like-named lines of the HUD-1 to the 

corresponding lines on the GFE. Second, a new page is added to the HUD-1 where some figures 

from the GFE and some figures from the modified HUD-1 are transcribed so as to appear next to 

each other in order to make it easier for the borrower to compare the fees on the GFE to the fees 

charged on the HUD-1. 

(1) The Consolidated HUD-1. In order to enhance comparability of the GFE to the 

HUD-1 HUD is modifying the HUD-1 so that, for each settlement cost item on the GFE, there is 

a line on the HUD-1 with exactly the same label as on the final GFE. These matching categories 

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on the HUD-1 also identify the location on the GFE where the corresponding entry is located. 

The borrower could simply hold the HUD-1 next to the GFE and compare the lines with the 

same labels. 

 Lines 801, 802, and 803 on the modified HUD-1 would be labeled “Our origination 

charge (from GFE #1),” “Your charge or credit for the specific interest chosen (from GFE #2),” 

and “Your Adjusted Origination Charges (from GFE A),” respectively. Only the “your adjusted 

origination charges” would be included in the borrower column, the seller column, or POC, in 

order to avoid double counting that would result if “our service charge” and “your charge or 

credit for the specific interest rate chosen” appeared there as well. The sum of the figures in the 

borrower’s and seller’s column and any POC amount for “your adjusted origination charges” 

would add up to the figure on the GFE. This summing of figures from these three locations will 

be necessary for every comparison back to the GFE. 

 

Lines 804, 805, 806, and 807 would now read “Appraisal fee to (from GFE #3),” “Credit 

report to (from GFE #3),” “Tax service (from GFE #3),” and “Flood certification (from GFE 

#3),” respectively. Lines 901, 902, and 903 now read “Daily interest charges (from GFE #8),” 

“Mortgage insurance premium (from GFE #3 or #5),” and “Homeowner’s insurance (from GFE 

#9),” respectively. The borrower would simply compare these figures from the HUD-1 back to 

the GFE. 

 

Line 1001 would read “Reserves or escrow (from GFE #9).” Only this line of the 1000 

series will have figures in the borrower’s column, the seller’s column, or POC. The breakout 

into components, including the aggregate adjustment, can be listed on subsequent lines but not 

put into the borrower’s column, the seller’s column, or labeled as POC since that would lead to a 

double counting error. 

 

Line 1101 would now read “Title services and required lenders title insurance (from GFE 

#4)” and “Owner’s title insurance (from GFE #5),” respectively. Just as with reserves or escrow, 

the title insurance and lender’s title insurance breakout into components can be listed on 

subsequent lines but not put into the borrower’s column, the seller’s column, or labeled as POC 

since, again, that would lead to a double counting error. 

 

Line 1201 now reads “Government recording charges (from GFE #7)” and line 1203 now 

reads “Transfer Taxes (from GFE #8).” The breakout would follow the pattern above for the 

escrow and title sections. Lines 1301 now reads “Required services that you can shop for (from 

GFE #6)” with breakouts of the specific services following. 

 

Any item mentioned above could be omitted from the HUD-1 if not charged and any 

other legitimate HUD-1 entry could be placed where it is currently placed. Clearly, sometimes 

there will be the need to enter items on the HUD-1 that were not included on the GFE such as 

repairs, payoffs, etc., and these still have a place on the HUD-1 where they can be located. 

(2) Comparing GFE and HUD-1 Charges on Page 3. The new page 3 of the HUD-1 

includes reprises the information on the loan from the GFE, with some additional details on 

adjustable interest rate loans and escrow payments, if any. Page 3 also includes a comparison of 

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charges estimated on the GFE to charges as they appear on the HUD-1 and a computation of the 

differential between the GFE and HUD-1 for charges subject to tolerances and the ratio of this 

differential to the tolerance baseline. This part of the HUD-1 will be referred to as the crosswalk 

table. The table contains 3 columns. The first column of the crosswalk table contains spaces for 

the names of the items from page 2 of the final GFE. The second column contains the quoted 

prices for those items from the GFE. Third column has corresponding spaces for figures from 

the HUD-1 

The first group are the zero-tolerance items including “our origination charge”, “your 

credit or charge for the specific interest rate chosen”, “your adjusted origination charges”, and 

“Transfer taxes”. “Our origination charge” plus the charge or minus the credit for the specific 

interest rate chosen equals the adjusted origination charge. If the HUD-1 amount for any of 

these items exceeds the corresponding GFE amount, the zero tolerance requirements of the GFE 

have been violated. 

As with any charge showing up on the HUD-1, the correct number to show on the 

crosswalk table is the sum of any dollar values appearing as “paid outside of closing” (POC), in 

the borrower’s column, and in the seller’s column since any charge could be paid any of these 

three ways or in any combination of the three. So, all three potential sources of these dollar 

values must be checked: POC, buyer, and seller: in order to catch the full size of the charge. 

This is true for all items coming from the HUD-1. When we refer to the “HUD-1 figure,” we 

will always be referring to the sum of these three numbers. 

There is zero tolerance on this first set of items which means that the HUD-1 figure for 

our origination charge may not exceed the GFE figure for that same charge and that the HUD-1 

figure for your adjusted origination charge may not exceed the GFE figure for that charge either. 

So long as these HUD-1figures are less than or equal to their respective GFE figures, the 

tolerance has not been violated. 

The second set of lines on the crosswalk table comes from sections three, four, five, six 

and seven on the GFE. These charges are subject to the overall 10 percent tolerance if either the 

provider is selected by the originator (three, and possibly four and five), or is selected by the 

borrower from a list of providers identified by the originator (six, and possibly four and five) 

Section seven of the GFE, government recording charges, is included in the 10 percent tolerance 

as well at the suggestion of public comments. If the service providers are selected by the buyer 

and do not come from the originator’s list of providers, the prices are not subject to the 10 

percent tolerance, and are not added to the denominator in calculating the overall 10 percent 

tolerance. Services for which the 10 percent tolerance does not apply are listed in the next 

section of the crosswalk table, “Charges that can change,” which also includes sections nine, 

“Reserves or escrow”, ten, “Daily interest charges”, and eleven, “Homeowners insurance.” 

 There is no tolerance constraint on any of these figures. 

The fees mentioned above from the HUD-1 should exhaust all of the required settlement 

service provider fees. If there are any other HUD-1 fees for loan origination, title work, or any 

 3-54 
other settlement service required to get the loan, they should be closely examined to see if they 

should have been included in the first section of the crosswalk table and subject to the zero 

tolerance, or if they should have been included in the second section charges and subject to the 

10 percent tolerance. Real estate commissions, charges for roof repairs or termite extermination, 

charges for homeowner’s warranties, or escrowed amounts to satisfy some contingency are 

examples of figures that probably do not belong on the crosswalk table since these are not likely 

to be fees that should be included in the GFE and to which tolerances apply. 

The changes that were made to the HUD-1 to enhance the ease of use and comprehension 

of the crosswalk table portion of page 3 are the re-labeling of some of the HUD-1 lines 

mentioned above so that there are lines that exactly match the individual entries from the final 

GFE that are entered on the crosswalk table. 

Comment. Many comments were opposed to the proposed HUD-1 Addendum or 

“script.” The purpose of requiring settlement agents to complete and read this form document 

was to have them describe, at settlement, the terms of the loan and to compare the settlement 

charges on the GFE to those on the HUD-1. 

The primary objection to the script was the time costs. HUD estimated the worst case 

scenario of the added time required of a non-conscientious agent dealing with a very complicated 

loan product to be an additional 45 minutes. We assumed that the script would lead to an 

additional thirty minutes preparing the script, and an additional fifteen minutes to the actual 

closing procedure consisting of five minutes reading the script, and ten minutes answering 

questions. To be cautious, we applied this estimate to establish the outer bound of the 

opportunity cost of the closing script to the settlement firm at $54 per settlement. The total cost 

of the script in a normal year (12.5 million originations) could be $676 million. Settlement 

industry groups were concerned about the potential additional costs of preparing and reading the 

script. 

A second objection is that the script could place a settlement agent in the position of 

committing the unauthorized practice of law. This would occur if they were required to answer 

questions concerning issues such as the loan terms for which they had no responsibility. 

Response. At recent roundtables, representatives of the settlement industry have assured 

HUD that their primary goal is transparency and customer service. HUD assumed that without 

the script settlement agents would neither take any time to explain the HUD-1 to borrowers nor 

take any time to answer questions Thus, HUD’s cost estimate of the script may be exaggerated. 

In the world of the conscientious settlement agent, the additional burden of the script at closing 

would be closer to zero. However, because of the concern expressed concerning the implications 

of the potential cost and legal implications of the script, HUD will not require a script in its final 

rule. 

To replace the script, HUD has added a page to the HUD-1 form. This will contain much 

of the same information but will much easier to fill out and will not have to be read the 

settlement agent. As described in detail above, the top half will contain a table that compares 

 3-55 
settlement charges with those on the GFE and shows the amount and percentage by which the 

charges have changed (in order to check whether the change is within the tolerance). The bottom 

half of the page consists of a summary of the loan terms, very similar to the first page of the 

GFE. 

III. Treatment of Premiums and Discounts 

As noted earlier, the Department considered changing the instructions for the reporting of 

loan premiums and discounts in brokered loans, but decided that the explicit credit or charge for 

yield spread premiums and discount points, respectively, better served borrowers’ interests. The 

issue of yield spread premiums and discount points is a complex issue, particularly since there 

can be different treatment in broker and lender transactions. This issue is discussed in some 

detail in this section. Subsection A provides background information on yield spread premiums, 

noting that consumers do not always receive the benefits of yield spread premiums. Subsection 

C first summarizes these issues and then explains the treatment of yield spread premiums and 

discount points in the final GFE, emphasizing (a) the importance of both the explicit credit for 

yield spread premiums and charge for discount points, (b) the addition of the summary page that 

does not include yield spread premiums, and (c) the trade-off table to assist consumers in 

understanding these somewhat complex financial concepts. 

III.A. Background Discussion of Premiums and Discounts 

Both brokers and lenders may make loans at interest rates above or below par. If the rate 

is above par, the stream of monthly payments will be greater than otherwise. If the loan is sold, 

the market price for that loan will be higher than for a loan with a par rate. Buyers will offer a 

premium for the stream of higher monthly payments. Lenders have the option of keeping the 

loan in portfolio and earning the premium over time or selling the loan and getting the premium 

as a lump sum from the investor who will earn the higher payments for the life of the loan.28 

The yield-spread premium (YSP) is the premium value, or value above par, of the loan and is 

realized upon sale of the loan.29 It is created, implicitly, upon creation of the above-par interest 

rate loan. Those originators who keep the loan in portfolio have an implicit YSP equal to the 

present value of the increase in monthly payments associated with the loan. It becomes 

recognizable in an accounting sense when the loan is sold. 

 

Conversely, loans made at lower than par rates have lower monthly payments generating 

lower market prices for such loans. Buyers will buy these loans only at a discount. This 

discount (sometimes called discount points) is implicitly created at origination but realized in an 

28 Some will hold the loan for a while and then sell it, getting a combination of the two. 

29 Discount points are the mirror image of yield-spread premiums. Loans originated at lower interest rates sell for 

less in the market. The value of the discount points is the amount by which the price of the loan is below par, as 

opposed to the yield spread premium, which is the amount by which the price of the loan is above par. 

 3-56 
accounting sense upon sale of the loan (although it would be included in any market valuation of 

the loan). 

Originators usually offer mortgages at various rates above and below par. Higher rate 

loans may lead to lower loan origination fees paid by the borrower, or even money back in some 

cases, as a result of yield spread premiums that are implicitly created upon origination and 

received either at the time of sale or over time so long as they are held in portfolio. Lower rate 

loans often generate charges to borrowers for discount points to offset the discounted market 

value of the loan. 

Currently, HUD-defined brokers are required to report the dollar value of yield spread 

premiums on the GFE and HUD-1 as going from the wholesale lender30 to the broker and paid 

outside of closing (POC). Other originators, HUD-defined lenders, do not report yield spread 

premiums since they are either realized in the secondary market and are exempt from reporting 

requirements or are realized over time after closing since the loan was not sold at closing. If the 

loan has not been sold by the time of the closing, there is no readily available indisputable value 

for the yield spread premium. The value is readily available at closing in a brokered transaction. 

In a transaction where the broker uses table funding, the premium price of the loan is available at 

closing. In the case of a broker who originates in the name of another, the wholesale lender’s 

payment based on the premium value of the loan would be available as well. As noted above, 

the value is not available at closing for many transactions involving lenders. 

There are no specific requirements for the reporting of discounts under current rules. For 

lenders, the sale, if any, is considered a secondary market transaction. Unlike the case of yield 

spread premiums, there is no explicit requirement in brokered transactions for the discount points 

charged to the borrower to equal the discount in the transaction between the broker and the 

wholesale lender. For example, the broker could charge the borrower two discount points while 

the price paid to the broker by the wholesale lender is in excess of 98 percent of the initial 

balance of the loan. The broker’s direct charge to the borrower (i.e., the discount points) may 

exceed the charge from the wholesale lender to the broker as reflected in the price of the loan 

(i.e., par value of the loan minus the discounted price that the wholesale lender pays the broker 

for below-par interest-rate loan). 

Thus all originators have the potential to increase their compensation by generating yield 

spread premiums that exceed the reduction in other fees charged to the borrower or by charging 

the borrower more in discount points than is warranted by the wholesale value of the loan. That 

is, the originator can profit by failing to reduce other charges by the full amount of a yield-spread 

premium or by overcharging for discount points. This is the problem that much of the public 

discussion on broker compensation has focused on, particularly the discussion of the yieldspread premium. Issues related to discount points, on the other hand, have not received much 

attention. 

 

30 The term “wholesale lender” will be used to describe the lender in a brokered loan. 

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Chapter 2 reviews studies that present evidence of the substantial variability in 

origination fees and broker compensation. These studies present a picture of a market 

characterized by excessive fees and price dispersion with some borrowers getting market-rate 

deals but others getting bad deals. Readers are referred to Section IV.D of Chapter 2 for a review 

of these studies. The discussion in Chapter 2 highlights the importance of encouraging 

consumers to shop among more than one originator, of having shopping forms (i.e., GFEs) that 

are simple to understand and that focus on the important bottom-line numbers, and of developing 

improved methods for explaining the trade-off between interest rates and upfront cash payments.

III.B. The 2002 Proposed Rule 

The 2002 proposed rule would have fundamentally changed the way in which mortgage 

broker compensation was reported by requiring in all loans originated by mortgage brokers, any 

payments from a wholesale lender based on an above par interest rate on the loan (payments 

generally called “yield spread premiums” in today’s market) be reported on the Good Faith 

Estimate (and the HUD-1 Settlement Statement) as a lender payment to the borrower. 

Additionally, that any borrower payments to reduce interest rate (“discount points”) must equal 

the discount in the price of the loan paid by the wholesale lender, and be so reported on the GFE 

(and HUD-1). These changes would have required mortgage brokers to disclose, at the outset, 

the maximum amount of compensation they could receive from a transaction, in the “origination 

services” block of the proposed GFE. They would have then disclosed the amount of the lender 

payment to the borrower that would be received at the interest rate quoted, if any. Under the 

2002 proposed rule, any premium in the price of a brokered loan would have gone back to the 

borrower in the form of an explicit credit to cover closing costs. Under HUD's proposed GFE 

and HUD-1 process, the broker was seen as not being a party to this payment from the wholesale 

lender to the borrower. The intention of HUD’s rule was to bring more focus on the yield spread 

premium, which was a far cry from the current system that reports yield spread premiums outside 

the buyer’s and seller’s columns in cryptic terms like “Yield Spread Premium POC”31 that are 

likely to be meaningless to the average borrower and do not require a dollar for dollar offset to 

closing costs. 

The 2002 proposed rule’s Treatment of YSPs. As noted above, the 2002 proposed rule 

changed the way yield spread premiums were treated, requiring brokers to report YSPs as lender 

payments to the borrower and report them in the "200" series on the HUD-1. This resulted in 

brokers having to report as fees for origination services the sum of the net originator charges to 

the borrower and the yield spread premium. Lenders were free to omit the yield-spread premium 

or its equivalent with the result that for an otherwise identical loan, brokers would report a higher 

figure for origination services than would lenders. Brokers commented that this would put them 

at an unfair disadvantage as compared to lenders. 

 

31 “POC” is Paid Outside Closing. 

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Lenders earn the equivalent of yield spread premiums when they originate loans with the 

same interest rates as brokers. Lenders either sell the loans and receive premium prices or they 

keep the loans in portfolio and collect a stream of higher monthly payments which has a higher 

present value represented by the yield spread premium. So both kinds of originators face the 

same reward structure derived from interest rates. Brokers argued that the differential disclosure 

requiring them to report higher origination fees than lenders report is unfair (in other words, 

results in an “un-level playing field”). 

Examples. An example can illustrate how the requirement in the 2002 proposed rule for 

the wholesale lender in a brokered loan to pass through premium prices and discount points 

directly to the borrower might adversely affect the competitive position of brokers as compared 

to lenders. While lenders could continue to simply reduce explicit fees in the presence of 

premium rate loans, brokers could not.32 Suppose a broker and a lender are offering the same 

terms on a loan, and both have the same origination services fee, $3,000 and the same other 

settlement costs, $4,000. Assume that the interest rate on each loan is the same, is higher than 

par, and that the premium value of the loan is the same for both originators, $2,000. On today’s 

GFE, both originators could simply quote $1,000 for originator fees and keep the yield spread 

premium of $2,000. Today, the broker would have to report the yield spread premium as $2,000 

and paid outside of closing while the lender would report nothing. Both would report the other 

settlement costs of $4,000 and the total due from the borrower would be $5,000.

In the 2002 proposed rule (as well as with the 2008 proposed GFE), lenders could report 

origination fees of $1,000 and show it on line 1 (see Table 3-1). The lender does not have to 

show any credit, so $0 can be put on line 2. The subtotal on line A would also be $1,000. Other 

settlement costs (line B) would be $4,000 and the settlement cost total (A + B) would be $5,000. 

On a brokered loan, the 2002 proposed rule required that the interest rate dependent payment 

($2,000) be shown as a $2,000 lender payment to the borrower and then shown as minus (-) 

$2,000, since it goes to the borrower instead of being a payment by the borrower (see line 2 of 

Table 3-2). In order for the broker to get $3,000, the origination fee would have to show $3,000. 

The net loan origination charge would be $1,000, the other settlement cost would be $4,000, and 

the settlement cost total would be $5,000. 

 

32 Sales of loans by lenders are considered “secondary market transactions” which are exempt from RESPA scrutiny 

by HUD regulation. Even if they were not exempt, the premiums are often not available at closing. For example, 

the loan may never be sold, the loan may be sold after closing with the price unknown at closing, or only part of the 

loan gets sold. 

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Table 3-1 

SETTLEMENT COSTS 

 1. ORIGINATION FEES __$1,000__

 2. INTEREST RATE DEPENDENT PAYMENT __ 0__

 A. NET LOAN ORIGINATION CHARGE __$1,000__

 B. (OTHER SETTLEMENT COSTS) __$4,000__

 A + B. TOTAL SETTLEMENT COSTS __$5,000__

Table 3-2 

SETTLEMENT COSTS 

 1. ORIGINATION FEES __$3,000__

 2. INTEREST RATE DEPENDENT PAYMENT __-2,000__

 A. NET LOAN ORIGINATION CHARGE __$1,000__

 B. (OTHER SETTLEMENT COSTS) __$4,000__

 A + B. TOTAL SETTLEMENT COSTS __$5,000__

To see the originator segment of the cost of this loan, a knowledgeable shopper would 

ignore 1 and 2 and go to the "NET LOAN ORIGINATION CHARGE" in Tables 3-1 and 3-2 (or 

simply go to the “TOTAL SETTLEMENT COSTS” to determine the overall cost of the loan). 

The “NET LOAN ORIGINATION CHARGE” would be the same for the lender and the broker, 

$1,000. In this case, the “TOTAL SETTLEMENT COSTS” are the same, $5,000. The 

knowledgeable shopper would conclude that these two loans cost the same and the borrower 

would be indifferent between the two loan offers. In these cases, there would be no adverse 

impact on the broker relative to the lender. 

However, a potential problem arises if a shopper is not knowledgeable. A lender trying 

to convince a borrower to take his loan instead of the broker’s might try to focus the borrower’s 

attention on the reported origination fee the two charge: $3,000 for the broker (Table 3-2) and 

$1,000 for the lender (Table 3-1). The lender would try to keep the borrower’s focus away from 

the numbers that show the same total cost (i.e., the “NET LOAN ORIGINATION CHARGE”) 

and constantly emphasize the $2,000 additional fee charged by the broker. In the case of 

borrowers who cannot see through this erroneous argument, the lender will appear cheaper than 

the broker and is more likely to get the borrower’s business. In fact, borrowers whose attention 

is focused on the origination fee might be persuaded that a loan from a lender (see Table 3-3) 

with higher total cost than from a broker (Table 3-2) is better for them based on their comparison 

of the origination fees alone. While HUD had attempted to design the proposed GFE in the 2002 

proposed rule to reduce any anti-competitive effects between brokers and lenders, the proposed 

form did treat them differently, and the potential existed for anti-competitive effects against 

brokers.

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Table 3-3 

SETTLEMENT COSTS 

 1. ORIGINATION FEES __$1,500__

 2. INTEREST RATE DEPENDENT PAYMENT __ 0__

 A. NET LOAN ORIGINATION CHARGE __$1,500__

 B. (OTHER SETTLEMENT COSTS) __$4,000__

 A + B. TOTAL SETTLEMENT COSTS __$5,500__

The potential source of bias with the proposed form was that the first number a borrower 

would see would differ for the same loan with a YSP offered by a broker and a lender. The first 

fee on the broker’s form would be higher and, if the borrower failed to focus on the net loan 

origination charge, this could work to the competitive disadvantage of the broker. 

III.C. Summary of YSP Issue and Treatment in the Final rule 

As explained above, the problem and potential source of the anti-competitive effect is 

that some borrowers may not know how to comparison-shop. The numbers presented to them 

when applying for a loan may confuse them. They might not know that the first two numbers 

presented to them on the 2002 proposed form, origination fees and the interest rate dependent 

payment, are irrelevant to comparison shopping. They might see the higher figure for origination 

fees from a brokered loan and falsely conclude that such a loan is more costly than an equivalent 

loan from a lender. In addition to any confusion the borrower might fall into all on his or her 

own, a lender trying to convince a borrower to take his loan over a broker's might well draw the 

borrower's attention to the "high" origination fee of the broker as compared to the "low" 

origination fee of the lender and try to use this to convince the borrower that the broker's loan 

costs more. 

Less sophisticated borrowers are susceptible to making these mistakes all on their own or 

being drawn into them by lenders seeking a competitive advantage. Borrowers would be harmed 

by these mistakes if they selected a more costly loan as a result. So brokers and borrowers could 

be harmed by such outcomes. It is also true, however, that every broker will know about the 

potential for the borrower to misinterpret the fees disclosed under the different requirements. As 

a result, every broker will have a powerful incentive to effectively explain the correct 

interpretation so that loans are not misevaluated. This ought to serve as a powerful 

counterbalance to potential bias. 

In commenting on the 2002 proposed rule, brokers argued to eliminate the bias created by 

the proposed presentation of yield spread premiums in the 2002 GFE. They favored eliminating 

the fee for origination services and the interest rate dependent payment at the top of the 

disclosure listing the fees. Thus, all loans would be presented in the same terms regardless of 

whether originated by a broker or a lender. Comparison-shopping errors would be eliminated by 

the elimination of the numbers that led to these errors. Brokers and lenders would then compete 

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on accurate and relevant measures of cost to the borrower, the potential for borrowers to get 

tangled up in irrelevant numbers would be reduced, and comparison shopping should work better 

leading to a more competitive market for mortgages. 

Treatment of Premiums and Points in the Final GFE. The treatment of yield spread 

premiums and discount points remain the same in the final rule as they were in the 2002 

proposed rule (although additional changes were made to the form to reduce any anticompetitive impacts on brokers, including placing the disclosure to the second page of the GFE). 

The Department believes that the disclosure of yield spread premiums as offsetting other closing 

costs within the disclosure of the array of fees rather than as a separate disclosure elsewhere on 

the form is the best method for making the borrower aware of the existence of yield spread 

premiums and the tradeoff between interest rate and upfront cost of a mortgage loan. In addition, 

using it as an offset makes it more likely that yield spread premiums will be used to reduce 

settlement costs rather than increase broker compensation – in other words, using it as an offset 

seeks to change the behavior in today’s market where statistical studies indicate that yield spread 

premiums are too often used to increase broker compensation rather than to reduce consumer 

settlement costs. 

In response to the concern that this treatment may lead to consumer errors that impede 

comparison shopping and that disadvantage brokers, the Department has taken several steps to 

reduce the likelihood that borrowers will make systematic errors in evaluating loan offers from 

brokers. The Kleimann Communication Group, experts in form development, was hired to 

improve the form. They worked on the wording and layout with the goal of improving borrower 

comprehension of the cost of the loan. Several improvements relate to the chance of 

misinterpretation of the yield spread premium and total loan cost. 

First, the second entry on page 2 of the GFE is now called “Your credit or charge 

(points) for the specific interest rate chosen.” The yield spread premium is now identified with 

the following statement: “You receive a credit of $_____ for this interest rate of _____%. This 

credit reduces your settlement charges.” An interest rate-related charge is identified with: “You 

pay a charge of $_____ for this interest rate of _____%. This payment (discount points) 

increases your settlement charges.” These replace “(-) Lender Payment to the Borrower for 

Higher Interest Rate” and “(+) Borrower Payment to Lender for Lower Interest Rate” that were 

on the 2002 proposed form. The new description explicitly states what happens to the bottom 

line cost as the borrower chooses a higher or lower interest rate. In consumer testing, 

comprehension showed measurable improvement as a result. 

Second, an additional option has been added to “Your credit or charge (points) for the 

specific interest rate chosen.” The new option reads: “The credit or charge for the interest rate 

you have chosen is included in ‘Our origination charge.’ (See item 1 above).” This was added so 

that borrowers would not have questions about what was going on when some originators’ GFEs 

would have an entry and others would not. Lenders who choose not to report a figure as a credit 

or charge must check this option in “Your credit or charge (points) for the specific interest rate 

chosen.” 

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Third, a summary page has been added, moving the detailed list of costs to the second 

page. The summary page contains loan features as well as total settlement . Borrowers wanting 

to comparison shop could do so with this first page only in front of them. Loan terms, interest 

rate, monthly payment, and up-front charges are all there. The comparison shopper has all he or 

she needs to compare loans on this front page. No one could possibly be confused by the yield 

spread premium on the summary page because it is not there. Lenders and brokers are treated 

identically. 

Fourth, the table showing the trade-off between interest rate chosen and up-front cost has 

been improved. This is important because evidence suggests that consumers do not always 

understand the financial trade-off between higher (lower) interest rates and lower (higher) 

settlement charges. The explanations in this table are more closely tied in to the effect of the 

charge or credit for the specific interest rate chosen, the yield spread premium or discount points, 

on the whole transaction. The table now contains language indicating how the interest rate 

affects the bottom line: “Your lower interest rate will raise your settlement costs by $__” and 

“Your higher interest rate will lower your settlement costs by $__.” It is now easier for the 

borrower to realize that this table is tied into the concept underlying the figure in “your charge or 

credit for the specific interest rate chosen.” 

The table explaining the trade-off between the interest rate (and monthly payment) and 

settlement charges is on page 3 after the section describing tolerances. This table shows the loan 

amount, interest rate, monthly payment, and total settlement charges for the loan selected by the 

borrower for which this GFE is filled out. Then it shows the loan amount, interest rate, monthly 

payment, and total settlement charges for two actual alternative loans that were available to the 

borrower but not chosen, one at a higher rate and one at a lower rate. It also shows the change in 

the monthly payments and change in the total estimated settlement charges relative to the loan 

chosen. 

This shows the borrower several things. First, there are multiple mortgage interest rates 

available in the market, not just one. Second, there is a trade-off between the interest rate chosen 

and upfront charge to get a loan. Third, the borrower can see an example of what trade-offs are 

available in the market so that the borrower can decide whether it is in his or her best interest to 

finance some of the closing costs with a higher interest rate or, instead, to pay more upfront for a 

lower monthly payment. Of course, since this table will be on the form anyway, the originator is 

likely to show the borrower information like this before writing up the GFE so that the borrower 

gets the loan he wants written up the first time. While it is likely that a more conscientious 

originator would have explained these options anyway, this table makes it more likely that the 

other originators will do so now since the failure to do so might result in a bunch of questions on 

the topic, and a change in the loan requested, and the need to write-up a new GFE. Finally, the 

new language used in this section referring to the effect of the interest rate chosen on settlement 

costs complements the language used to describe the yield spread premium and discount points, 

which should improve the borrower’s comprehension of the trade-off between interest rate and 

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up-front fees and its relationship to yield spread premiums.33 Improving the borrower's 

comprehension of this relationship is one of his primary objectives of the final rule. 

Fifth, a “Mortgage Shopping Chart” has been added on the bottom of page 3of the GFE. 

It has spaces for the loan originator’s name, the loan amount, interest rate, term of the loan, 

monthly payment, other characteristics of the loan, and total estimated settlement charges. 

Borrowers can fill in the information for various loan offers and use the chart to help in 

evaluating and comparing them. It is designed to help borrowers comparison shop. 

 Sixth, arrows have been added to the subtotals on page two, “Your Adjusted Origination 

Charges” and “Your Charges for All Other Settlement Services,” as well as to the ”Total 

Estimated Settlement Charges” at the bottom of page two, and the bottom of the “Mortgage 

Shopping Chart.” This done to focus the borrower’s attention on the net or overall charges rather 

than any one component that might be meaningless considered by itself. 

The above-mentioned six changes along with the professional layout of the form will lead 

to good borrower comprehension of the information and minimize any potential adverse impact 

of disclosing yield spread premiums on borrowers who are comparing loans from brokers and 

lenders. Tests of the new GFE form indicate that consumers make the right decisions when 

comparing the costs of a broker’s loan with the costs of a lender’s loan. As explained in Section 

II.D.1, consumers in these tests correctly chose the cheapest loan over 90% of the time. 

IV. Permissibility of Average Cost Pricing and Negotiated Discounts 

Average Cost Pricing. The final rule clarifies that pricing based on average charges is 

not a violation of RESPA. The Department is seeking to make unambiguously clear that some 

pricing arrangements that will benefit consumers will now be allowed, but not those that might 

lead to uncontrolled kickback and referral payments. The Department will permit loan 

originators and third-party settlement service providers to adopt average cost pricing for services 

they buy, or make arrangements for, provided they use a documented averaging technique, 

charge the borrower no more than this average, and that the aggregate amount charged for the 

service does not exceed the aggregate amount actually paid to third parties for the service over 

the time the average charge was used. 

 

33 The borrower’s awareness of the trade-off is likely to be enhanced under the new rule if the borrower applies for a 

loan with even one broker. The new GFE’s treatment of YSPs is much more likely to get the attention of the 

borrower than a “YSP POC” item placed off to the side outside the number columns in the “800” series. This 

increased awareness of YSPs should lead the curious to find out where it comes from, if they do not already know, 

by bringing up the issue with the broker (or lender) and to find out how it is being used in their case (e.g., to offset 

closing costs). Once this understanding is acquired, the borrower should be able to interpret the figures disclosed 

and effectively comparison shop among brokers and lenders that offer a variety of trade-offs between settlement 

costs and yield spread premiums. 

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The final rule includes these provisions because HUD's current regulations implementing 

RESPA have sometimes been cited as obstacles to consumer-friendly business practices. 

Discussions at the RESPA Reform Roundtables during 2005 and additional comments from both 

industry representatives and consumer advocates have suggested the need for a more level 

playing field in the settlement process. In light of these suggestions, HUD has determined that, 

in its implementation of RESPA, there should be greater flexibility for pricing mechanisms that 

bring more innovation and increased price competition to the settlement process without 

violating the statutory requirements of RESPA. 

Currently, with transaction specific price requirements, all individual prices must be 

precisely tracked and assigned properly to each borrower. If there are any changes, these must 

be noted and changed for all the records that will be the source of the HUD-1 entries. 

Inadvertent tolerance violations might occur if the increase in prices is large enough. 

Average cost pricing also has the advantage of eliminating the need to precisely follow 

each exact price for every service. GFEs can be filled out with the average as permitted by the 

Department. HUD-1s can be filled out in the same way. Borrowers get charged no more than 

what they were told at the GFE stage. Providers collect what they expected to get. On average, 

this would be acceptable to the party charging the average. Sometimes the individual price is 

higher, sometimes lower, but it averages out in the end. If that were unacceptable to the loan 

originator, for example, they would not utilize average cost pricing. 

Another consequence of average cost pricing is a reduction in internal administrative 

costs that results from the elimination of the need to follow who does what and for what price for 

every third-party service associated with the loan. The end result is that the cost of filling out a 

GFE is reduced, internal costs are reduced, and the cost of generating HUD-1 figures is reduced. 

So there are savings in compliance costs and internal costs. Competition will create pressure for 

these savings to be passed on to borrowers. 

Lender comments to the proposed rule of 2002 and discussions during the RESPA 

Reform roundtables in 2005 continued to cite a need for a complete exemption from Section 8 

before lenders could seek discounts, including volume-based discounts, and to utilize average 

cost pricing. In advance of that proposal, HUD had determined that in order to fully develop the 

potential to reduce closing costs, loan originators would need to be able to seek discounts and to 

utilize average cost pricing. The final rule relies on adapting the GFE requirements to broaden 

the mortgage lending and settlement services marketplace, without a need for specific packaging 

proscriptions and requirements or a section 8 exemption. 

HUD believes that no such exemption is necessary in order to permit discounting and 

average cost pricing. Rather, HUD has determined that RESPA provides enough flexibility to 

permit a variety of approaches to fee calculations average cost pricing, so long as they do not 

unnecessarily increase fees charged to the consumer. During the 2005 RESPA Roundtables, 

some loan originators and third-party settlement service providers also took the position that 

neither a full Section 8 exemption nor formal authority for packaging is needed. These providers 

believed that the development of average-cost pricing could promote lower prices. This final 

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rule would obtain the benefits of average cost pricing in the GFE context without the need for a 

Section 8 exemption. 

Discounts. The 2008 proposed rule encouraged volume discount arrangements, which 

would lead to more competitive third-party prices, by clarifying that volume discounts are legal 

as long as the cost reduction is passed along to consumers. In the final rule, HUD has decided 

not to implement the proposed changes at this time. 

V. Tolerances on Settlement Costs 

A fourth feature of the changes to the GFE is to more strictly interpret the term “good 

faith.” Currently, there is no objective accuracy standard to which originators are held when 

filling out the numbers on the GFE. The final rule contains zero tolerance for error in some 

categories, a 10 percent tolerance standard for some others, and no required tolerance standard 

(no change from today’s rules) for the rest. This would reduce or eliminate surprise fees at the 

settlement table. Subsection V.A describes the tolerances and subsection V.B and V.C discusses 

the rationale and impacts of tolerances. Subsections C and D discuss several issues raised in the 

comments concerning the market implementation of tolerances – and HUD’s response to those 

issues. 

V.A. Zero and 10 Percent Tolerances34

Zero tolerance would apply to the charges that the originator should know: his own 

origination charge, as indicated by “Our origination charge” in item #1 on page 2 of the new 

GFE and transfer taxes.35 After the borrower locks the interest rate, the credit or charge (points) 

for the specific interest rate chosen is also subject to zero tolerance as is, by arithmetic, the 

adjusted origination charge. The rationale for zero tolerance is that any originator should know 

its own fee, as well as applicable transfer taxes. As will be discussed below, there were some 

issues raised (a) about the lender's ability to determine its charge within the three-day period 

allowed before GFE issuance and (b) about the need for adjustments in costs when there were 

legitimate but unforeseeable events that lead to extra work and costs. These issues are discussed 

in subsections C and D below. 

An overall 10 percent tolerance, with protection coming from the originator, would 

apply to the charges for all of the required third-party services except those where the borrower 

 

34The zero and 10 percent tolerances discussed in this section would be in effect “absent changed circumstances” 

beyond the originator’s control such as acts of God, war, disaster, or any other emergency, marking it impossible or 

impractical to perform, or new or different information about the borrower or transaction from that used to generate 

the GFE. A list of examples is provided in the proposed rule (e.g., flood insurance, a second appraisal, and extra 

title work to clear up a problem). 

35 There is also zero tolerance on points in item #2, once the borrower locks in his or her interest rate. 

 3-66 
selected a provider that was not identified by the originator.36 In other words, the 10 percent 

protection for the borrower would apply for the services where the provider was selected by the 

originator and for the services where the borrower asked for and utilized originator-identified 

providers for the title services and title insurance and the borrower-selected third-party 

services.37 The 10 percent tolerance is an overall tolerance rather than a set of individual 

tolerances. All of the items on the GFE with the 10 percent tolerance protection would be 

summed and compared to the sum of those entries on the HUD-1. If the sum of the HUD-1 

entries is greater than the sum of the GFE entries, the borrower would have to cover the first 10 

percent of the excess. The rest of the excess would have to be covered by the loan originator. 

The originator could have arrangements set up for settlement services to be provided for its 

customers at a predetermined price, protecting the originator from prices beyond the tolerance. 

The originator could also have lined up a settlement service subpackage (which are increasingly 

appearing on the market) provided by a third-party settlement provider. Or the originator could 

survey the market and make referrals without any arrangements with settlement service 

providers, but the originator would have to hope that no settlement service provider to whom it 

makes referrals suddenly raises prices to take advantage of the tolerances. HUD's reasoning 

behind changing the tolerance for lender-selected services from zero percent in the 2002 

proposed rule to being included in the overall 10 percent tolerance is discussed in subsections C 

and D below.

There would be no tolerance protection on homeowner’s insurance, per diem interest, 

escrow reserves, or optional borrower’s title insurance. Homeowners often choose greater 

hazard insurance coverage that costs more than the minimum required by lenders, so tolerances 

would be inappropriate. Per Diem interest depends on the closing date, which is not always 

easily predictable. Any excess in the escrow account will be returned when the first annual 

escrow analysis is performed. Borrower’s title charges are simply a matter of consumer choice. 

Originators do not receive any of these charges except the per diem interest and that charge is the 

result of the interest rate on the note and the day of the billing cycle on which the loan settles. 

V.B. Tolerances: More Detailed Analysis 

The final rule maintains the zero tolerance on the originator’s charge (called “Our 

origination charge” on item #1 of page 2 of the GFE). As explained in Section V.B below, the 

Department believes that three days is long enough for the originator to determine his own price 

for the product he chooses to offer to the borrower. Arguments to the effect that three days is 

insufficient for the originator to determine his prices for the products he sells were not 

persuasive. Once the borrower locks in the interest rate, there is also zero tolerance on discount 

points or the yield spread premium (item #2). Since any premium or discount cannot be known 

 

36 Upfront private mortgage insurance premium is included in the overall 10 percent tolerance as are government 

recording fees. 

37 The 10 percent tolerance also applies for any required services where the originator does not select the vendor and 

identifies no providers for the borrower, 

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until the borrower locks the interest rate, the composite figure called “Your Adjusted Origination 

Charges” (item A, which combines items #1 and #2) cannot also be known until the lock takes 

place. Thus, the zero tolerance for this figure must await the lock. 

Zero tolerance also applies to transaction taxes. These are dependent on the location of 

the mortgaged property and are easily determined from the details of the transaction. If 

something causes the amount to change, like a difference in house price that significantly 

changes a transfer tax amount, a new GFE is to be issued. Government recording charges are in 

the 10 percent tolerance category in the final rule based on public comments that these amounts 

are usually a very small part of the transaction, and may not be known until an actual page count 

of recorded documents is established just before closing. 

Allowing transfer taxes to be included in the 10 percent tolerance, or allowing them to be 

outside the tolerances, provides an incentive for originators to provide inaccurate GFEs. For 

example, if transfer taxes were not subject to tolerances, originators would have an incentive to 

underestimate them to make their loans look cheaper to shoppers. Similarly, if transfer taxes 

were subject to the 10 percent tolerance, they would inflate the denominator over which the 10 

percent is computed meaning there is more room available for prices of settlement service to 

increase at settlement. In this case, there may be an incentive to overestimate transfer taxes. The 

zero tolerance on the daily per diem interest has been eliminated and no tolerance applies. Total 

per diem interest is the product of the number of days from the closing until the first day of the 

regular mortgage cycle times the daily per diem rate. The total cannot be guaranteed since the 

closing date is never certain. Thus, the total fee cannot be guaranteed. This diminishes the value 

of guaranteeing a component, especially since the guarantee does not come into existence until 

the borrower locks the interest rate and establishes a firm closing date. 

Some third-party services that are required by the lender are chosen by the borrower 

rather than by the lender. In the final rule, there is still no tolerance protection that applies where 

the borrower chooses vendors not identified by the originator. In the case where the borrower 

asks for a referral and uses a provider to whom he or she was referred, the overall 10 percent 

tolerance (lender selected and lender referred) applies in the final rule. If the originator does not 

identify providers of any required service that the borrower must shop for, the 10 percent 

tolerance still applies to the originator’s estimates for those services on the GFE. As explained 

in Section V.A, this tolerance was not set at zero for several reasons. First, it might not be 

known at the time of application exactly what services are needed to close the loan. With title 

services, for example, it could range from the preparation of powers of attorney to clearing up a 

complicated title issue. The overall 10 percent tolerance is only a partial solution. If lenderselected and lender-referred third-party services come to $1600, the tolerance would cover 

problems costing up to $160. Problems that require more than the overall 10 percent to remedy 

need some kind of an exception, which is explained in Section V.E below.

The escrow account deposit is not subject to tolerances. This is because originators have 

little incentive to put too much in the escrow account. They cannot pocket the excess as profit as 

they would in the case of an origination fee. And any higher balance in the escrow account 

would be returned to the borrower when the first annual escrow analysis is performed at the end 

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of the first year of the loan. There seems to be little danger to the borrower from eliminating this 

tolerance. 

Homeowner’s insurance remains the same with no tolerance applying, since the 

homeowner decides on the level of coverage and, therefore, the price. 

V.C. Impact of Tolerances 

The tolerances will lead to well-informed market professionals either arranging for the 

purchase of the settlement services or at least establishing a benchmark that borrowers can use to 

start their own search. Under either set of circumstances, this should lead to lower prices for 

borrowers than if the borrowers shopped on their own (or if the borrower simply relied on a 

referral) since the typical borrower’s knowledge of the settlement service market is limited, at 

best. In addition to lower prices, the prices quoted are likely to be more reliable, without 

surprises at settlement, since the originator could retaliate by cutting off the settlement service 

provider who comes to the closing table with too many surprises. The result will be lower prices 

for the other settlement services. This is a transfer from other settlement service providers. The 

recipient is either the borrower or the lender. To the extent that the market for loans is more 

competitive, competition for borrowers will tend to force these savings to be passed on to 

borrowers. To the extent that these markets are less competitive, there will be less pressure for 

these benefits to be passed on. So the recipients of these transfers will be either borrowers or 

originators depending on the degree of competition in the mortgage market. Evidence reviewed 

in Chapter 2 indicates that the mortgage market can be quite competitive when consumers are 

well informed, which suggests that borrowers will be the main recipients of these transfers. 

Tolerances should also lead to a reduction in unexpected fees at closing. Where 

tolerances apply, the originator may be liable under State breach of contract law for whatever 

charge is in excess of the tolerance. The originator’s service charge, with zero tolerance, should 

have no surprises. Lender required and selected third parties should have few surprises. Lenderrequired but borrower-selected third parties should have few surprises if the borrower asks the 

originator where to go so that the tolerance protection applies. Originators can retaliate against 

any third parties who do not charge the expected prices. At the least, the offenders can be cut off 

from future business. The tolerances will not protect the borrower from unexpected fees in the 

event that the borrower buys his or her own third-party services without the referral. 

As the above discussion emphasizes, tolerances are aimed at controlling third-party fees 

as well as origination fees. It is anticipated that originators will seek to protect themselves from 

tolerance violations. When asked for a referral, the originator could simply refer the borrower to 

a third-party firm with whom the originator has a prearranged price for the borrower. This 

reduces the originator’s tolerance risk for the included services. Subsections D and E will pull 

together various issues related to tolerances, origination costs, and third-party costs. Section IV 

above has already discussed the permissibility of discounts, a feature of the final rule that relates 

to the tolerances. 

 3-69 
V.D. Tolerances: Comments and Further Discussion 

Comments on the 2008 Proposed Rule. Many commenters expressed various degrees of 

support for the concept of tolerances. A trade group, representing mortgage brokers as well as 

some large lenders expressed support for the concept of tolerances, albeit with certain 

clarifications or modifications. However, the strongest support for tolerances came from federal 

banking regulators and from groups representing consumer interests. These commenters agreed 

that unexpected increases in costs between those provided in the GFE and those actually charged 

at settlement are a significant problem for prospective borrowers, and that the tolerances 

proposed by HUD would be an effective way of preventing such surprises. These commenters 

made various suggestions for strengthening the tolerance provisions to provide additional 

protections for borrowers. Suggestions included calculating the tolerances item-by-item rather 

than by grouping certain items together and strengthening enforcement. 

Most lenders, trade groups representing lenders, and trade groups representing other 

settlement service providers were generally opposed to the proposed tolerance provisions. These 

commenters stated that tolerances and particularly the zero tolerance for loan originator charges 

are equivalent to a settlement cost guarantee, and therefore conflict with the explicit statutory 

requirement for an estimate of settlement charges. Several comments reviewed the legislative 

history of section 5 of RESPA, emphasizing that the statute was designed “to provide the 

prospective homebuyer with general information as to what their costs will be at the time of 

settlement.” H.R. Rep. No. 667, 94th Cong., 1st Sess., at 2, 1975 U.S.C.C.A.N. 2448, 2449 

(Nov. 14, 1975) (emphasis added). These commenters also stated that tolerances may be 

inconsistent with the statutory provision permitting disclosure of a range of charges for 

settlement services. 

Trade groups representing other settlement servicer providers, especially realtors and title 

companies, focused on the potential anticompetitive effects of the tolerance provisions. These 

groups suggested that large lenders would seek to manage the risks associated with tolerances by 

contracting with large third party settlement service providers, and thereby placing small 

settlement service providers at a competitive disadvantage. 

In addition to their general objections to the tolerance provisions, lenders and trade 

groups representing lenders and other settlement service providers strongly supported removing 

government recording and transfer charges from the tolerances. They stated that these charges 

are outside of the control of the loan originator and cannot be known with any certainty at the 

time the GFE is provided. 

Several lenders and trade groups representing lenders suggested alternatives to the 

proposed tolerance provisions. For example, certain trade groups representing lenders 

recommended that tolerances not apply to the initial GFE, which would be used as a shopping 

tool, but tolerances would apply only to a “final” GFE that would be provided after a full 

mortgage application had been completed. These trade groups also supported more flexibility in 

the tolerance for the loan originator’s own charges, suggesting a five percent tolerance rather 

than a “zero tolerance.” Another alternative suggested by at least one lender was to evaluate 

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overall compliance with tolerances rather than compliance on a loan-by-loan basis. This 

suggestion, according to the commenter, would alleviate many of the difficulties in anticipating 

unusual aspects of individual loans but still hold lenders accountable for providing GFEs that, as 

a rule, accurately reflect charges at settlement. Another suggestion offered was to make 

providing a list of third party settlement service providers to prospective borrowers optional, 

with tolerances only applying where the loan originator selected the service provider or where 

the loan originator provided a list of service providers. 

Based on the comments received in response to the proposed rule, HUD has revised a 

number of provisions dealing with the tolerances, and in particular has clarified the situations 

where the loan originator would no longer be bound by the tolerances. However, HUD has 

determined that only limited changes are necessary in the tolerance provisions themselves. 

Through all of these provisions, the final rule seeks to balance the borrower’s interest in 

receiving an accurate GFE early in the application process to enable the borrower to shop 

effectively, with the lender’s interest in maintaining flexibility to address the many issues that 

can arise in a complex process such as loan origination. 

Many commenters recommended changes to the size of the tolerances for different 

categories of settlement costs, especially the zero tolerance for loan originator charges. With one 

exception described below, the final rule does not change the amounts of the tolerances 

permitted for the different categories of settlement costs. As noted in the proposed rule, HUD 

considered the best available data on the variation in the costs of settlement services, in particular 

title services, in determining that a 10 percent tolerance is reasonable. No commenters submitted 

or identified any alternative data sources that would support expanding the tolerances beyond 10 

percent. 

With respect to the zero tolerance for a loan originator’s own charges, HUD recognizes 

the comments characterizing the tolerance as a settlement cost guarantee. However, the final 

rule provides substantial flexibility to loan originators in providing a revised GFE when 

circumstances, unforeseeable or otherwise, necessitate changes. By providing such flexibility, 

HUD intends to prevent only those increases in the loan originator’s charges that are made in 

“bad faith.” Section 19(a) provides explicit authority for the Secretary to make such 

interpretations as may be necessary to achieve the purposes of RESPA. Providing a clear, 

objective standard for what constitutes “good faith” under section 5 of RESPA is necessary to 

provide more effective advance disclosure to home buyers and sellers of settlement costs, and as 

such, falls directly within the Secretary’s interpretive authority under section 19(a). In the 

context of residential mortgage negotiations, HUD finds that the term “good faith” requires that, 

once a loan provider has quoted in writing a certain price as the cost of its own services in a 

specific transaction and absent the relevant exceptions mentioned elsewhere in the rule, the 

provider must adhere to the quoted price. 

The one exception to the amounts of the tolerances remaining the same as in the proposed 

rule is the tolerance for the government recording and transfer charges. HUD has adjusted how 

these charges are treated under the tolerances, based on the numerous comments received on this 

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issue. The final rule splits the government recording and transfer charges into two categories: 

government recording charges, and transfer taxes. 

Transfer taxes should generally be known at the time the GFE is provided, so those taxes 

continue to be subject to a zero tolerance. If there are changes in the tax rates or in the price of 

the property after a GFE is provided, those changes would either constitute unforeseeable 

circumstances or new information that would be the basis for providing a revised GFE. It is 

HUD’s view that these provisions will provide sufficient flexibility to protect loan originators 

from changes outside their control, while still preventing loan originators from providing “lowball” estimates of transfer taxes on the GFE that could mislead prospective borrowers. 

Government recording charges, in contrast, often may not be known with any certainty at the 

time the GFE is provided, and in many cases not until close to or at closing. Therefore, HUD has 

determined that these charges should be included with the third party charges that are subject to 

an overall 10 percent tolerance. Because the government recording charges typically are small in 

relation to other settlement costs, this should provide ample flexibility to loan originators on 

these charges without unduly impacting the permitted tolerances for other third party settlement 

charges. 

Response to Comments. HUD has made a number of changes to the tolerances 

provisions to clarify and provide additional flexibility in managing the tolerances. The final rule 

adds a new paragraph providing loan originators with an opportunity to cure any violation of the 

tolerance by reimbursing the borrower any amount by which the tolerances were exceeded. This 

reimbursement may be made at settlement or within 30 calendar days after settlement. HUD will 

deem a payment to have been provided in a timely fashion if it is placed in the mail by the loan 

originator within 30 calendar days after settlement. HUD has determined, based on the 

comments received, that 30 calendar days provides sufficient time for loan originators to identify 

and cure any tolerance violations through their post-closing review process. In most cases, 

HUD expects that violations will be identified at or before settlement when completing the 

revised HUD-1 form, which provides a clear format for comparing the charges estimated on the 

GFE with those actually imposed at settlement. 

The opportunity to cure violations of the tolerances is an important tool for loan 

originators to manage compliance with the tolerance requirements. Many lenders and groups 

representing lenders and other settlement service providers objected to the imposition of 

tolerances because of the difficulty of providing accurate estimates to prospective borrowers 

early in the application process. The opportunity to cure will permit loan originators to give an 

estimate of expected settlement charges in good faith, without subjecting them to harsh penalties 

if the estimate turns out to be lower than the actual charges at settlement. 

HUD has also made clarifying changes to the proposed provision describing the 

circumstances in which the GFE can be revised. As described in more detail below, 

unforeseeable circumstances that result in higher costs can be a basis for providing a revised 

GFE. In addition, information that was either not known at the time the original GFE was 

provided may also be the basis for providing a modified GFE. 

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V.E. Changed Circumstances 

The March 2008 proposed rule provided that loan originators would not be held to 

tolerances where actions by the borrower or circumstances concerning the borrower’s particular 

transaction result in higher costs that could not have reasonably been foreseen at the time of the 

GFE application, or where other legitimate circumstances beyond the originator’s control result 

in such higher costs. The proposed rule also provided that if unforeseeable circumstances would 

result in a change in the borrower’s eligibility for the specific loan terms identified in the GFE, 

the borrower must be notified of the rejection for the loan and be provided a new GFE if another 

loan is made available. 

Comments on the 2008 Proposed Rule. Most of the commenters who commented on 

unforeseeable circumstances generally supported the proposed rule’s provision on this matter, 

but many recommended changes or additions to the proposed definition of unforeseeable 

circumstances. Several lenders and trade groups representing lenders indicated that, while 

“unforeseeable circumstances” encompasses many things that would fall under the statutory 

requirement that estimates of settlement costs be in “good faith,” the two concepts are not always 

equivalent. Some commenters suggested that the definition be expanded or clarified to include 

any situation that is outside the lender’s control, even if such situation involves a change that 

occurs often enough to be “foreseeable” in some sense. An example of such situation that was 

offered is that in which the changes in the price of the property or in the estimated value of the 

collateral may necessitate new information about the credit quality of the borrower that is 

developed during the underwriting process, or any other situation for which there is a reasonable 

explanation and still consistent with “good faith.” 

Several commenters, including FTC staff and a trade group representing mortgage 

brokers, found the proposed definition of “unforeseeable circumstances” to be vague. They 

suggested adding specific examples of common situations to clarify the scope of “unforeseeable 

circumstances.” 

These commenters also offered suggestions regarding the definition. A group 

representing consumer interests recommended that HUD carefully monitor how often 

unforeseeable circumstances override the tolerance requirements to ensure that the exception 

does not swallow the rule. A joint comment letter from groups representing state regulators 

suggested that a provision be included requiring loan originators to provide written notice to 

borrowers describing the “unforeseeable circumstance” that resulted in the higher costs. 

HUD Response to Comments. Based on the comments received in response to the 

proposed rule, HUD has made a number of changes to the proposed provisions describing the 

circumstances in which the GFE can be revised. HUD has determined that several changes are 

needed to the proposed grounds for providing a revised GFE. 

The final rule clarifies the different types of circumstances that can be a basis for 

providing a revised GFE. The final rule continues to emphasize that market price fluctuations by 

themselves are not unforeseeable circumstances. For example, if an appraiser that a loan 

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originator intends to use for a particular transaction raises its prices by $50 after the loan 

originator has already provided a GFE, that increase would not constitute an unforeseeable 

circumstance. 

HUD recognizes that numerous commenters recommended elaborations of, or technical 

changes to the definition of unforeseeable circumstances. Because many of the changes 

described in the proposed definition of “unforeseeable circumstances” happen frequently enough 

that they could be reasonably foreseen, the final rule replaces the definition of “unforeseeable 

circumstances” with a new definition for “changed circumstances.” However, the types of 

circumstances included in the new definition are similar to the types of circumstances that were 

included in the proposed rule. The first clause in the definition of unforeseeable circumstances 

still includes acts of God, war, disaster, or other emergencies. The final rule clarifies that the 

other circumstances in the second clause are separate from and in addition to the circumstances 

listed in the first clause. The final rule also clarifies that the other circumstances include 

situations where information particular to the borrower or the transaction either change or are 

later found to be different from what was known at the time the GFE was provided. For 

example, new information affecting the borrower’s credit quality or a change in the loan amount 

might occur often enough to be reasonably foreseeable, but they would still fall within the types 

of circumstances included in the second clause of the definition of “changed circumstances.” 

Under the final rule, changed circumstances that result in an increase in settlement costs 

such that the tolerances would be exceeded or that result in a change in a borrower’s eligibility 

for the loan offered may be the basis for providing a revised GFE. For example, if the actual 

loan amount turns out to be higher than the loan amount indicated by the borrower at the time the 

GFE was provided, and certain settlement charges that are based on the loan amount increase as 

a result, the loan originator may provide a revised GFE reflecting those higher amounts. 

Compliance with the tolerance provisions would be evaluated by comparing the revised GFE 

with the actual amounts charged at settlement. 

Similarly, if underwriting and verification show that a borrower’s monthly income is 

different from the income relied on in providing the original GFE, and the difference results in a 

change in the borrower’s eligibility for that loan with those particular terms, the loan originator 

would no longer be bound by the original GFE. If a loan with different terms is available for that 

borrower, then the loan originator would have the option of providing a modified GFE. 

Conversely, as an example, if the borrower’s total assets were relied on in providing the original 

GFE, and those assets are not materially different from what was stated at application, then the 

borrower’s total assets may not be used a basis for providing a revised or modified GFE. 

While these changes are intended to provide loan originators with more flexibility in 

providing revised GFEs, HUD is also mindful of the potential for abuse. Unscrupulous loan 

originators might seek to avoid providing a reliable GFE by claiming not to have relied on 

information provided by the prospective borrower. In order to discourage loan originators from 

providing “generic” GFEs that are not based on a preliminary evaluation of a particular 

borrower, the final rule limits the ability of loan originators to provide a revised GFE based on 

information that was collected prior to providing the GFE. However, if a loan originator 

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documents that it relies on a limited range of information in providing GFEs to borrowers, the 

loan originator may provide a revised GFE based on any other information that results in 

increased settlement costs or a change in the borrower’s eligibility, even if the information was 

received by the loan originator prior to providing the GFE.. Loan originators are presumed to 

have relied on the same minimum information that must be collected by the lender before 

providing a GFE: the borrower’s name, the borrower’s monthly income, the property address, 

the borrower’s best estimate of the value of the property, the amount of the mortgage loan 

sought, and any credit report that is obtained by the loan originator before providing the GFE. 

These limitations on providing a revised GFE only apply if subsequent underwriting and 

verification confirm that the information remains substantially the same as the information 

provided by the borrower at the time of the GFE. For example, if the borrower’s monthly 

income turns out to be substantially less than the monthly income stated by the borrower in the 

initial application, the final rule would not prevent the loan originator from either providing a 

revised GFE or from denying the loan altogether. If the loan originator decides to provide a 

revised GFE, HUD encourages the loan originator to explain to the borrower the reasons for 

providing a revised GFE based on the changed circumstances. 

Several other provisions in the final rule that permit revisions to the GFE have not 

changed significantly from those proposed. The final rule provides that a revised GFE may be 

provided if a borrower requests changes in the loan product, such as changing from a 30-year 

term to a 15-year term, or from a fixed rate mortgage to an adjustable rate mortgage. A revised 

GFE would be permitted whether such change is first suggested by the loan originator, or by any 

other party. The final rule also provides that if a prospective borrower does not express an intent 

to continue with an application within 10 business days of receiving the original GFE, or such 

longer time specified by the loan originator on the GFE, the loan originator is no longer bound 

by the GFE. While HUD does not intend the GFE form to in any way affect state laws regarding 

contract formation, this provision is intended to make clear that the estimated charges on a GFE 

are not open-ended. 

The final rule also clarifies that, where a borrower has not locked a particular interest 

rate, or where an interest rate lock has expired, all interest rate-dependent charges on the GFE are 

subject to change. The charges that may change include the charge or credit for the interest rate 

chosen, the adjusted origination charges, and per diem interest. The loan originator’s service 

charge, shown in block 1 on page 2 of the GFE, is not subject to change even if the interest rate 

floats. Of course, the various specific places where the interest rate is identified on the GFE 

would also be subject to change if the interest rate is not locked. If the borrower later locks the 

interest rate, a revised GFE should be provided at that time to show the revised information. 

Finally, the final rule includes the proposed provision on revision of the GFE for 

transactions involving new home purchases. HUD recognizes that in cases of new construction, 

the original GFE may be provided long before settlement is anticipated to occur. In those cases, 

the loan originator may provide a clear and conspicuous disclosure to the borrower that a revised 

GFE may be provided at any time up until 60 calendar days prior to closing. If no such 

disclosure is provided, or if no revised GFE is actually given, then compliance with the 

tolerances will be evaluated by comparing the charges on the original GFE with the actual 

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charges at settlement. During the 60 calendar days prior to closing, a revised GFE may only be 

provided in accordance with the other paragraphs in this section. 

In any case where a revised or modified GFE is provided to a prospective borrower, the 

loan originator is required to document the reasons for changes that are made and to maintain 

that documentation for 3 years after settlement. 

VI. Additional Topics 

The 2008 proposed rule includes a number of changes that HUD made concerning the 

implementation of the GFE, in addition to those already discussed. This section briefly describes 

some of the more significant of these changes and their rationale. The section begins with one of 

the more important changes – the definition of an application. 

VI.A. Definition of an Application 

The March 2008 proposed rule provided separate definitions for a “GFE application” and 

a “mortgage application” in an effort to promote shopping. Under the proposed rule, a loan 

originator would have provided a borrower a GFE once the borrower provided the originator six 

pieces of information that included: borrower’s name, Social Security number, property address, 

gross monthly income, borrower’s information on the house price or best estimate of the value of 

the property, and the amount of the mortgage loan sought. The rule provided that the GFE 

application would have to be in written form, and if provided orally, would have to be reduced to 

a written or electronic record. Under the March 2008 proposed rule, a separate GFE would have 

to be provided for each loan where a transaction involved more than one mortgage loan. 

The proposed rule would have required that once a borrower chose to proceed with a 

particular loan originator, the loan originator could require the borrower to provide additional 

information through a “mortgage application” in order to complete final underwriting. This 

additional information could be used to verify the GFE, and could include income and 

employment verification, property valuation, an updated credit analysis, and the borrower’s 

assets and liabilities. 

The March 2008 proposed rule provided that a borrower could be rejected at the GFE 

application stage if the loan originator determined that the borrower was not credit worthy. The 

borrower could not be rejected at the mortgage application stage unless the originator determined 

there was a change in the borrower’s eligibility based on final underwriting, as compared to 

information developed for such application prior to the time the borrower chose the particular 

originator. Under the proposed rule, the originator would have been required to document the 

basis for such a determination and maintain the records for no less than three years after 

settlement. 

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The March 2008 proposed rule also provided that where a borrower was rejected for a 

loan for which a GFE had been issued, but the borrower qualified for a different loan program, 

the originator would have to provide a revised GFE. If a borrower was rejected for a loan and no 

other loan product could be offered, the borrower would have to be notified within one business 

day and the applicable notice requirements satisfied. 

Under the March 2008 proposed rule, for loans covered by RESPA, the TILA disclosures 

would be provided within 3 days of a written GFE application, unless the creditor, i.e. loan 

originator, determined that the application could not be approved on the terms requested. The 

proposed rule indicated that based on consultations with the Federal Reserve Board, when a GFE 

application is submitted, an initial TILA disclosure would also have to be provided so long as the 

application is in writing, or, in the case of an oral application, committed to written or electronic 

form. HUD noted that whether a GFE application under a particular set of facts triggers the 

Home Mortgage Disclosure Act (HMDA) or the Equal Credit Opportunity Act (ECOA) 

requirements would be determined under Regulation B and Regulation C, as interpreted in the 

Federal Reserve Board’s official staff commentary. 

Comments on the 2008 Proposed Rule. Consumer representatives supported early 

delivery of the GFE, which, under the proposed rule, would be issued when a lender receives the 

proposed “GFE Application.” However, they emphasized that enforcement and private rights of 

action are necessary to ensure that a meaningful GFE will be provided to consumers early in the 

mortgage application process. 

Consumer representatives also raised the issue of whether HUD’s definition of “GFE 

Application” triggers other regulatory requirements. They recognized the Federal Reserve 

Board’s rulemaking authority under ECOA and the Fair Credit Reporting Act (FCRA) and 

indicated that requirements under these statutes and their implementing regulations would be 

triggered by the newly defined GFE application. They noted that current definitions in both 

statutes and their implementing regulations cover the GFE application. 

According to their comments, the application of ECOA and FCRA to the GFE 

application is important because such application ensures binding and accurate disclosures. 

These commenters recommended that HUD coordinate with the FTC to ensure that the GFE 

application remains covered by ECOA and FCRA. 

Industry representatives expressed significant concerns about the “GFE Application” and 

“Mortgage Application” approach under the March 2008 RESPA proposal. Specifically, they 

expressed concerns about the limited information originators would be permitted to collect in 

order to conduct preliminary underwriting before issuing a GFE. One commenter stated that this 

limitation precludes an originator from considering, at the GFE application stage, important 

information that a lender currently collects early in the transaction in order to develop a GFE. 

Some of those additional items include loan product type sought, purpose of loan, and 

information to compute the loan-to-value ratio. The commenters claimed that limiting 

consideration of this type of information would make it difficult for originators to provide a 

meaningful GFE because they would be unable to provide any reliable estimate of cost or 

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determine a borrower’s ability to repay the loan. They also stated that the inability to consider 

important underwriting information until the mortgage application stage would result in the 

issuance of more than one GFE. The net result, they concluded, would lead to borrower 

confusion and increased costs to the borrower. 

Industry commenters also expressed further operational concerns related to the 

limitations on underwriting information at the GFE stage. They stated that the limitation on 

information that loan originators can take into consideration in developing a GFE, would force 

lenders to develop systems that could underwrite based on very limited information. They 

further stated that the originator would not have sufficient information to determine the type of 

property the consumer is considering – such as whether the property is commercial, industrial, 

vacation, or residential – or the type of loan the consumer is considering such as a purchase 

money loan, refinance, or home equity loan. They stated it is important for the lender to have 

this information because the lender may not engage in the kind of lending a consumer seeks. 

In addition, industry commenters expressed confusion over whether a credit report was 

one of the six pieces of information they could collect as part of the GFE application, and 

requested that HUD provide such clarification. Industry representatives also requested that HUD 

permit borrowers to expedite the application process and proceed to the mortgage application 

stage where the borrower so desires due to timing or other concerns. 

Industry representatives stated that the new application definitions in the March 2008 

proposed rule would present uncertainty in complying with other mortgage related statutes and 

regulations. They commented that compliance with other statues and regulations is triggered by 

a mortgage “application.” Because HUD’s proposal includes both a “GFE Application” and a 

“Mortgage Application”, they commented that it is not clear which one is the “application” for 

purposes of compliance with other regulations. In particular, lenders expressed concern with the 

possibility that the “GFE Application” would trigger compliance obligations under FCRA, 

ECOA, HMDA and the TILA requirements. They requested that ambiguities surrounding 

compliance with these statutes and other laws be addressed to provide clarity and mitigate 

litigation exposure. For example, one lender noted that to calculate the spread for high cost loans 

under Regulation Z and many state predatory lending laws, the index used is based on the month 

in which the “application” for credit is received by the creditor. This lender stated that it was 

not clear from the proposed rule whether the GFE application is an application for purposes of 

Regulation Z. 

Industry commenters expressed confusion about preamble statements regarding whether 

HMDA or ECOA is triggered by the GFE Application. They indicated that the preamble stated 

that whether HMDA or ECOA is triggered by the GFE Application should be determined under 

Regulations C and B as interpreted by the Board. They noted, however, that the preamble stated 

that based on consultations with the Federal Reserve Board, TILA disclosures would be provided 

within three days of a written GFE application unless the creditor determines that the application 

cannot be approved on the terms requested. The commenters further noted that the Regulatory 

Impact Analysis states “[t]he proposed rule clarifies that only the “mortgage application” would 

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be subject to Regulations B (ECOA) and C (HMDA), which is the current situation today.” 

These commenters requested clarification of this matter. 

Industry representatives questioned HUD’s legal authority to: limit information 

originators can request to underwrite a loan; require that originators accept an abbreviated 

application from which to complete a GFE; require a new GFE when a counteroffer is made; and 

require a consumer to be notified within one business day of a lenders decision to reject an 

application, among other concerns. 

Additionally, one lender commented that under HUD’s March 2008 proposed rule, 

lenders would be required to retain the GFE application for three years which is different from 

the 25 month retention requirement by TILA or ECOA. The lender commented that this 

difference presents additional expense without a substantive benefit to the consumer. 

The FTC staff recommended that HUD reevaluate the proposed “GFE application” as this 

terminology is new and could generate consumer confusion in the already complex mortgage 

process. FTC staff suggested that HUD characterize it as the “GFE application” concept so 

consumers do not confuse it with the mortgage application. They also recommended that HUD 

educate consumers about these two components of the mortgage lending process. Further, FTC 

indicated that the industry would also benefit from guidance on how the GFE application relates 

to other mortgage lending laws that include an “application” concept. 

The Conference of State Bank Supervisors, the American Association of Residential 

Mortgage Regulators, and the National Association of Consumer Credit Administrators) also 

expressed concern over the creation of a “GFE application” and a “mortgage application” 

because, they asserted, these application concepts will cause consumer confusion. They 

recommended that HUD coordinate with other federal regulatory agencies to ensure consistency 

and clarity to regulatory requirements from loan application to loan closing. 

Response to Comments. To address the concerns raised by the commenters about the 

bifurcated application approach set forth in the proposed rule, HUD has adopted a single 

application process for the final rule. Under this approach, at the time of application, the 

originator will decide which information that it collects from a borrower to issue a GFE will be 

used to deliver a meaningful GFE. The originator, however, must collect at least the following 

six items before providing the GFE: the borrower’s name, social security number, and gross 

monthly income; the property address; the house price; and the amount of the mortgage loan 

sought. The borrower’s social security number would be collected for purposes of obtaining a 

credit report. 

The originator will continue to be required to deliver or mail a GFE to the applicant 

within 3 business days after the application, including all necessary information, is provided by 

the borrower. HUD is revising the definition of “business day” to maintain consistency with the 

timing of the TILA disclosure under the Federal Reserve Board’s recently finalized rule limiting 

the fees that consumers can be charged for the delivery of TILA disclosure (see revisions of § 

226.119(a), (73 FR 44522, July 30, 2008). HUD is also limiting the fee that may be charged for 

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providing the GFE, consistent with the Federal Reserve Board’s recently finalized rule. A loan 

originator also may not require the applicant to provide supplemental documentation to verify 

the information that will be used to provide the GFE. 

After the GFE has been provided, the loan originator may collect additional fees needed 

to proceed to final underwriting for borrowers that decide to proceed with a loan from that 

originator. At that time, verification information or any other information could be required 

from the applicant, such as bank statements and W-2 forms, to confirm representations made by 

the applicant in the application. 

None of the information collected by the originator prior to issuing the GFE may later 

become the basis for a “changed circumstance” from which a loan originator may offer a revised 

GFE, unless there is a material change in that information, or unless the loan originator has an 

established policy of relying on a more limited set of information in providing GFEs. If a loan 

originator can document such a policy, then the limitation on providing a revised GFE would 

only apply to the information that the lender relied on pursuant to its policy. Other information 

collected by the loan originator may be the basis for a “changed circumstance” that could give 

rise to a new GFE. However, a loan originator may not claim that it has policy of not relying on 

one or more of the six pieces of information that are required prior to providing a GFE. The loan 

originator is presumed to have relied on the borrower’s name, the borrower’s monthly income, 

the property address, the borrower’s best estimate of the value of the property, the mortgage loan 

amount sought, and any information contained in any credit report obtained by the loan 

originator before providing the GFE, unless that information changes or is later found to be 

inaccurate. HUD determined that this approach balances the flexibility originators need to 

properly underwrite, while limiting bait-and-switch methods whereby the originator uses the 

GFE to draw in a borrower and, after a significant application fee is paid or burdensome 

documentation demands are made, claims that a material change has resulted in a more 

expensive loan offering. If a loan originator determines that changed circumstances necessitates 

the issuance of a new GFE, such new GFE must be provided to the borrower within three days. 

The three-day requirement is in response to comments on the proposed rule which stated that 

providing a new GFE within one day is not workable. 

The approach set forth in this rule furthers HUD’s goal to promote consumer shopping 

among mortgage originators because it does not overly burden a consumer at an early stage. 

Rather, a consumer provides information that is easily communicated and pays a nominal fee in 

order to get a GFE. 

As noted, this public policy is further supported by the Federal Reserve Board through its 

recently issued final rule limiting fees that can be charged for the delivery of the TILA 

disclosure. Under this rule, borrowers must receive the TILA disclosure before paying or 

incurring any fee imposed by a creditor or other person in connection with the consumer’s 

application for a closed-end mortgage, except that creditors may charge a bona fide and 

reasonable fee for obtaining the consumer’s credit history. 

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VI.B. Trade Off Chart for Interest Rates and Costs 

Most comments supported the idea of a chart showing settlement cost and interest rate 

trade-offs; however, some lenders wanted a generic chart rather than a customized chart that 

compares alternatives to the shopper’s own loan. Some lenders stated that the trade-off chart 

was more appropriate for the Settlement Cost Booklet that HUD publishes for consumers. 

HUD has made clear that consumers should be advised of how their interest rate affects their 

settlement costs. HUD believes that consumers should be apprised of the interrelationship 

between their interest rate and their up-front settlement obligations as early as possible when 

shopping for a loan, and that their options in this regard should be presented on the GFE form. 

During the tests of the GFE, consumers indicated that the trade-off chart provided useful 

information. Thus, the final rule continues to include the customized chart that compares the 

borrower’s selected option with higher- and lower-interest rate options (assuming the originator 

offers such options). It is required that the two options be actual offers available to the borrower 

when he or she made the choice of interest rate and points for which the GFE is filled out. (See 

Section II.D of this chapter for a full discussion of the trade-off table.) 

VI.C. Opportunity to Cure 

The March 2008 proposed rule provided that HUD would deem violations of the 

requirements for the GFE in 24 CFR 3500.7 to be violations of section 5 of RESPA. This would 

include instances where the charges listed on the GFE are exceeded at settlement by more than 

the tolerances permitted under § 3500.7(e). In similar fashion, the proposed rule provided that 

HUD would deem violations of the requirements for the HUD-1/1A in § 3500.8 to be violations 

of section 4 of RESPA. 

HUD invited comments on whether a provision should be added to the RESPA 

regulations that allow a loan originator, for a limited time after closing, to address the failure to 

comply with tolerances under the proposed GFE requirements, and if so, how such a provision 

should be structured. HUD sought comments on whether such a provision would be useful, and 

if so, what the appropriate time frame would be for finding and refunding excess charges. HUD 

also invited comments on whether the potential for abuse of such a provision would be harmful 

to consumers. Comments were also sought on whether the ability of prosecutors to exercise 

enforcement discretion would obviate the need for such a provision. 

Many comments were received on the advisability of allowing loan originators to cure 

potential violations of the tolerances on the GFE. Lenders and trade groups representing lenders 

and some settlement service providers strongly supported the addition of a provision allowing 

loan originators to cure potential violations of the tolerances. Several lenders reiterated their 

previous comment that HUD lacks authority to impose tolerance requirements on the GFE, but 

that if a tolerance provision were authorized by statute, they would support the inclusion of a 

cure provision. Among the lenders and lender trade groups that supported inclusion of a cure 

provision, the comments were almost evenly divided between those suggesting a 60-calendarday period to cure potential violations of the tolerances, and those suggesting a 90-calendar-day 

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period. Another commenter recommended that HUD consider adding a cure provision for the 

HUD-1 and closing script. 

Consumer groups were generally supportive of stronger enforcement of RESPA’s 

disclosure requirements, including enactment of statutory changes that would include civil 

money penalties for violations of those requirements. A consumer group that responded to 

HUD’s question regarding a cure provision expressed its opposition to adding such a provision. 

Consumer groups, generally, raised the possibility that a cure provision could be abused by 

offering only partial reimbursement to a borrower. These commenters suggested that loan 

originators would have an incentive to cure violations even without a specific provision 

exempting them from liability if a potential violation is cured. 

Based on the comments received in response to the proposed rule and further 

consideration of this issue by HUD, HUD has determined that a cure provision is essential to 

allow loan originators to more effectively manage any uncertainty in costs associated with the 

required tolerances on the GFE. By including a cure provision, HUD recognizes that some 

errors are inevitable when handling large numbers of complex transactions, and HUD does not 

intend for the tolerance requirements to create liability for inadvertent errors. 

As described in more detail above, HUD has built an opportunity to cure violations of the 

tolerances into the requirements establishing the tolerances. The final rule also makes 

allowances for inadvertent or technical errors in filling out the HUD-1/1A. The settlement agent 

would have an opportunity to cure any violation of section 4 of RESPA by providing a revised 

HUD-1/1A to the borrower and/or seller within 30 calendar days of settlement. This 

opportunity to cure errors on the HUD-1/1A is consistent with HUD’s longstanding policy 

permitting settlement agents to provide revised HUD-1/1A settlement statements where errors 

are discovered after settlement. 

VI.D. Delaying Implementation of the New GFE 

In the March 2008 proposed rule, HUD stated that it intended to include a 12-month 

transition period in the final rule. During the 12-month transition period, settlement service 

providers and other persons could comply with either the current RESPA requirements or the 

revised requirements of the amended provisions. HUD invited comments on whether such a 

transition period is appropriate. 

Comments on the 2008 Proposed Rule. Consumer representatives generally favored a 

12-month implementation period. while lenders and their trade associations sought a longer 

implementation period on the basis that 12 months is insufficient time to prepare for compliance 

with the new requirements. According to one major lender, a 12-month period is far too short 

given the extensive nature of the changes. This lender estimated that an 18-24 month period will 

be required for implementation of the proposal as published on March 14, 2008. According to 

other major lenders, the proposed rule would require significant systems and operational changes 

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well beyond the complex forms changes, and would take a minimum of 2 years to implement. A 

lender association stated that requiring the industry to implement changes to RESPA disclosures 

and then to later implement changes to TILA disclosures would result in significant and 

duplicative costs for systems changes, training, and staffing that would ultimately be borne by 

consumers. This association expressed support for an implementation period beginning 18 

months after the effective date of the rule, or 18 months after the implementation period for the 

Federal Reserve Board’s TILA rule, whichever is later. 

Response to Comments. HUD has determined to proceed with adoption of a 12-month 

implementation period. HUD recognizes that operational changes will be required in order to 

implement the new rule, in addition to training staff on the new requirements. However, the 

need for a standardized GFE with relevant information about the loan and settlement charges is 

critical in light of the problems in the current market and further delay is not warranted. HUD 

believes that a 12-month implementation period will provide sufficient time for systems changes 

and training to occur. Therefore, use of the new GFE and the new HUD-1/1A will be required as 

of January 1, 2010. During the transition period, the current RESPA requirements with respect 

to the GFE and the HUD-1/1A remain in effect and settlement service providers may choose to 

proceed under either the current GFE and HUD-1/1A requirements or may choose to proceed 

under the new GFE and HUD-1/1A requirements. However, any settlement service provider 

who delivers the required GFE prior to January 1, 2010 will be subject to all of the requirements 

of the required GFE, including compliance with the tolerance provisions and use of the required 

HUD-1/1A. . 

Other provisions of the rule, including average cost pricing, required use and the 

technical amendments are implemented immediately upon the effective date of the rule. 

VI.E. Other GFE Topics 

Prepayment Penalty. Prepayment penalties can be used to the borrower’s advantage as 

a technique that allows a borrower to avoid paying a loan fee upfront. A lender might be willing 

to accept a higher monthly payment as an alternative to a higher upfront fee if there were some 

protection from not recouping the fee in the event of an early payoff. A prepayment penalty can 

do that if it approximates the remaining unpaid part of that fee. Sometimes, however, 

prepayment penalties are used for other purposes. For example, they can be designed to be a 

severe deterrent to paying off a loan made at a very unfavorable interest rate. The disclosure is 

designed simply to alert the borrower that there is a prepayment penalty and if so, its maximum 

amount. If there is a prepayment penalty, the borrower certainly should be aware of it.

Splitting of Title Insurance. Many commented that the breakout of title charges into the 

pure insurance premium and the title agent compensation was of little value. Title insurance 

prices are divided into two components. One component goes to the salesperson as a 

commission. The other goes to the title insurance company to cover all the other costs of 

running an insurance company, including making claim payments. The salesperson receiving the 

commission often does other settlement work as well. For example, the salesperson might be the 

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settlement agent in the transaction. If true, the salesperson might get paid as the settlement agent 

and the person receiving the commission. But the commission is hidden income from the 

borrower’s perspective. This breakout in the final rule is designed to shed light on this otherwise 

hidden, sometimes large, sales commission often received by the settlement agent who might be 

charging additional fees in the transaction. It might put competitive pressure on the sum of all 

fees received by the title insurance salesperson. This requirement is included in the final rules 

for the HUD-1 to avoid complicating the GFE, and because the other competitive pressures 

established in this rule should be sufficient to drive down title-related costs. HUD also believes 

that the relevant figure for borrowers to shop and compare is the total price, not a component 

price. This is done at the recommendation of a Government Accountability Office Report on the 

title insurance industry. It is a disclosure intended to be used for enforcement purposes, to 

ensure that title insurance agent commissions are put toward other title expenses. 

Splitting of Lender and Broker Fees. Also, the form does not break down the lender 

and broker charges because HUD believes that the final form presents the best depiction of the 

service charge of the broker and the lender, and is also the proper figure for the borrower to 

focus on. 

Private Mortgage Insurance. Private mortgage insurance comes in two main forms – 

upfront premiums and monthly premiums. There is zero tolerance on the monthly payment once 

the borrower locks in his or her interest rate. The ten percent tolerance applies to the upfront 

premium for lender-selected or lender-referred third-party services. 

VI.F. Required Use 

Generally, required use is a situation in which a borrower’s access to some distinct 

service, property, discount, rebate or other economic incentive, or the borrower’s ability to avoid 

an economic disincentive or penalty is contingent upon the borrower using or failing to use a 

referred provider of settlement services. Under the current rule, penalizing a borrower for not 

obtaining a loan or settlement service from an affiliate is a violation of RESPA. The final rule 

changes the definition of required use to include the withdrawing of a positive incentive for not 

doing business with an affiliate. This change clarifies that withholding a positive incentive is 

equivalent to imposing a negative incentive. 

The offering by a settlement service provider of an optional package or combination of 

bona fide settlement services to a borrower at a total price (net of the value of the associated 

discount, rebate, or other economic incentive) lower than the sum of the prices of the individual 

settlement services does not constitute a required use. Lenders and settlement service providers 

will be allowed to package settlement services but not make a discount contingent on the 

purchase of anything that is not a settlement service from an affiliate. 

An example of a required use violation is the imposition of a penalty from real estate 

developers who have affiliate business arrangements with lenders and title insurance companies. 

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In one recent case (described by Harney, November 18, 2006), which was resolved without any 

public action by HUD, “a builder canceled a sales contract and seized an $11,845 good-faith 

deposit when a buyer refused to use the builder’s affiliated mortgage company.” Refusing to 

sell, and seizing the good faith deposit in more extreme cases, is only one strategy used to 

compel a borrower to use an affiliate or subsidiary. Other typical penalties include raising the 

price of a home and requiring an additional escrow deposit. Such actions are anti-competitive 

and are violations of RESPA. 

Many large builders offer positive economic incentives to home buyers in order to 

encourage them to either borrow from an affiliated lender, obtain settlement and title services 

from an affiliate, or both. This alternative strategy to imposing a penalty is currently permitted 

by RESPA. The incentive may be a financial once such as a discount on the price of the house, a 

reduction of settlement costs, or payment of home association fees for a limited time. An 

incentive may also take the form of a physical upgrade to the home, such as additional 

landscaping, finishing a patio or basement, a wide-screen TV, or granite kitchen counter tops. 

RESPA requires that the builder discount represent true savings for the consumer. Raising the 

price of the house or any other charge in order to compensate the builder for the cost of the 

incentive constitutes a violation of RESPA. 

Under the March 2008 proposed rule, the current definition of “required use” in 24 CFR 

3500.2 would be changed so that consumers would be more likely to shop for the homes and 

home features, and the loans and settlement services, that are best for them, free from the 

influence of deceptive referral arrangements. Through this proposed change, HUD sought to 

establish that in a real estate transaction covered by RESPA, incentives that consumers may want 

to accept and disincentives that consumers may want to avoid should be analyzed similarly for 

compliance with RESPA. 

The proposed change would have made clear that HUD views economic disincentives 

that a consumer can avoid only by purchasing a settlement service from particular providers or 

businesses to which the consumer has been referred to be potentially as problematic under 

RESPA as are economic incentives that are contingent on the consumer’s choice of a particular 

settlement service provider. The modifications in the proposed rule were not intended to prevent 

discounts that are beneficial to consumers, however. The proposed definition stated that the 

offering by a settlement service provider of an optional package or combination of bona fide 

settlement services to a borrower at a total price lower than the sum of the prices of the 

individual settlement services would not constitute a “required use.” 

The proposed revision to the “required use” definition would have continued to apply in 

two sections of the regulations: the affiliated business exemption in 24 CFR 3500.15, and the 

prohibition on the seller requiring the buyer to purchase title insurance from a particular 

company in § 3500.16. However, in light of the other changes that would have been made by 

the proposed rule, the term “required use” would no longer have applied as it does currently in § 

3500.7 (e). 

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Comments on the 2008 Proposed Rule. NCLC stated that the proposed change to the 

“required use” definition does not go far enough to protect consumers. NCLC stated that the 

settlement services to obtain a home loan are only a small part of the costs of the loan. 

According to NCLC, the interest rate, the term of the loan, and whether a prepayment penalty is 

permitted, or a balloon payment is required, are all more important elements of the costs of the 

home loan than are the costs of settlement services. NCLC stated that “(i)t does not make sense 

for the settlement services to be capped in return for a required use, while the more critical 

components of the costs of the loan are not limited, especially where the service itself could be 

discounted while the loan terms are increased.” NCLC proposed to define “required use” to 

include the total cost of the loan in addition to the total of settlement services. CRL commended 

HUD’s efforts in this area and agreed with NCLC that the definition of “required use” should 

include the total cost of the loan in addition to total settlement services. 

The California Reinvestment Coalition supported the proposed change to the definition of 

“required use” and stated that the proposed change will “benefit the borrower by leveling the 

field.” 

Generally, lenders expressed opposition to the proposed change to the definition of 

“required use” on the grounds that the proposal is difficult to understand, is overbroad, and 

would eliminate the ability of builders and others to offer legitimate consumer discounts. MBA 

stated that it would be sufficient for HUD to indicate that under its current rules it may scrutinize 

discounts to assure that they are bona fide rather than risking depriving borrowers of discounts 

altogether. 

The ABA stated that the proposed change to the required use definition is “flawed and 

unreasonable” because HUD cited only anecdotal evidence that incentives have been abused by 

some companies to steer customers to affiliated vendors with high prices and inferior service, but 

offered “no empirical evidence to support this assertion.” ABA also stated that the proposal runs 

counter to the plain meaning of the words in the statute because defining “required use” to mean 

any incentive offered to use an affiliated company contradicts the unambiguous meaning of the 

statutory word “required.” It stated that the Department should not confuse legitimate incentive 

arrangements among affiliated entities with undue influence or required use of a product or 

service. 

NAMB, the Maryland Association of Mortgage Brokers (MAMB) and the Idaho 

Association of Mortgage Brokers (IAMB) expressed support for the proposed change in the 

definition of “required use.” NAMB stated that the proposed revision should resolve the 

problems with tying and required use. NAMB recommended that the new definition avoid 

setting a threshold higher than zero for determining what constitutes an economic incentive or 

disincentive. NAMB, MAMB and IAMB all stated that the threshold for determining incentives 

and disincentives should be “any thing of value.” 

Builders and builder-affiliated mortgage companies opposed the proposed change to the 

“required use” definition. CTX Mortgage Company asserted that the proposed change would 

“provide a significant road block for future customers to benefit from the streamlined mortgage 

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and title services that Centex offers.” The National Association of Home Builders (NAHB) 

asserted that the change would eliminate bona fide incentives, denying consumers significant 

savings in their home purchases. NAHB characterized the Department’s examples of “required 

use” problems as “ambiguous and incomplete.” NAHB asserted that home builders with 

affiliated lenders have business incentives to ensure that home buyers are pleased with the 

experience of obtaining loans from their affiliated lenders. NAHB noted that studies of builderaffiliated mortgage companies conducted by an independent research firm have found that such 

firms have lower per-loan operating costs as compared to outside lenders. According to NAHB, 

while the savings from these economies and the other affiliate benefits are difficult to quantify, 

they are significant and are passed along to consumers in the form of incentives for use of a 

builder affiliate. NAHB stated that home builders in general do not increase the selling price of 

homes to offset these incentives and asserted that the vast majority of builders who provide 

incentives for buyer use of affiliates do so in a responsible manner that brings substantial 

benefits to consumers. NAHB and other commenters also suggested alternative language to the 

proposed definition to ensure that consumers are presented with the option to select an incentive 

that is bona fide. 

RESPRO objected to the proposed change to “required use” and stated that it would 

“prohibit many consumer incentives offered by home builders and real estate brokers in today’s 

marketplace that provide consumers with lower costs and/or better service; is based on 

unsubstantiated and anecdotal evidence about alleged abuses; attempts to address violations that 

already are prohibited under RESPA, and is based on an inaccurate reading of anti-trust laws.” 

RESPRO asserted that consumer incentives are offered to ensure that sales transactions close as 

quickly and as efficiently as possible. RESPRO recommended that the current definition of 

“required use” be retained. 

NAR opposed the proposed change and stated that it would have at least two unintended 

consequences. According to NAR, the rule authorizes discounts only on the prices of the 

recommended provider and this would limit the kind of non-price/services promotions that joint 

venture owners currently and permissibly offer to promote affiliates. NAR noted that real estate 

agents and brokers offer a variety of inducements to clients to promote their services, such as by 

offering a gift certificate to a local business or a free home inspection, and indicated that it does 

not believe that HUD intended to eliminate a practice which benefits consumers. In addition, 

according to NAR, the proposal would allow a discounted combination of settlement services 

only to a borrower, and NAR believes that sellers should not be precluded from receiving 

discounts as incentives as sellers often pay the majority of settlement costs in a real estate 

transaction. 

The Laborers’ International Union of North America (LIUNA) supported the proposed 

change to the “required use” definition, stating that it “will promote more comparison shopping 

by borrowers and achieve HUD’s intended goal of protecting consumers from unnecessarily high 

settlement costs.” 

LIUNA further stated that the “cost to the builders of incentives has already been built 

into the sales price, so that it is not a true discount, but a penalty for using another company.” 

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According to LIUNA, its research indicates that the effect of incentives “dissuade customers 

from comparison shopping for lenders.” Rather, “customers are steered to loans that are very 

often more expensive, despite the incentives.” LIUNA asserted that builders have improperly 

used “related business relationships at the expense of consumers” that “resulted in higher costs 

for homebuyers ... and have played a large part in creating the current housing crisis.” LIUNA 

provided statistics indicating that in February 2006, the average rate for a 30-year fixed-rate 

mortgage was 6.25%. In contrast, LIUNA noted that although the main benefit of an ARM is 

that it has a lower starting interest rate than the equivalent fixed-rate loan, approximately half of 

the mortgages made by certain builders in February 2006 were ARMs that had starting rates of 

6.25% or higher. LIUNA stated that builders “have an incentive to sell their inventory at the 

highest possible price, and in-house mortgage units provide the financing to make it possible. 

There is evidence that during the housing boom in 2004-2006 builders were only able to sell 

homes at such inflated prices because of the collaboration with their mortgage subsidiary and an 

affiliated appraisal company. This resulted in large numbers of homeowners who were 

“underwater,” owing more than the value of their home, from day one.” 

CSBS, AARMR and NACCA supported the proposed change to the “required use” 

definition. However, these commenters recommended that the definition of “required use” be 

expanded to incorporate situations where the originator fails to give a required Affiliated 

Business Arrangement disclosure, or provides a misleading disclosure that facilitates steering of 

the borrower to an affiliate. According to these commenters, absent information necessary to 

make the best decision, the borrower has effectively been required to use a particular provider. 

The FTC staff recommended that HUD reconsider the proposed change to the definition 

of required use. The FTC staff stated that the expanded definition could deprive customers of 

the lower prices that can result from bundling related services. 

After reviewing comments about HUD’s proposal to change the definition of “required 

use” and re-examining aspects of the proposed revised definition, HUD has determined to retain 

the concepts in the definition of “required use” set forth in the proposed rule, but with some 

revisions that better reflect HUD’s intent in applying the definition. The new definition makes it 

clear that economic disincentives that are used to improperly influence a consumer’s choices are 

as problematic under RESPA as are incentives. The revisions made in the definition subsequent 

to the proposed rule clarify how the definition will apply in the context of the affiliated business 

exemption under Section 8 (c ) of RESPA and § 3500.15 of HUD’s regulations, and similarly 

frames the definition to apply to “persons” rather than only “borrowers.” 

The change to the definition of “required use” will not eliminate the ability of anyone to 

offer legitimate consumer discounts. HUD does not interpret RESPA as preventing a settlement 

service provider or anyone else from offering a discount or other thing of value directly to the 

consumer. The only limitation is on tying such a discount to the use of a particular settlement 

service provider. HUD believes that consumers will utilize affiliated and preferred businesses if 

the costs of using those businesses are lower than the costs associated with similar services from 

other providers. 

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Under the final rule, builders will not be allowed to offer positive economic incentives 

for the homebuyer to use an affiliated lender or settlement service provider. An incentive would 

have to be general, i.e., applicable to any lender or settlement service provider. It would be 

allowable for a builder to offer to pay a portion of the buyer’s closing costs, but that offer could 

not depend on whether the buyer uses an affiliated lender or settlement service provider. 

VI.F.1. Arguments for Changing Definition of Required Use 

The average consumer faces the two largest and most complex financial transactions that 

he or she has ever encountered when buying a house and obtaining a mortgage loan for the first 

time. There is a danger that the consumer is not able to shop as effectively for the cheapest loan 

when the choice of the home and lender are tied to one another. According to the National 

Association of Mortgage Brokers (NAMB), affiliated lenders tend to offer interest rates oneeight to one-quarter percent higher than what borrowers could get from an independent lender 

(see Harney, April 29, 2005). For the average home price ($192,000) used in this economic 

analysis, an extra quarter point above par would increase the value of the loan by approximately 

$1,200. In this particular case, the builder will gain (and the borrower will lose) if the economic 

incentive is worth less than the additional yield spread premium. Frequently, there will be more 

than $1,200 at stake. New homes are more expensive than average and that the distribution of 

new home prices are skewed upwards. For such homes, a difference of a fraction of a percentage 

point could increase the costs for borrowers by thousands of dollars. 

Deals involving economic incentives are difficult to evaluate. The borrower would have 

to shop for comparable loans to discover whether and to what extent the loan that they are being 

offered is more expensive. If it is, then they would have to value the incentive that they are 

being offered to take the deal. An example is of a consumer, who was offered a “free” morning 

room addition to the house in return for obtaining a loan from the builder’s mortgage affiliate. 

The borrower was informed that the addition was worth $13,400 and that the loan was very 

competitive. Upon researching the mortgage market, the borrower found that the subsidiary’s 

fees were extremely high (an origination fee of $5,400). The consumer appealed to HUD, upon 

which the builder waived the origination fee (see Harney, November 18, 2006). 

One major argument against builder discounts is that assessing the value of a nonfinancial incentive upgrade (such as a finished basement) may pose challenges that inhibit 

effective shopping for loans and settlement services by consumers. As long as the homebuyer is 

not able to properly compare the yield spread premium and the market value of the builder 

discount, then the builder may gain from a buyer’s confusion. Another major argument against 

allowing builder discounts is that some builders may pay for the economic incentive by 

surreptitiously raising other charges beyond the market price. Such behavior is a violation of the 

current rule: discounts must be legitimate and not built into the price of the house or the cost of 

the loan. This is nevertheless difficult to monitor and enforce. Prohibiting builder discounts 

altogether is more effective. A third argument, advanced by the NAMB, is that the builder 

discount is an anti-competitive practice (see Harney, June 24, 2006). Independent brokers have 

an interest in encouraging consumers to shop further for mortgages. The NAMB maintains that 

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the incentives from builders are illegal kickbacks under RESPA and that they violate anti-trust 

laws (the Federal Trade Commission’s Magnuson-Moss Act, which prohibits “tie-in sales”). 

VI.F.2. Arguments against Changing Definition of Required Use 

One could argue that the builder discounts for contracting with an affiliate are beneficial 

for both builders and consumers. Thus, in specific circumstances, the prohibiting of builder 

discounts could prevent mutually beneficial trades between the builder and consumer from 

occurring. Consider the claim that an affiliated business arrangement could reduce the average 

cost of origination or settlement, an efficiency that would be shared by the consumer. For 

example, a lender saves on advertising costs when a consumer is referred by a builder. If the 

lender is an affiliate, then the builder would be able to pass on some of those savings in the form 

of a builder discount. In addition, there may economies of scale. According to the NAHB, 

“affiliated business arrangements also lower costs to consumers by allowing diversified 

companies to streamline administrative expenses and offer discounts and rebates on packages of 

services.”38 Thus, there may be true cost savings that can be legitimately passed on, in the form 

of a builder discount, to homebuyers who do business with an affiliate. 

VI.F.3. Conclusion 

HUD maintains that the average consumer will gain by formally separating the home 

purchase and loan decisions. There is evidence that many consumers do not gain from so-called 

builder discounts. Evaluating the deal that they are being offered is a formidable and costly task. 

Builders and lenders, who normally have the advantage of being better informed, can cloud 

borrowers’ decisions by offering extraneous incentives. HUD believes that most affiliated 

businesses are able to offset the cost of the incentive by charging a higher interest rate, home 

price, or closing costs. HUD recognizes the possibility that some affiliated business 

arrangements may reduce the average origination and settlement costs. However, we argue that 

the competitive pressure that will result from simplifying the shopping process will benefit the 

average consumer. The agency believes that, more often than not, consumers do not gain from, 

and can be mislead by, deals involving economic incentives from a builder to obtain a loan or 

settlement services from an affiliate. 

HUD also recognizes the builders’ argument that there is the potential for builderaffiliated mortgage companies to have lower per-loan operating costs. More importantly, 

builder-affiliated lenders have an incentive to offer acceptable loans to consumers. The builder 

gains by selling its properties and closing the loans promptly, as well as by ensuring that the loan 

is sustainable and does not lead to foreclosure. The final rule reflects this understanding by 

easing the qualification for the affiliated business exemption. 

 

38 See Ledford, David. “Mortgage Lending.” National Association of Home Builders, 

<http://www.nahb.org/generic.aspx?genericContentID=79479>. 

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In the final rule, to qualify for the affiliated business exemption under § 3500.15, a 

settlement service provider may offer a combination of bona fide settlement services at a total 

price (net of the value of the associated discount, rebate, or other economic incentive) lower than 

the sum of the market prices of the individual settlement services and will not be found to have 

required the use of the settlement service providers as long as: (1) the use of any such 

combination is optional to the purchaser; and (2) the lower price for the combination is not made 

up by higher costs elsewhere in the settlement process. 

Consumers will still have the liberty to choose the best loan regardless of who offers it. 

The rule does not prohibit the borrower from financing through a builder’s affiliate; it prohibits 

the builder from offering a discount for doing so. To attract business, the affiliated lender only 

has to offer a competitive loan. Indeed, the affiliated lender may have inherent advantages over 

independent lenders such as greater convenience for the borrower, a greater likelihood of loan 

approval, and flexibility concerning the closing. A recent study by J.D. Power found that the 

majority of borrowers surveyed who finance through a builder’s affiliate were satisfied with the 

experience (see Sichelman, 2007). According to J.D. Power, borrowers claimed that they chose 

to borrow from builder affiliates because the interest rates were competitive and that the process 

was easier. The final rule does not remove the real economic advantages of financing with (or 

purchasing settlement services from) a builder’s affiliate. The final rule continues to allow the 

offering by a settlement service provider of an optional package or combination of bona fide 

settlement services to a borrower at a total price lower than the sum of the prices of the 

individual settlement services. The final rule will also allow an unaffiliated builder to offer a 

discount to a borrower for choosing a preferred lender or settlement service provider. Expanding 

the definition of required use simply limits the builder’s capacity to steer the consumer away 

from actively shopping for the best loan terms and least expensive settlement services. 

VI.F.4. Economic Effects of Required Use 

The predicted consumer savings from changing the definition of required use are not 

estimated separately from the aggregate consumer savings (estimated to be $8.35 billion in the 

base case). In conjunction with other parts of this rule, the change in required use will lead to 

lower prices due to improved shopping for both originator and third-party services. The benefits 

of expanding the definition of required use represent transfers from affiliated lenders and 

settlement services to borrowers. The sector of the industry affected is not likely to be large 

compared to the total market: only lenders and settlement service providers affiliated with 

builders of new homes could lose from the change in required use. Approximately one-sixth of 

home sales are new homes. Industry data concerning the proportion of builders that have 

affiliated lender or settlement service providers do not exist. However, one can reasonably 

assume that only large construction companies could afford to have affiliates. One-third of the 

single-family homes in 2002 were built by establishments with over 500 starts (see Chapter 5 for 

a description of New Single Family Contractors and New Housing Operative Builders). 

Assuming that all large construction firms have affiliated business arrangements, the change in 

required use will affect approximately five percent of the market. In all likelihood, this 

proportion will be smaller since only an unknown fraction of builders have affiliated lenders and 

settlement service providers. 

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The only compliance cost imposed by the change in required use will be the one-time 

cost of the legal consultation necessary to understand the consequences for affiliated business 

arrangements. Builders, lenders, and settlement service providers may require additional legal 

consultation to check whether the discounts that they are offering consumers violate RESPA. 

The legal compliance costs from the change in required use are treated as a part of the total legal 

costs described in Section VII of Chapter 6. 

The impact on small business of the change in required use is not expected to be 

proportionally different than the impact of other parts of the rule. The well-known examples of 

affiliated business arrangements, such as Centex Homes and Pulte Homes, consist of nationwide 

operations building and financing thousands of single-family homes. However, affiliated 

business arrangements also include smaller-scale operations: an individual mortgage broker 

could be an affiliate of a local developer. For this reason, we assume that the share of the 

transfers resulting from the change in required use is identical to the overall small business share 

of 49.5 percent. 

VII. Market Effects: Consumer Shopping and Benefits 

The various market effects of the rule are discussed in this and the next section. This 

section (VII) describes consumer shopping benefits while the next section (VIII) describes 

competitive impacts on brokers, lenders, and third-party service providers, with an emphasis on 

small business impacts. The various changes that HUD is making to the GFE will lead to more 

effective consumer shopping and better prices of both loan origination services and third-party 

settlement services, as well as a better consumer understanding of discount points, yield spread 

premiums, and loan options. Sections A-C briefly summarize the benefits of the rule in the 

context of the literature review provided in Chapter 2 about problems that consumers face when 

shopping for mortgages, while Section D examines whether benefits from the rule will be passed 

through to borrowers. Section E provides quantitative estimates of the consumer savings under 

the rule.39

VII.A. Consumer Shopping: Problems and Issues 

Chapter 2 discusses numerous issues important for understanding HUD's objectives with 

respect to using the new GFE to improve shopping and lower fees. Readers are referred to 

Chapter 2 for a detailed treatment of those issues. Chapter 2 offers two convincing conclusions: 

(1) borrowers can find it difficult to comparison shop in today's mortgage market; and (2) 

borrowers are often overcharged in today's mortgage market. 

 

39 Readers not interested in the overview of the shopping and other market benefits of the new GFE may want to 

proceed directly to Section VII.E, which provides quantitative estimates of the consumer benefits. 

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The mortgage process can be complex and can involve rather complicated financial tradeoffs, which are often not fully and clearly explained to borrowers. Less informed and 

unsuspecting borrowers are particularly vulnerable in this market. But given the fact that a 

borrower may be more interested in the main transaction (the home purchase), even more 

sophisticated borrowers may not shop aggressively for the mortgage or may not monitor the 

transaction very closely. Price dispersion and price discrimination characterize the mortgage 

market, which is surprising given that there are more than 40,000 brokers and lenders supplying 

mortgages in this market (suggesting that a competitive market outcome should be obtained). 

Most observers believe that the market breakdown occurs in the relationship between the 

consumer and the loan originator -- the ability of the loan originator to price discriminate among 

different types of consumers leads to some paying more than others, and to excessive fees being 

charged to originate a loan. 

Staff from the Federal Trade Commission (FTC, 2002) notes that the dispersion of prices 

in the mortgage market suggests that there could be large savings from more effective consumer 

shopping. Specifically, FTC staff recognizes the potential benefits of HUD's increasing 

consumer awareness in the mortgage area: "HUD's characterization of substantial competition on 

the supply side of the market also suggests that consumers who engage in information search 

should be able to find competitively priced loan products...." (p. 6). In other words, if 

consumers could increase and improve their shopping, there are many suppliers of funds (more 

than 40,000 brokers and lenders) in the market that would compete for their business. Thus, the 

complexity of the origination process, combined with the fact that consumers have limited 

experience taking out mortgages, places a premium on having a process that is simple, easy to 

understand, and clear about the various mortgage options available to the consumer.40 The 

current mortgage shopping process is often characterized as confusing and providing little useful 

information to guide the consumer in making a final decision. The new GFE is intended to 

remedy this situation. 

VII.B. The New GFE: Improved Ability to Shop 

The new GFE approach seeks to increase consumer shopping and to improve the quality 

of consumer shopping. More effective shopping will lead to reductions in the fees charged to 

borrowers. The earlier sections of this chapter have provided several reasons to believe that 

shopping will be enhanced by this rule. They are as follows: 

 

40 The FTC staff also note that empirical studies indicate (a) that price dispersion is common in retail markets, even 

markets where entry is relatively easy and economic profits are rare; and (b) that the extent to which consumers shop 

for low prices helps to explain why some consumers pay less than others. They go on to note that if the mortgage 

market is characterized by easy entry and little economic profit, then price dispersion in the mortgage market is 

probably explained by imperfect information and a lack of consumer search. Their insights reflect the situation in 

today’s mortgage market, where consumer shopping is made difficult by the complexity of the mortgage process and 

the inadequacy of current disclosure rules (such as the existing GFE). 

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1. The presentation is simpler, with a summary page that provides the essential information. 

In addition, cost figures are combined into functional categories, so that borrowers are 

less likely to be overwhelmed by detail. 

2. Consumer testing of the GFE form indicates that consumers are comfortable with the 

clarity of the form and the breakdown of the various cost categories. They can use it to 

select the cheapest loan. 

3. The new GFE with its treatment of yield spread premiums and its trade-off table will 

increase the shopper's understanding of different interest-rate options and the trade-off 

involved in accepting a higher interest rate loan (with a yield spread premium) to offset 

settlement charges, or paying discount points in order to get a lower interest rate loan. 

Borrowers (particularly less sophisticated and less informed ones) are being overcharged 

because they do not fully understand these transactions and because originators are not 

always presenting the full set of options to borrowers.41 In the consumer testing of the 

GFE, consumers rated the "trade-off table" as the most useful part of the GFE. 

4. The estimates on the GFEs are more reliable which will make it more likely that 

decisions based on this information will make the borrower better off. This reliability is 

ensured by changes to the HUD-1 to make it more directly comparable to the GFE, and 

by the closing script addendum to the HUD-1, which will be prepared by a 

knowledgeable party (the closing agent) and alert the borrower to deviations from the 

GFE tolerances. 

Additional Considerations. But there is an additional effect beyond the benefits realized 

by the individual borrowers who can shop more effectively. With more borrowers shopping more 

effectively in the mortgage market, the originator who sought to exploit the badly informed 

borrower will find fewer victims in the market. Originators whose prime purpose is to engage in 

such activities will find their efforts rewarded to a smaller extent than prior to this rule since it 

will be harder and more costly to find victims. Targeting these victims will become a less 

profitable strategy since fewer of their applicants will take loans with more costly terms. There 

will be a tendency for these lenders to leave the industry or change their marketing tactics to try 

and get the borrowers who are more in the mainstream. Other originators who engage in this 

activity less frequently, only when targets of opportunity present themselves, may find their hit 

rates falling. They may decide the business lost is not warranted by the gains from above-market 

offers and abusive lending. In both cases, there will be a reduction in resources used by 

originators to search for potential victims. This increases the chances that even a poorly 

informed borrower who could easily become a victim would get more competitive offers when 

searching for a loan. So shopping has direct benefits to the shopper and indirect benefits to all 

other borrowers, whether shoppers or not. In either case, there is pressure for prices to fall and 

the result is transfers from originators to borrowers.

 

41 In addition, there is also the potential for significant gains in information with the trade-off table -- so long as the 

borrower has had even one originator explain the relationship between the interest rate and net fees, the borrower 

will be aware of this and expect that any other loan offer would reflect the tradeoff. 

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The increased ease of shopping will benefit both the prime and subprime markets. In the 

prime market, the uninformed borrower can be taken advantage of by an aggressive originator 

who tries to get the borrower to agree to costly terms. The uninformed borrower who does not 

shop is a potential victim. As mentioned above, the increase in shopping should benefit both 

those who increase their shopping and have spillover benefits to others by decreasing the 

likelihood that they will run into an aggressive lender looking for victims. 

The subprime market has an additional complication. Most prime borrowers correctly 

assume their credit status and shop on that assumption. Prime loan information is easy to access 

in the market and that facilitates comparison shopping. Subprime borrowers have a more 

difficult time comparison shopping. First, subprime borrowers do not know exactly what their 

credit status is without going through underwriting. Second, even if they know their credit status 

as evaluated by one originator, that status could be different with another originator due to a lack 

of standardized underwriting criteria. So, in today’s subprime market, the borrower who wants 

to comparison shop must go through underwriting for each originator from whom he gets a loan 

quote. This could be very burdensome for the borrower and deter shopping. Under the new 

GFE, comparison shopping should be much easier because the loan terms offered on the GFE are 

based on at least some underwriting. While the cost in time and money may not fall to the level 

of the prime market, the new GFE is an improvement over the current scheme available in the 

subprime market. 

VII.C. The New GFE: Benefits from Tolerances 

The rule includes a zero tolerance on the originator’s own fees and an overall 10 percent 

tolerance in the cases where the lender selects the third-party provider or where the borrower 

asks for a referral and uses the provider to whom he was referred. Those third-party services 

that are required by the lender but chosen by the borrower without a referral have no tolerance 

protection. There is a zero tolerance on government recording fees and transfer taxes. 

Chapter 2 explains that it is not clear how closely consumers shop for and monitor thirdparty costs. Consumers often rely on recommendations for third-party services, but there may 

not be any incentive for the referring party (the loan originator, real estate agent, etc.) to direct 

the consumer to the lowest cost provider, and because settlement services may be a secondary 

consideration to the consumer (rather than the primary one of buying a home), the consumer may 

not closely monitor settlement costs, much less engage in some intensive search for them. As the 

FTC staff (2003) concluded, consumers may not obtain low-cost settlement services. 

The limited tolerances under the enhanced GFE are intended to improve on today's 

current practices where consumers rely on referrals that may or may not be in their best interests. 

The tolerances will lead to well informed market professionals either arranging for the purchase 

of the settlement services or at least establishing a benchmark that borrowers can use to start 

their own search. Under either set of circumstances, this should lead to lower prices for 

borrowers than if the borrowers shopped on their own since the typical borrower’s knowledge of 

the settlement service market is limited, at best. In addition to lower prices, the prices quoted are 

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likely to be more reliable, without surprises at settlement. The result of tolerances will be lower 

prices for third-party settlement services. 

Tolerances are aimed at controlling third-party fees as well as origination fees. In 

addition, RESPA reform offers a framework that will encourage competitive negotiations, 

discount arrangements, and average cost pricing, all of which will lower third-party settlement 

prices. The discounting arrangements of the new GFE complement the tolerance requirements. 

Both seek to increase competition in the market for settlement services and to obtain lower 

settlement costs for the consumers. 

VII.D. Obtaining the Benefits through Shopping in a Competitive Mortgage Market 

One issue that underlies much of the RESPA policy discussion is the extent to which 

there is competition in the mortgage market. The consumer benefits from this rule depend 

importantly on the various cost reductions being passed through from lenders to consumers. 

This issue of whether lower costs will be passed through to consumers has been a particularly 

controversial one -- for that reason, Chapter 2 included an extensive discussion of the 

competitiveness of the mortgage market. This section briefly highlights competitive issues with 

respect to the benefits of the new GFE in the subprime as well as the prime part of the market. 

Except for the price discrimination issue discussed in Chapter 2 (which concerns the 

relationship between a mortgage originator and a consumer), the mortgage market is highly 

competitive, as discussed in Chapter 2. On the industry side, there are many firms that originate 

mortgages and there seems to be little in the way of significant barriers to entry. The potential 

for successful collusion among the large number of originators is remote, as it is also among the 

"mega" wholesale and retail lenders.42 With these conditions one would expect to see entry and 

exit until economic profit is zero: firms would earn only normal profit. Thus, there is nothing 

about the structure of the industry that leads to a breakdown in competition. 

On the borrower’s side, there are a large number of borrowers and collusion among them 

is nil. But, as explained in Chapter 2, there is an asymmetry in the information in the hands of 

some borrowers relative to the lenders: some borrowers are poorly informed and the nature of the 

information gathering and application process makes some borrowers (even sophisticated ones 

but surely unsophisticated ones) susceptible to noncompetitive loans. While lenders have good 

information about the market for mortgages, some borrowers do not. As a result borrowers can 

wind up with terms above the competitive level. This can happen under two different sets of 

circumstances. First is the case where firms post prices and borrowers either take them or leave 

them: there is no individual haggling over terms. A borrower who does not shop and takes the 

first offer will either be lucky and get competitive terms or be unlucky and get a more costly 

loan. Borrowers simply taking the first loan without much shopping will most likely pay more. 

 

42 As Woodward (2003a) notes, the “wholesale lending market is highly competitive and well informed on both 

sides” (page 38). Also see LaMalfa (2002) and Joint Center for Housing Studies (2002). 

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The borrower who shops will get the lowest terms. Even if half the lenders are non-competitive, 

the borrower who shops as few as three lenders has only a 12.5% chance of getting no 

competitive offers (.5 to the third power). It is argued that some lower income areas have higher 

proportions of noncompetitive originators so that a given amount of shopping provides less 

protection from a noncompetitive offer.43 

Second is the case of non-posted prices, where each loan is the result of individual 

negotiation. The extent to which the originator will go in offering high terms is one important 

factor. The strength of the borrower’s negotiation and shopping skills are also important. The 

unsophisticated borrower who conveys that notion to the originator and who does not shop is at 

greatest risk here. 

Shopping is the borrower’s first line defense. But shopping is more difficult for some 

segments of the market than others. Those borrowers who have “A” credit can shop using the 

newspaper, phone, Internet, and other easy-to-access sources of information. In a short period of 

time, the borrower would have a sense of what competitive terms were at any point in time for 

“A” quality credit. The same is not true for subprime borrowers. There are many gradations of 

subprime credit and the borrowers are unlikely to know which standard they fit. This is 

especially true since different lenders would grade borrowers differently even using the same 

information. The only way to find out is for the borrower to go through complete underwriting. 

As discussed earlier, that means it is very costly in terms of money and effort for a subprime 

borrower to shop. That implies less shopping, which in turn implies that it is more likely that a 

subprime borrower will not get competitive terms for his or her quality of credit, that is, a “B” 

borrower may get the terms of a “B-minus“ loan, or worse. 

Another way for the market to break down is through misleading or fraudulent behavior. 

For a purchase loan, if the truth is discovered before closing, the borrower may have only two 

choices: take the abusive loan or lose the house. Many would take the abusive loan despite the 

additional fees. In the case of a refinance, the choices are take the abusive loan, keep the old 

loan, or negotiate another new loan at current rates. If rates have risen enough since the lock, the 

borrower may still take the abusive loan with the additional fees since the higher interest rate on 

a newly negotiated loan could be more costly than the additional fees on the abusive loan, and 

the abusive loan could still be less costly than the existing loan. 

General strategies that are suggested by this analysis are to make it easier for borrowers 

to shop and to make the numbers they shop with more reliable. This is accomplished with a 

simpler and easier-to-comprehend GFE, given earlier in the process, with more reliable numbers 

that are easier to verify. This rule is an attempt to do just that to the maximum extent possible -- 

to place borrowers in a position so that they can effectively shop for mortgage loans. 

 

43 If the probability of finding a bad deal increases from .5 to .6 for any given originator, then shopping with three 

originators leaves the borrower with a 21.6% (.6 to the third power) chance of a bad deal, which is greater than the 

12.5% chance if the probability of a bad deal is .5 for any given originator. 

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VII.E. Estimation of Consumer Benefits from the Rule 

The above sections have outlined two important types of consumer benefits, one 

associated with improved shopping with the new GFE and one associated with lower costs from 

tolerances. This section quantifies these benefits by providing estimates of consumer savings, or 

transfers from originators and third-party settlement service providers to consumers. Estimates 

of the transfers from small originators and small third-party providers are also provided. The 

specific steps in deriving the various estimates are numbered below. Steps (1)-(9) in subsection 

E.1 derive the estimates of consumer savings. Steps (10)-(15) in subsection E.2 derive the 

estimates of small business revenue impacts. Step (16) in subsection E.3 summarizes the 

previous steps. And Steps (17)-(25) in subsection E.4 provides several sensitivity analyses 

examining the effects on consumer savings and small business impacts of alternative 

assumptions about important parameters (such as the projected savings in third-party costs). The 

sensitivity analysis allows readers to gauge the range of dollar savings and transfers that are 

possible with the rule 

Chapter 5: Further Industry Information. The analysis below disaggregates the 

sources of consumer savings into the following major categories: originators with a breakdown 

for brokers and lenders, and third-party providers with a breakdown for the title/settlement 

industry and other third-party providers. Readers are referred to Chapter 5 for a more detailed 

examination of the various component industries as well as for the derivations of many of the 

estimates presented below. Information on individual sectors of the originator and third-party 

industries can be found in the following sections of Chapter 5: 

Originators: 

Mortgage Brokers: Section II. 

Mortgage Lending -- Commercial Banks, Savings Institutions, Mortgage Banks 

and Credit Unions: Section III. 

Third-party Providers: 

Settlement and Title Services -- Direct Title Insurance Carriers, Title Abstract and 

Settlement Offices, Lawyers, and Escrow Companies: Section IV. 

Real Estate Appraisers: Section V. 

Surveyors: Section VI. 

Pest Inspectors: Section VII. 

Credit Bureaus: Section VIII. 

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Chapter 5 reports data from the Bureau of the Census on each of the component 

industries listed above -- for example, basic characteristics (number of firms and employees, 

revenue, payroll, average firm size, etc.) of each industry are provided and estimates of the 

number of small businesses and their share of industry revenues. Estimated transfers due to the 

GFE are reported for each of the component industries. For the major industry sectors, such as 

brokers, lenders, and title and settlement firms, Chapter 5: discusses the nature of the industry; 

supplements the Bureau of Census data with information from industry and other sources; 

examines various methodological issues associated with estimating the revenue impacts of the 

rule; presents methodologies for estimating small business impacts in cases where the Bureau of 

the Census data are inadequate; presents sensitivity analyses of transfer and small business 

estimates; where possible, expresses transfer estimates as a percentage of industry revenues.44

Where necessary for understanding the savings and transfer estimates, information from Chapter 

5 is incorporated into the discussion below, particularly in the technical footnotes. 

Nature of Estimates. Before presenting the estimates, it should be acknowledged that 

there is uncertainty in this analysis, but this uncertainty is unavoidable, for the simple fact that it 

is very difficult to predict impacts that depend on a market structure that does not yet exist. 

Sensitivity of the results to reasonable deviations in key assumptions will be provided, but it is 

recognized that a new business model is being put in place for mortgage originations. Even 

though the impact of this rulemaking cannot yet be tested in a market setting, this economic 

analysis has demonstrated the potential for significant consumer savings with the changes being 

made. In addition, the economic analysis has demonstrated that the rule has been responsive to 

legitimate concerns voiced by various segments of the market. 

The success of this rulemaking depends critically on three things: the new forms are 

better shopping tools than today’s GFE, the various tolerances associated with the new GFE will 

lead to a reduction in non-competitive third-party fees, and retail lending is competitive, which 

means that any cost savings will be passed through to the borrower. Chapter 2 describes 

considerable evidence that a single mortgage lender has virtually no pricing power in the current 

borrower market. This means that most settlement cost savings negotiated by lenders will likely 

be passed through to consumers. Section II of this chapter describes the many rounds of 

consumer surveys that have shown conclusively that the structure of the new forms is transparent 

and useful to shoppers. Consumers say the forms are well written, user-friendly, and can assist 

them in shopping for a mortgage. With the new forms, consumers can identify the cheaper loan 

in over 90 percent of the cases. 

Establishing a GFE form that is a good shopping tool and providing incentives for experts 

(e.g., lenders) to negotiate price savings for consumers will lead to consumer benefits – this 

provides a reasonable basis for this rulemaking. Executive Order (EO) 12866 and the 

Regulatory Flexibility Act (RFA), however, require further analysis. They require that agencies 

estimate the cost and benefits of their rulemaking, and the impact of their rulemaking on all 

small entities if the agency does not certify that the rulemaking does not have a substantial effect 

 

44 Important background information on these major industries, and particularly brokers, is also provided in Chapter 

2. The competitive impacts of RESPA rule on these industries are discussed in Section VII below for the GFE. 

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on small entities. EO 12866 further specifies that costs and benefits include both quantifiable 

measures (to the fullest extent that these can be usefully estimated) and qualitative measures that 

are difficult to quantify but are nevertheless essential to consider. Finally, EO 12866 requires 

that agencies will propose and adopt a regulation only upon a reasoned determination that the 

benefits of the intended regulation justify the costs. HUD does conclude that the benefits of this 

rulemaking justify the costs. Chapter 6 conducts the RFA analysis while Chapter 3 conducts the 

required 12866 cost-benefit analysis. In order to estimate the actual impacts of the rulemaking. 

This chapter uses the best available data and analysis to establish the domain of potential 

savings, and to estimate the actual monetary impacts of better consumer shopping and more 

aggressive negotiation of third-party fees. 

VII.E.1 Steps in Deriving the Savings 

(1) Total Mortgage Volume. The projections of consumer savings are annual projections 

that depend on the volume of mortgage originations. Total single-family mortgage origination 

volume is assumed to be $2.4 trillion. This is the average 2008 projection for Fannie Mae, 

Freddie Mac, and the Mortgage Bankers Association of America (MBAA). It assumes a more 

normal home purchase environment than existed during the 2002-04 period.45 The refinance rate 

is projected to be 40 percent, much lower than the approximately 70 percent refinance rate for 

2003. Of course, different annual origination volumes can easily be incorporated into this 

analysis by adjusting the various annual savings estimates based on the origination volume 

assumed. Step (25) below shows the effects on consumer savings and revenue transfers of 

higher mortgage origination volumes. 

(2) Mortgage Volume by Originator Type. As explained in Section III.E of Chapter 2, 

David Olson (2002, 2005) estimates that brokers, in the broad sense of the term, originated 55-68 

percent of mortgages over the past few years.46 Applying 60 percent to the $2.4 trillion yields 

$1,440 billion for brokers, leaving 40 percent for non-brokers or lenders ($960 billion). It is 

assumed that half of the brokers (under Olson’s broad definition) are HUD-defined brokers 

($510 billion), leaving $510 billion in loans originated by non-HUD-defined brokers. 

(3) Total Origination Costs -- Direct and Indirect. There are varying estimates of the 

origination fee percentage. Olson (2002) estimated that brokers collect approximately 2 percent 

of the origination amount as fees and that 45 percent of that comes from yield spread premiums. 

In his more recent study of the 2004 market, Olson estimated brokers collect approximately 1.71 

percent of the origination amount as fees; this study assumes 1.75 percent as the baseline. Olson 

also estimated that 55 percent of brokers’ origination fee income comes from yield spread 

premiums (Wholesale Access, 2005). However, in his 2003 study of lenders, Olson estimated 

that only 31 percent of lenders’ origination fees came from the yield spread premium (Wholesale 

 

45 Freddie Mac projects $1.856 trillion (36 percent refinance rate) in 2004 and $1.748 trillion (29 percent refinance 

rate) in 2005. 

46 As explained in Chapter 2, the broker’s share of the origination market has varied recently, from 55 percent in 

2000 to 65 percent during the refinance-dominated year of 2002 to 68 percent in 2002. 

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Access, 2004). Adding (a) the brokers’ YSP share (0.553) times the brokers’ projected share 

(0.60) of the market and (b) the lenders’ YSP share (0.31) times the lenders’ projected share 

(0.4) of the market yields 0.456 for the weighted average YSP share of total origination charges. 

Thus, this study assumes 45 percent of origination income is derived through the YSP. Applying 

these assumptions to the entire market of $2.4 trillion in originations would yield the following: 

$42 billion in total origination fees for brokers and lenders, of which $18.9 trillion is paid by 

borrowers indirectly through yield spread premiums and the remaining $23.1 trillion is paid by 

borrowers directly though origination charges. HUD has seen different estimates of origination 

percentages than 1.75 percent.47 Therefore, Step (21) conducts sensitivity analyses using 

origination fees of 1.5 percent and 2.00 percent. 

(4) Savings in Origination Costs. Section IV.D.2 of Chapter 2 presents evidence of the 

substantial variability in origination fees and broker compensation found in studies by Jackson 

and Berry (2001), Jackson (2002), Woodward (2003a), the Urban Institute (2008), as well as the 

analysis of Guttentag (2002). The findings of Jackson, Berry, Woodward, and the Urban Institute 

present a picture of a market characterized by excessive fees, price dispersion, and price 

discrimination -- with some borrowers getting market-rate deals but others getting bad deals. 

Jackson and Berry (2001) found evidence of troubling price dispersion, which suggested to them 

that brokers used yield spread premiums as a device “to extract unnecessary and excessive 

payments from unsuspecting borrowers” (p. 9). Findings from the study by Woodward (2003a), 

which used the same data as Jackson and Berry, confirmed that shopping for a mortgage is not 

easy, particularly for borrowers attempting more difficult shopping strategies involving a 

tradeoff of interest rates and points (see below). According to Woodward, less educated 

borrowers pay an additional $1,500 in broker fees, compared with more educated borrowers and 

after controlling for other factors that might affect broker fees. Woodward finds the size of this 

differential “disheartening” (p. 39). On average, African-Americans pay brokers an additional 

$500 and Hispanic borrowers, $275, compared to other borrowers, after accounting for education 

and other characteristics.48

The increase in good information made available to the borrower by the new GFE should 

put fees of all originators under more competitive pressure, and given the substantial variability 

in prices noted above and in Chapter 2, there should be substantial savings from the new GFE 

and its disclosure requirements. The extent of the savings to borrowers will depend importantly 

on the effect of the new GFE disclosures concerning alternative interest rate/up-front cost 

 

47 The recent Bankrate.com survey reported origination fees of $3,337, or 1.67 percent of the assumed 200,000 loan. 

It should also be noted that some have reported origination fees greater than 2.0 percent in home purchase 

transactions. A table on page 2 of a paper by the Progressive Policy Institute (2003) reports $3,800 as the “typical 

cost under the current system” for “mortgage costs”, which include the costs associated with loan origination, 

application processing, and underwriting. Applying the $3,800 to the assumed $150,000 purchase price yields 2.53 

percent; assuming a 90 percent loan-to-value ratio, the $3,800 origination fee would represent 2.82 percent of the 

loan amount ($135,000). The Progressive Policy Institute does not indicate the source of their data. 

48 Guttentag (2002) reaches similar conclusions to those of Jackson and Berry, Woodward, and the Urban Institute. 

As explained in Section IV.D.4 of Chapter 2, Guttentag finds a very large dispersion in gross profits per loan, which 

leads Guttentag to state: “it is clear that brokers take advantage of the inability of borrowers to shop effectively by 

extracting more from those who can afford to pay more.” (p.138). Guttentag emphasizes that consumers don’t shop 

effectively for mortgages. 

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combinations and the effect of reporting the yield spread premiums and discount points on the 

GFE form. As discussed in Section II.B of this chapter, the new GFE requires HUD-defined 

brokers to report both discount points and yield spread premiums derived from the sale price of 

the loan, which means that borrowers in these transactions will be fully informed of these two 

amounts. But as also discussed in Sections II.D and III of this chapter, the trade-off table of the 

new GFE will improve borrower understanding of the financial trade-offs between interest rates 

and points (discount points and yield spread premiums) and should lead to a better understanding 

by all borrowers of their loan options. As explained in Section II.F, many rounds of consumer 

tests demonstrate that consumers can choose the cheapest loan with the new GFE. This increase 

in comprehension by borrowers should put fees of all originators under more competitive 

pressure. Notice that this step does not limit the shopping savings to just those consumers who 

used a HUD-defined broker. Other brokers might not appear any different to the borrower than a 

HUD-defined broker who uses table funding. 

In fact, the only difference to the borrower today is that the broker who does not fit the 

HUD definition does not even report the yield spread premium as “POC” (paid outside of 

closing), so that the borrower is even more in the dark on this matter. It could be argued that 

since these non-HUD brokers still do not have to report any yield-spread premiums, they will be 

under less pressure to use it to offset closing costs. But under the new GFE approach, any 

borrower who has had the explanation of the trade-off from any originator, and any borrower 

who has gone to a HUD-defined-broker and seen the reported yield spread premium and is told 

where it comes from, should have improved awareness of the yield spread premium principle. So 

borrowers seeking loans from non-HUD-defined brokers might well be as aggressive as those 

seeking loans from HUD-defined brokers. In fact, since there is no disclosure at all of yield 

spread premiums in this portion of the market today, the amount returned might be an even 

greater portion of any yield spread premiums. Similar comments apply to the remaining lender 

(or non-broker) part of the market. Again, the borrower may have no idea about the “broker” 

status of an originator. And the improved awareness effect discussed in this paragraph will apply 

to all loan originators, not just HUD-defined mortgage brokers. 

The remainder of this section describes the method for estimating potential savings in 

origination costs from this new GFE. A range of estimates will be provided. The following 

analysis is based on the studies summarized in Section IV.D of Chapter 2. Readers are referred 

there for background and the details of the various studies. 

Woodward (2003a) Study. A starting point is the study by Woodward (2003a), which is 

reviewed in much detail in Chapter 2. Important for the estimations in this section are 

Woodward's insights about different mortgage shopping strategies of consumers. Woodward 

classifies the borrower’s strategy for paying for closing costs as follows: (1) pay all closing costs, 

including the broker’s fee and possibly additional discount points to reduce the interest rate, in 

cash, and shop on broker fee, discount points and rate; (2) pay some closing costs with cash, and 

some with a payment from the lender for a premium interest rate (i.e., yield spread premium); (3) 

incorporate the entire broker’s fee into the rate, pay other closing costs with cash, and shop on 

rate; and (4) incorporate the broker’s fee and some, or even all, closing costs into the rate and 

search for a loan with the lowest rate (includes (5) and (6) below). According to Woodward, (1) 

and (2) are the two most difficult. Both of these strategies require skill in evaluating the 

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rate/point tradeoff. Woodward expects that mortgage brokers will be much better at gauging the 

rate/point tradeoff on mortgages than consumers are. Brokers have more experience and they 

have the wholesale lenders’ prices in the form of rate sheets, which are not shown to consumers. 

The straightforward capture of present value in the rate sheets assures that brokers get the tradeoff right, according to Woodward. 

Thus, borrowers who pay part of their closing costs in cash and pay for the rest with a 

yield spread premium -- as well as borrowers who pay discount points – (strategies (1) and (2)) 

have a more complicated shopping task, because they must have an idea of appropriate 

compensation for the broker and other settlement providers (like those borrowers who pay all 

closing costs in cash), but they also must be able to compare rates and points. If they could 

examine the wholesale lender's rate sheets, which are available to the broker, their task would be 

easier, but still not easy.49 Since many shoppers following strategy (1) are trying to reduce 

monthly payments by paying discount points, they understand the rate/point tradeoff and are 

likely to be better shoppers, but still face a complicated task. 

For the borrower, the simplest transaction to understand is the no points, or no-cost loan. 

The borrower seeking a no-cost loan can simply shop for the best interest rate (similar to how 

they shop for a car loan). If a borrower has chosen to shop on the basis of rate, her shopping 

difficulty is greatly reduced compared to the borrower who is trying to evaluate rate/point 

tradeoffs. In addition, the borrower’s comparative informational disadvantage to the broker is 

reduced because the broker is not in a position to offer the borrower rate/point choices that lure 

her towards the mortgage choice with a lower present value for her, but higher value to the 

broker. 

Woodward conducted a regression analysis of broker compensation, which was defined 

to include both direct origination fees paid to brokers and indirect fees paid the brokers (i.e., 

yield spread premiums). This regression analysis relates the broker fee negotiated between the 

borrower and broker to a "borrower's confusion" variable, defined as the ratio of YSP to the 

broker fee. Woodward identifies the "no-cost" as loans with the YSP/broker fee ratio greater 

than one. For loans with a ratio greater than one, the YSP is sufficient to cover the broker’s fee 

plus at least some other closing costs as well. Table 3-4 lists the coefficients on the ratio of YSP 

to Broker Fee in her regression explaining broker compensation.50

 

49 Woodward also emphasizes, that in the negotiations between the mortgage broker and borrower over the broker’s 

compensation, the broker has many more advantages than the borrower. The broker has the rate sheets, plus certified 

financial information about the borrower, but also, the broker has far more practice and skill with the transaction. 

The broker can use these advantages both to charge consumers direct fees and also to place consumers in high 

interest rate loans, thus collecting lucrative yield spread premiums from wholesale lenders. 

50 Because the actual ratio can be affected by the difference in interest rates on the date the borrower’s rate was 

locked and the day the loan was sold, few loans in the database have exactly the YSP to Broker Fee ratios shown. 

Loans are classified according to which ratio they are closest to. 

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Table 3-4 Coefficient of Ratio of YSP to Broker Fee 

Shopping Strategy 

Category Number Definition Coefficient 

(1) 0.0 Ratio (the par loans and loans where borrowers paid discount 

points) 

-$617 

(2) 0.5 Ratio (maximal rate/point confusion -- most difficult shopping) +$68 

(3) 1.0 Ratio (where the broker’s fee is paid entirely by the lender in 

the form of a YSP) 

-$847 

(4) 1.5 Ratio (where at least some closing costs are rolled into the 

rate) 

-$1,038 

(5) 2.5 Ratio (where nearly all closing costs are rolled into the rate -- 

easiest shopping) 

-$2,731 

(6) 4.0 Ratio (where even more closing costs are rolled into the rate – 

also easiest shopping) 

-$2,071 

Source: Woodward (2003a) 

Obviously, these results show that different groups pay substantially different amounts of 

origination fees. According to Woodward, her results confirm the relative difficulty of different 

shopping strategies. The above coefficient values at 1.0, 1.5, 2.5, and 4.0 (groups 3-6) show that 

that broker fees fall as borrowers roll more and more of their closing costs into the rate and the 

ratio of YSP to broker fee rises. The loans on which borrowers are struggling hardest to evaluate 

the rate/point tradeoff (group 2 at ratio = 0.5) have the highest fees – for example, the fees for 

group 2 are $915 [($68 – (- 847)] more than the fees for group 3 and they are $685 [$68 – (-617)] 

more than the fees for group (1). Again, according to Woodward, borrowers in group (1) pay the 

broker more because they are pursuing a strategy where the broker’s informational advantage is 

greater -- the highest broker fees are those on which both the borrower and the wholesale lender 

(by paying a yield spread premium) bring substantial cash to closing. 

The objective of RESPA reform is to reduce the above variation in fees and bring the 

groups paying excessive fees down to those groups paying lower fees – for example, bring the 

prices paid by group (2) above down to the prices paid by group (3). The test results reported in 

Section II.F showing that consumers can identify the cheapest loans using the new GFE form 

suggest that this is possible. In fact, the treatment of YSP in the new GFE and the trade-off table 

are specifically aimed at those borrowers who have difficulty evaluating the interest-rate-points 

trade-off – and during the tests conducted, consumers rated the trade-off table as one of the most 

helpful features of the new form. Thus, one measure of potential savings from the new GFE 

form would be the savings from moving group (2) closer to the other groups. For example, it 

may be that the new GFE, by simplifying the fee discussion and including a tradeoff table that is 

very effective in educating consumers on the point-fee tradeoff, reduces the difference between 

the loans in Woodward’s analysis that require knowledge on the point-fee tradeoff (the group 1 

loans) and the otherwise hardest to shop loans that do not require knowledge of a point-fee 

tradeoff (the group 2 loans). If under RESPA reform, group (2) obtained the results of group (1), 

the weighted average savings would be $219 (0.32 times $685), assuming that group (2) 

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represented 32 percent (its sample weight) of borrowers. As noted above, further improving the 

shopping of group (2) so that it matched group (3) would save that group $915, resulting in 

average overall savings of $293 (0.32 times $915). RESPA reform would also reduce the 

differential between group (1) and group (3), offering additional savings. And RESPA reform 

would also improve the shopping of the low-cost groups 3-6, leading to even further savings (this 

“benchmark effect” is discussed below). 

Conducting analyses such as the above provides a basis for estimating potential consumer 

savings from the new GFE form. If the new GFE resulted in groups (1) and (2) obtaining the 

results of group (3), there would be a weighted average savings of $342, representing 14.1 

percent of total origination fees.51 These are the savings in fees that can be obtained even if 

there are no other shopping improvements (such as moving groups 1 and 2 closer to group 4, or 

even moving group 3 closer to group 4). It is useful to point out some further adjustments that 

could be made to this estimate of consumer savings under the new GFE form. 

 

A first issue concerns how representative Woodward’s sample is. In some ways it 

resembles what one might consider a representative sample – the average origination fee is 

approximately 2.0 percent and yield spread premiums are 51.5 percent of closing cost – both 

figures similar to the figures reported by Olson in Step (3) above. This is not unexpected, 

because the defendant lender in the lawsuit was operating in many markets and competing 

successfully against many other lenders. Its prices and practices had to be representative of the 

market in order for it to remain competitive. 

In addition, the Defendants sample, which accounts for three-fourths of Woodward’s 

overall sample, is considered the most random and the most representative of her data. Still, it is 

unclear whether the weights across the six groups are representative of the nation as a whole or if 

there are other biases. One means of hedging against biased estimates, as well as being 

conservative, is to lower the estimated savings by one-half of the coefficient standard errors to 

account for non-representative (and possible upward bias) of the sample. (Of course, other 

adjustments could possibly be made.) Doing this reduces the estimated savings to $309, 

representing 12.8 percent of origination fees. A further possible adjustment would be to align 

Woodward’s YSP share of total origination fees (51.5 percent) with that (45 percent) estimated 

51 Several pieces of information from Woodward’s data were used to make this calculation. The six groups were 

distributed as follows: (1) 19.9 percent, (2) 32.4 percent, (3) 40.7 percent, (4) 5.6 percent, (5) 1.2 percent, and (6) 0.1 

percent. This distribution is based on the 2,009 loans in the so-called Defendant’s sample, which is the more 

representative of the samples used by Woodward. Woodward’s total sample for the regression analysis was 2,624; 

Woodward states the additional 600 loans over-weighted par value loans (e.g., group 1 represented 30.1 percent of 

the overall sample of 2,624, compared with only 19.9 percent of the Defendant’s sample). Whether this sample is 

under representing group (2), which has only a 32.4 percent share, is an open question. Obviously, groups (5) and 

(6) have a low weight (only 1.3 percent). Other key data from Woodward that are used in the calculations in this 

section include the following: $1,250 average yield spread premium; $2,425 average broker fees (including both 

direct and indirect fees); $4,050 average total closing costs; and $130,000 average loan amount. The $342 savings 

figure in the text was calculated as follows: (a) group 1 differential from group 3 of $230 times weight (.199) of 

group 1 yields $45.78 plus (b) group 2 differential from group 3 of $915 times weight of group 2 (.324) yields 

$296.46 – adding $45.78 and $296.46 yields $342.24. Dividing 342.24 by $2,425 yields the 14.1 percent reported in 

the text. 

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by Olson (see Step 3). Doing this reduces the savings percentage to 11.1 percent. Thus, in this 

case, the estimated savings from reforming the GFE would range from 11 to 14 percent. 

The above analysis ignores the possibility of savings due to an overall improvement in 

shopping by all groups in the market, an effect that goes beyond the YSP issue. That is, the 

groups that are getting the best deals in today’s market would likely get even better deals with 

the new shopping form. Thus, savings under the new GFE could be increased by an additional 

amount, over that noted above. If one added just 2 to 3 percent to the above estimates, the 11 to 

14 percent range would increase to 13 to 17 percent. In addition, the 11 to 14 percent range does 

not take into account other possible improvements, such as moving groups 1 and 2 closer to 

group 4, which could provide additional savings. 

There is a second (and related) methodology that could be used to estimate savings under 

the new GFE – this is to rely on studies that have directly estimated the average impact of YSPs 

on consumer costs. As discussed in Chapter 2, different estimates of the impact of yield spread 

premiums on broker compensation and closing costs have been produced by these studies, with 

Jackson (2002) concluding that yield spread premiums offset approximately 25 percent of 

closing costs and Woodward (2002), in an earlier study, concluding, 75 percent. Or conversely, 

the studies find that from 25 percent (Woodward) to 75 percent (Jackson) of the yield spread 

premium goes to enhance broker compensation, rather than to reduce consumer costs. As 

discussed in Chapter 2, estimates by Benson (2001) fall mainly in the 30 to 40 percent range, 

although Woodward (2002), Jackson (2002), and Jackson and Berry (2001) have done the more 

extensive work on this issue. Woodward’s recent analysis (reviewed above) suggests a larger 

impact that her initial estimate of 25 percent. Woodward has indicated to HUD staff that her 

recent view on this issue is that the effect is approximately 38 percent.52 Under this approach, 

one would proceed as follows to estimate savings in origination fees from the new GFE. If the 

features (simpler presentation, summary sheet, YSP calculation, trade-off table, etc.) of the new 

GFE resulted in savings equal to 25 percent of YSPs (a low-end estimate), then savings in 

overall origination costs would be 11.2 percent.53 If the YSP savings is increased (reduced) to 

30 percent (20 percent), the overall savings in origination costs is 13.5 percent (9.0 percent)

Again, these estimates ignore any savings due the benchmark effect discussed above. 

. 

 

Based on the work of Woodward (2003a), it appears that 14 percent savings in 

origination fees is a reasonable starting point for examining the benefits of the new GFE; 

sensitivity analysis will show the effects of an 11 percent savings rate. As discussed above, this 

52 Some rough calculations from Woodward’s recent work suggest the “YSP effect” is larger than her initial estimate 

of 25 percent. In this case, the “YSP effect” refers to the increase in total origination costs (both direct fees paid by 

the borrower and the YSP) associated with a one-dollar increase in YSPs. Ideally, one would want to see a zero 

impact, meaning that the form of financing (cash or YSPs or both) does not affect the total origination costs to the 

borrower. Based on Woodward’s estimates presented in the text, if groups (1) and (2) improved their results to the 

weighted average of groups (3)-(6), there would be overall savings of 15.7 percent in total origination fees. Using 

the other regression methodology, a “YSP effect” of 35 percent would yield similar savings relative to total 

origination fees (direct fees plus YSPs). 

53 This is calculated as follows: percentage savings (25 percent) in YSP times the YSP share of total origination 

costs (45 percent from step 3) yields 11.2 percent 

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range of 11 to 14 percent in potential savings is also consistent with the low-end of estimates 

from those studies that have estimated the average effect of YSPs on origination fees. The recent 

analysis of FHA data by the Urban Institute also points to the potential for large reductions in 

origination charges from an improved shopping system. As reported in Chapter 2, that study 

found that originators (brokers and lenders) substantially overcharged consumers in loans having 

yield spread premiums. 

 (5) Savings in Total Origination Costs: Summary. Projected savings of 14.0 percent 

translates into $5.88 billion54 of the $42.0 billion in total origination costs.55 Again, given 

improved consumer shopping, increased information about financial trade-offs, improved 

disclosure of yield spread premiums, and zero tolerance on the originator's direct fees, this 14.0 

percent figure is a reasonable amount of savings to expect from the rule, and is probably a 

conservative estimate. The more conservative case of 11.0 percent savings translates into $4.62 

billion in savings. Findings of non-competitive fees by studies reviewed in Chapter 2, the 

results of consumer tests showing that the new GFE can be used to identify the cheapest loans, 

and the analysis in Step (4), support this 11 to 14 percent range in potential savings of origination 

costs from the new GFE. 

(6) Individual Third-party Fees. The potential savings on third-party fees would come 

mostly from the services already ordered by the originator: (a) appraisal, (b) credit report, (c) tax 

service, (d) flood certificate, (e) pest inspection, (f) survey, and (g) title insurance and settlement 

agent charges. This economic analysis relied mainly on average cost data from a sample of FHA 

loans, although different estimates will be examined throughout the discussion and during the 

sensitivity analysis.56 The main results are reported in Table 3.1 The following mean values 

(calculated over all loans even when the particular service is not required and in some cases 

reporting round numbers for simplicity) are used: (a) $350 for appraisal, (b) $25 for credit report,

(c) $70 for tax service, (d) $15 for the flood certificate, (e) $26 for pest inspection,57 (f) $58 for 

 

54 The projected consumer savings can be disaggregated by mortgage channel (see Section III.D of Chapter 2). The 

$4.62-$5.88 billion in potential savings would be distributed as follows: (a) $1.386-$1.764 billion from HUDdefined brokers (who account for 30% of the total mortgage market, or one-half of the 60 percent share for the 

broadly-defined broker market); (b) $1.386-$1.764 billion from non-HUD-defined brokers (who also account for 

30% of the total mortgage market, or one-half of the 60 percent share for the broadly-defined broker market); and 

(c) $1.848-$2.352 billion for lenders (who account for 40% of the mortgage market). 

55 If origination fees were 1.50 percent (instead of 1.75 percent), then total origination fees would be $36 billion 

(instead of $42.000 billion) and consumer savings in origination fees would be $5.04 billion (instead of $5.88 

billion). If origination fees were 2.00 percent (instead of 1.75 percent), then total origination fees would be $48 

billion (instead of $42.000 billion) and consumer savings in origination fees would be $6.72 billion (instead of $5.88 

billion). See Step (21). 

56 See discussion of the FHA data based in Chapter 2. For an earlier analysis of FHA closing costs, see Office of 

Policy Development and Research (HUD), “Closing Costs”, U.S. Housing Market Conditions, May 2000, pp. 4-8. 

57 In the cases where there was a pest inspection, the average price was $60; the reduction to $26 is explained as 

follows. Only 55 percent of the FHA sample included a pest inspection. The FHA sample included only home 

purchase loans. It was assumed that refinance loans would require a survey at half the rate as home purchase loans, 

or 27.5 percent. In the projection year, home purchase loans were assumed to account for 60 percent of all loans and 

refinance loans, 40 percent of all loans. With these assumptions, the following calculations were made: [0.60 (home 

purchase rate) times 0.55 (proportion of home purchase loans that need a pest inspection)] plus [0.40 (refinance rate) 

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survey,58 and (g) $1,435 for title insurance and settlement agent charges.59 60 Combined, these 

charges come to $1,979.61 The average price of the first six items is $544 per loan, or 31.5 

percent of total third-party fees. The title insurance and settlement agent charges average 

$1,435, or 72.5 percent of third-party fees. 

(7) Total Third-party Fees. From Step (6), the average third-party fee is $1,979. 

Multiplying this figure by the number of loans (12,500,000) yields approximately $24.738 

 times 0.275 (proportion of refinance loans that need a pest inspection)], which yields 0.44 as the overall proportion 

of times a pest inspection is needed. To derive the $26 in the text, the following additional calculation was made: 

0.44 times $60 equals $26.40, which is rounded to $26. 

58 In the cases where there was a survey, the average price was $200; however, only 48 percent of the sample 

included a survey. In the projection year, home purchase loans are assumed to account for 60 percent of all loans. 

Assuming that surveys are mainly completed for home purchase loans, the following calculations were made: 0.60 

(home purchase rate) times 0.48 (proportion of home loans that need a survey) times $200, which yields $96 in text. 

59 The recent Bankrate.com survey reported the following third-party charges: (a) appraisal -- $343, (b) credit report 

-- $22, (c) tax service -- $67, (d) flood certificate -- $14, (e) pest inspection -- $60, (f) survey --$144, and (g) title 

insurance and settlement agent charges -- $1,256. 

60 Earlier surveys can also be referenced. A report by the Progressive Policy Institute (2003) reports the following 

“typical” third-party fees: $300 for appraisals, $30 for credit report, and $1,650 for title and settlement. The Institute 

combined survey and pest inspections with government taxes and also did not report separate data for flood 

certification or tax services. The source of the Institute’s data is not stated. Orange Mortgage (ING DIRECT) 

posted what it labeled “national averages” for third-party fees; they were as follows: $269 for appraisals, $37 for 

credit report, $22 for flood certification, $88 for pest inspection, and $1,099 for title and closing-related work ($374 

for attorney/settlement fee, $220 for title work, $460 for title insurance work, and $45 for postage/courier fees). 

Again, it is not clear what the source of these data are (the data can be found at 

www:home.ingdirect.com/products/mortgage_fees_popup). Brian Peart, owner of Nexus Financial Group Inc. and 

the author of “The RESPA Survival Guide” reports that title charges in 2003 were $1,000 (1.0 percent) on a 

$100,000 refinance loan in Florida; see “Contending with the GMPA,” Origination News, July 2003, p. 4. Also see 

the earlier Bankrate.com data as reported by Holden Lewis, “Closing Costs: Highs, Lows, and Averages,” at 

Bankrate.com. Lewis reports data from a survey of 306 good faith estimates (6 per state and D.C). He shows 

averages of $327 for appraisal, $29 for credit report, $17 for flood certification, $68 for pest inspection, and $174 for 

a survey 

61 The average price for all third-party fees in the proposed rule was $1,583, but that did not include pest inspections 

($18) and surveys ($66). Including these two latter figures yields $1,667, and multiplying that figure by 1.045 

yields the $1,742 figure in the text. The average prices used in this economic analysis were increased by 4.5 percent 

from those used in the proposed rule; this is the 2000 to 2002 total increase in the consumer price index (CPI). 

Another option would have been to increase the original 1997-based FHA data by the 14.6 percent, which was the 

percentage increase in the CPI between 1997 and 2003. However, doing that resulted in appraisals being priced at 

$331, which was higher than the $300 reported by the Progressive Policy Institute (2003); also, given the trend 

toward automated valuation models, the overall weighted average of appraisal costs may be even lower. Using the 

full 14.6 percent adjustment would have increased title and settlement fees by $115, from $1,185 to $1,300. The 

effects of different estimates of title fees will be noted. 

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billion in third-party fees. Third-party fees represent 1.031 percent62 of total mortgage 

originations ($2.4 trillion).63 

(8) Third-party Savings. While there is evidence related to title fees (discussed below), 

there exists much less data for third-party settlement charges, as compared with the recent 

analyses of yield spread premiums and origination costs. Thus, there are two complimentary 

approaches that can be taken for estimating the potential third-party savings from the GSE. One 

is to analyze the magnitude of the likely impacts of the GFE on third-party fees, drawing from 

the changes under the GFE and from the analysis of origination fees discussed above – are thirdparty-few impacts likely to be of the same order of magnitude as the origination-fee effects. Will 

the tolerances and other cost-savings opportunities (discounting and average cost pricing) 

associated with the GFE place competitive pressure on third-party fees, along the same lines as 

improved consumer shopping with the GFE will place on origination fees? A second and 

complimentary approach focuses on available information, particularly data from the title 

industry. Both approaches will be considered here. 

Just as origination fees will be lower with shopping under the rule, third-party costs 

should be lower with shopping. Lenders tell HUD that there is not enough incentive in today’s 

market to negotiate lower prices for third-party services – rather, higher third-party costs are too 

often simply passed through to the consumer. Sections V and VII.C of this chapter explain how 

the new GFE with its tolerances will reduce third-party fees. In addition to reducing or 

eliminating surprises at closing for any charge subject to them, tolerances will lower prices 

because the originator will be arranging for the third-party service or providing the borrower 

with a good benchmark from which to begin his own search. Tolerances should lead to more 

competition among third-party providers, with the result being lower prices for consumers. As 

discussed in Step (7), third-party fees are projected to be $24.7 billion. This is the amount that 

would come under the effects of tolerances, allowing originators to seek out discounts on behalf 

of borrowers, and the simplified GFE. 

There is some evidence that third-party prices can be reduced using techniques such as 

discounting arrangements and more competitive negotiations. Statements by early users of 

packaging, for example, can offer some guidance. ABN-AMRO, the first lender to offer one-fee 

packages, reported average savings in closing costs of $563 on the first 100,000 loans its OneFee 

program. ABN-AMRO said OneFee loans were taking 25 percent less time to process. First 

American rolled out a “single-fee package” that was expected to cut costs to homebuyers by 

25 percent. First American’s product for lenders was a fixed, discounted-price loan closing 

 

62 These costs do not include government fees and taxes and escrow items. 

63 From Step (3), origination costs were estimated to be 1.75 percent of total mortgage originations, or $42.0 billion. 

Thus, total settlement costs (origination costs and third-party fees) are estimated to be $66.738 billion, or 2.78 

percent of the mortgage amount. (The $66.738 billion includes yield spread premiums paid indirectly by the 

borrower.) If origination fees were 1.50 percent (instead of 1.75 percent), then total settlement costs (origination 

costs and third-party fees) would be $60.738 billion, or 2.531 percent of the mortgage amount. If origination fees 

were 2.00 percent (instead of 1.75 percent), then total settlement costs (origination costs and third-party fees) would 

be $72.738 billion, or 3.031 percent of the mortgage amount. 

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package consisting of appraisal, flood certification, title search and insurance, home warranty 

policies, credit and settlement services – all obtained from First American subsidiaries. 64 Given 

the significant shopping and competitive benefits of the new GFE, and the high variability of 

these costs, it seems reasonable to project that they would lead to at least a decline of 10 percent 

in third-party fees. Thus, the analysis of third-party savings for the GFE will assume a 10 

percent savings, with a sensitivity analysis of 7.5 percent. Savings of 10 percent translates into 

$2.47 billion in consumer savings of third-party fees, while savings of 7.5 percent translates into 

$1.86 billion of third-party fees. The next section examines additional information on potential 

savings, with a focus on the title industry, where evidence of excessive fees is most conclusive. 

Title Fees. Section V.B of Chapter 2 discussed available evidence (both anecdotal and 

statistical) suggesting that third-party fees, and particularly title and settlement service fees, can 

be reduced in both refinance and purchase money transactions. Consistent with the discussion 

above, the material presented in Chapter 2 suggests that tolerances, the encouragement of 

discounting, average cost pricing, and other shopping benefits of the rule can have a significant 

impact on third-party costs, but particularly title costs, which is also the largest third-party 

category. Some of the main points from Chapter 2 are as follows: 

• Industry representatives (such as Wells Fargo and Fannie Mae) and consumer advocacy 

groups (such as the National Community Reinvestment Coalition) believe that title fees 

are excessive and have been that way for some time. Fannie Mae’s vice president for 

credit policy, Joe Biegel, also sees a potential for reduced fees. Speaking in reference to 

title insurance premiums Biegel states, “it’s safe to say that prices, in many respects, are 

higher than they ought to be.”65 

• Title and closing costs have been the subject of litigation across the country. Cases in 

New York claim that title and settlement service providers overcharge refinancing 

borrowers by charging them standard rates, rather than the lower reissue rates.66 State 

and local officials from California reached a settlement with title insurers and their 

affiliates in a case concerning deceptive business practices. The California case was 

based on a Consumers Union survey that found evidence that borrowers were paying too 

much for title insurance when they refinance their homes. Norma Garcia, a senior 

attorney for Consumers Union’s West Coast Regional Office declared, “Californians are 

 

64 Statement by Landon Taylor, Vice President at First American. Taylor also says “There would be no eleventhhour surprises on settlement costs for these home buyers.” See “Help Is Coming for Buyers With Little Credit 

History,” Washington Post, October 25, 2003, p. F01 (story written by Ken Harney). 

65 Ruth Simon, Wall Street Journal, December 18, 2002, p. 1. In addition, Forbes magazine has taken the editorial 

position that the title insurance industry is a “racket” and a “cartel.” Ira Carnahan, Forbes Magazine, September 2, 

2002. In its analysis of the title industry, Standard and Poor’s concluded that HUD’s 2002 proposed RESPA rule 

“could place downward pressure on title rates.” Standard and Poor’s, “Industry Report Card: U.S. Mortgage and 

Title Insurers, 2003, page 2. 

66 The idea behind discounted reissue rates for title insurance on a refinancing is that there may be no need to pay 

the full price for a complete title search on a property that had received a complete title search a few years earlier as 

part of the initial home purchase or an earlier refinancing. 

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paying too much for title insurance. We believe the high cost of a refinance title 

insurance policy would be substantially lower if there were more competition in the 

industry.”67 As a result of the Consumers Union survey, the California Attorney General 

reached a $50 million settlement against six major title companies and their affiliates, 

charging them with deceiving Californians with hidden fees and costs while providing 

routine residential escrow.68 

• Title and closing costs have been the subject of investigation and litigation across the 

country by HUD as well as by the courts. HUD and state regulatory agencies have 

initiated many investigations identifying allegedly illegal activities in which realtors, 

lenders and builders have been compensated for consumer referrals to title agencies in 

apparent violation of provisions of RESPA. As explained in Chapter 2, HUD has 

identified and addressed a number of illegal activities related to the marketing and sale of 

title insurance. 

• Chapter 2 provides additional discussion of reissue rates, which are the discounts off 

standard premiums charged on title insurance policies. An article by Ken Harney 69 

reported that while the discounts vary from State to State and from title insurer to title 

insurer, they average 50-60 percent.70 While reissue rates are normally available on 

refinancings, in some areas they can be obtained on home resales where a title search was 

performed relatively recently. Harney’s article focused on the fact that this concept of 

discount pricing is not widely known to consumers nor is it widely promoted by the 

industry. Harney quotes James R. Maher of the American Land Title Association 

(ALTA) as saying he is aware that “not all of our [ALTA] members disclose” the 

existence of reissue rate discounts. Harney also notes that while some mortgage brokers 

routinely ask the title or closing agent for reissue rates on refinancings, others admit that 

unless an applicant asks, they don’t mention the reissue rate option. With respect to title 

agents or closing attorneys disclosing reissue rates, some do but there are financial 

incentives against them doing so. This is because the title agent or attorney receives most 

of the insurance premium back from the insurance company; thus, the smaller the 

premium that is charged for the insurance coverage, the smaller the compensation to the 

title agency or settlement attorney. Harney quotes Maher as saying the average national 

“split” of the premium charged at closings is 70-72 percent to the title or settlement 

agency, and the balance to the title insurance company. The splits go as high as 92.5 

percent to the agent or attorney and just 7.5 percent for insurance, according to Maher. 

 

67 Norma Garcia, Consumers Union news release, April 2, 2003. 

68 Office of the Attorney General, State of California, Press Release dated October 8, 2002. 

69 See Kenneth R. Harney, “How to Save 50 to 60 Percent on Title Insurance When Refinancing,” Realty Times, 

June 17, 2002. 

70 According to Mike Finnerman, a senior title officer with the American Title Company, deeply discounted reissue 

rates are usually available on refinances, typically ranging from 30-50 percent of the normal premium fee. 

Finnerman also notes “these discount opportunities seem to be a deep, dark secret in today’s marketplace.” See 

“Trimming the Cost of Title Insurance,” South Coast Today: The Standard Times, June 29, 2002, page T3. 

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Title insurance company financial statements suggest the split averages about 80 percent 

to agents, 20 percent to the insurance companies. 

• Chapter 2 discusses an alternative title insurance product (Radian Lien Protection or 

RLP) that had the potential to reduce the costs of title insurance; estimates of fifty percent 

savings on title insurance for refinancing borrowers are provided (ranging from $275-

$600). Although RLP was disallowed, the fact that one of the major title insurers 

(Fidelity National Financial) considered offering a low-price product similar to RLP 

suggested that when confronted with the possibility of competition title insurers can 

indeed lower their prices. 

• Wholesale Access Mortgage Research & Consulting, Inc. also sees a potential for savings 

in title fees. In their letter commenting on the 2002 rule, they write: “Perhaps total 

savings might be as much as $5 billion, but that assumes states allow average pricing of 

title insurance.”71

• An article "Cutting A Better Title Deal: Money-Back Settlement Programs Put Cash in 

Buyers' Pockets" by Kenneth R. Harney72 provided support that title and settlement fees 

can be excessive and in many cases reduced, by as much as $525-$1,525 in the 

Washington, D.C. area. The article explored the "little-publicized joint venture 

arrangements between real estate brokerage companies and title insurance agencies." 

According to Harney, these joint ventures funnel hundreds, and sometimes thousands, of 

dollars from homebuyers' settlement fees (e.g. fees purportedly for title insurance) back 

to subsidiary companies formed by large real estate brokerage firms. Industry executives 

say that consumers rarely understand that their payments are flowing back to the realty 

company. One executive stated that as a general rule, "a substantial percentage" of the 

title premium paid by consumers at real estate settlements often goes to the title agency 

or settlement company performing the closing, but the title agents may have joint venture 

arrangements with large real estate brokerage firms, and share the total fees generated by 

every client with those firms. Under the arrangements described in the article, the bulk of 

title insurance premiums are often paid to the title agency that does the closing with only 

a fraction to the title insurance company for actual insurance coverage against title 

problems. Harney reported that industry officials say that title agents can receive 70-85 

percent of the title premium, depending upon the amount of business the agents direct to 

a specific title insurance underwriter. Those same title agents may have joint venture 

arrangements with large real estate brokerage firms and shares with the real estate 

brokers the total fees generated by every client the firm brings in for a settlement 

 

71 See comments from Tom LaMalfa and David Olson, Wholesale Access Mortgage Research & Consulting, Inc., to 

Rules Docket Clerk, HUD, regarding “Proposed Rule on Real Estate Settlement Procedures Act (RESPA); 

Simplifying and Improving the Process of Obtaining Mortgages To Reduce Settlement Costs to Consumers; Docket 

No. FR-4727-P-01; 67 Fed. Reg. 49134 (July 29, 2002),” September 30, 2002. 

72 Kenneth R. Harney, "Cutting a Better Title Deal: Money-Back Settlement Programs Put Cash In Buyers' Pockets," 

The Washington Post, January 24, 2004, p. F01. 

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transaction.73 Jerry Boutcher, president of Monarch Title, says his firms avoids such 

deals with real estate firms, but he reports a case of a settlement company paying a 

brokerage $800 to $1,00 per transaction. 

 

• The lenders involved in the programs mentioned in the Harney article provide some 

insights into the types of cost savings that can result from volume-based discounting. 

According to Harney, the lenders in these programs appear to be "bundling" -- appraisals, 

credit reports, flood certifications, process and origination charges -- into a guaranteed 

cost package. The title firms taking part appear to be cutting their own net fees in 

exchange for expected higher volumes of business from individual buyers and their realty 

agents. Larry Pratt, president and chief executive of First Savings Mortgage said there are 

two separate levels of cost reductions built into his firm's program: First Savings is 

reducing or putting lids on cost items such as appraisals, credit reports and other 

origination services, and then guaranteeing home buyers that the costs will not exceed a 

specific amount at settlement. A second level of savings is the lower total fee for title 

and settlement services by virtue of not having to split the money with a real estate broker 

via an affiliated business relationship. 

• An article on the practice of lenders creating vendor management companies as 

subsidiaries expressed similar sentiments about the title industry as the Harney article 

(Shenn, 2004a). A big reason vendor management subsidiaries have been lucrative for 

their lenders is that they are created as title agencies; Shenn (2004a) notes that "title 

premiums, which often are set by states, are among the most expensive pieces of the 

settlement pie, and are often split on a negotiated basis between title agents and insurers." 

In these cases, Terry Wakefield, president of a Wisconsin consulting firm, notes that "the 

ability to make some extra money on each loan as a title agent is a big benefit"(Shenn, 

2004a). 

• Evidence from a variety of sources indicates title and settlement service fees vary widely 

within specific geographic areas, suggesting some consumers are paying too much. 

Analysis of Consumers Union survey data (see above) suggests that settlement and title 

service fees can be significantly reduced. The Consumers Union data indicate the fees 

quoted by escrow agents vary widely for the same sized loan within metropolitan areas. 

For example, quoted fees for title insurance and all other settlement related expenses for a 

$250,000 refinancing in the Los Angeles metropolitan area ranged from $1,000 to 

$1,590, placing the highest price quote almost 60 percent higher than the lowest price 

quote. The average quoted price in the Los Angeles area was $1,286, or 28.6 percent 

greater than the lowest quoted price. The percentage difference between the highest 

(average) and lowest quoted price was 60 percent (26 percent) in Fresno, 30 percent 

73 Harney outlined two new industry products in the Washington, D.C. area that purport to reduce overall settlement 

and title costs by: (1) reducing costs for items such as appraisals, credit reports and other origination services; and 

(2) avoiding joint venture arrangements under which title fees are paid back to the brokerage or real estate firms' 

subsidiaries. These programs also provide some insights into the types of cost savings that can result from 

packaging. The lenders in these programs appear to be "bundling" fixed or discount-cost loan fees -- appraisals, 

credit reports, flood certifications, process and origination charges -- into a guaranteed cost package. 

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(16 percent) in Sacramento, 24 percent (12 percent) in San Francisco, and 24 percent 

(10 percent) in San Diego. 

• Data on title and settlement fees analyzed by Woodward (2003b) indicated substantial 

dispersion in fees, suggesting the feasibility of significant savings.74 In her sample, the 

cost of title insurance averaged $910 with a standard deviation of $550, an enormous 

amount of variability. Woodward also finds that the total amount of title charges 

increases with the number of separate title charge line items. 

• Analyses by the Urban Institute (2008) and HUD of title and settlement fees charged 

FHA borrowers showed substantial variation in these fees, both across and within states 

and metropolitan areas. Title and settlement fees also exhibited wide variation within 

states and metropolitan areas for the same loan amount. The metropolitan area charts in 

the Appendix B to Chapter 2 show clearly how much title fees vary within an area for the 

same mortgage amounts. As explained in Chapter 2, this study of FHA closing costs 

represents the first major study of these fees, and the results show that they vary all over 

the place. 

• The recent report by the GAO and the academic literature review of the title industry 

provided in Chapter 2 both paint the same picture of an industry characterized by noncompetitive conditions and one where it is difficult for consumers to shop for the lowest 

price. 

In addition to the more comprehensive analysis described earlier that projects 7.5 to 

10 percent savings in third-party fees, the analysis will also be conducted assuming that savings 

from the rule occur only in the title industry. As indicated above, there is much more evidence 

available on the potential for cost reductions in the title and settlement industry than in the other 

third-party industries, and the title and settlement industry accounts for 72.5 percent of thirdparty fees. While estimates of potential cost reductions vary, a $400-$500 range appears feasible 

to some observers; savings of this magnitude translate into at least 25 percent savings. 

Based on the above data and industry information, this chapter projects savings in title 

and settlement fees from the GFE of $200. Therefore, under the “title approach”, title and 

settlement savings from the new GFE are projected to be $200 with sensitivity analysis 

conducted for savings of $150. There are no additional cost savings from the other industries 

under this approach. Thus, under this approach, total third-party savings are $200, or $2.50 

billion, assuming 12,500,000 in loan originations, with sensitivity analysis at $150 savings per 

origination, or $1.875 billion in total. 

 

74 In addition, a 1996 Media General surveyed 489 settlement service providers in Virginia and found that attorneys 

who acted as settlement agents charged 65 percent more than non-attorneys for the same service. See Media 

General, Residential Real Estate Closing Cost Survey, September 1996. 

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The other industry with a significant closing revenue share is the appraisal industry, 

which accounts for 17.7 percent of third-party fees. Thus, together, the title and appraisal 

industries account for most (90.2 percent) of third-party fees. As part of sensitivity analysis, 

potential cost savings are also provided for the appraisal industry as well. It is recognized there 

is not as much evidence of non-competitive prices in this industry, but competitive pressure 

under tolerances, discounting, and average cost pricing will lead to pressure to all costs. The 

variability in appraisal prices was noted by Timothy Schools, who heads National Commerce 

Financial Corp.'s vender management subsidiary. His company found that appraisals ordered by 

10 different employees at one of its bank branches ranged in cost from $150 to $350 -- all from 

the same appraiser.75 Schools was noting the advantages of more centralized ordering of thirdparty services. Vendor management is designed to eliminate such wide dispersions in pricing. 

According to Mr. Schools, by centralizing the ordering of a portion of its settlement services, 

National Commerce has found $7 million a year in savings from improved efficiency and 

negotiated discounts (Shenn, 2004a). Thus, the competitive pressure to reduce all third-party 

fees may involve many avenues, for example, discount arrangements, more aggressive 

negotiation of fees, originators examining their practices to ensure consistency in appraisal 

changes (see above example), and even larger use of automated valuation models. Sensitivity 

analysis showing the effects of $35 dollars in appraisal savings will be presented below. 

The more comprehensive approach (7.5-10 percent savings) incorporates the remaining 

third-party industries (e.g., pest, survey) into the analysis. One reason for considering the 

remaining third-party industries is to allow a complete analysis of the impacts on small 

businesses – many of the firms in these industries are small businesses and, even though it is 

difficult to estimate the impact on them, there will be pressure to reduce all third-party costs 

under the new GFE tolerances and discounting provisions of the rule. While evidence of noncompetitive prices is not available in these industries, they will be subject to the more aggressive 

shopping by originators for their services. This should lead to reductions in prices. As noted 

earlier, under this more comprehensive approach, third-party prices are projected to decline by 

10 percent, saving borrowers $2.47 billion (of the $24.738 billion in third-party fees). Sensitivity 

analysis will show the effects of a 7.5 percent reduction in prices, which translates to savings of 

$1.86 billion in third-party fees. This 7.5 to 10.0 percent range in savings could be a 

conservative projection -- the new GFE could lead to a greater than 10 percent reduction in thirdparty fees. 

 

(9) Total Dollar Savings for the Consumer from the Enhanced GFE. Under the title 

approach, total estimated price reduction to borrowers comes to $8.38 billion, or 12.6 percent of 

the $66.74 billion in total charges (i.e., origination fees, appraisal, credit report, tax service, flood 

certificate, pest inspection, survey, and title insurance and settlement agent charges).76 Under the 

more comprehensive approach, projected savings are similar at $8.35 billion, or 12.5 percent of 

 

75 Flood determinations ranged from $6 to $25. 

76 The exact consumer savings figure is $6.696 billion, consisting of $4.760 billion in savings of origination charges 

(including yield spread premium savings) and $1.936 billion in savings of third-party fees. Dividing this figure 

($6.696 billion) by total origination and third-party fees ($53.356 billion) yields 12.5 percent. 

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all fees. Thus, there is an estimated approximately $8.4 billion in transfers from firms to 

borrowers from more and better shopping with the improved GFE, from a better understanding 

by consumers of financial trade-offs and yield spread premiums, from the price-reducing effects 

of tolerances on both originator and third-party fees, from cost-reducing discount arrangements 

between originators and third-party providers, and from average cost pricing. The $8.4 billion 

figure (representing about 12.5 percent of total charges) is a reasonable if not conservative 

estimate of consumer savings. Still, sensitivity analyses with lower savings are conducted; for 

example, one scenario projects $6.5 billion in consumer savings, representing 9.7 percent of total 

charges. 

VII.E.2. Steps in Deriving the Small Business Transfer Estimates 

While results from the title approach will be presented, the small business discussion will 

initially focus on the comprehensive approach, as that shows a wider range of small business 

impacts. 

(10) Dollar Transfers to Consumers from Major Providers. Of the $8.35 billion in 

consumer savings, originators contribute $5.88 billion of this (see Step 5) and third-party 

settlement service providers, $2.47 billion (see Step 8). [Under the title approach, the figures 

would be practically the same -- $8.38 billion, $5.88 billion (exactly the same since originators 

are treated the same under the two approaches to cost savings), and $2.50 billion, respectively. 

However, as discussed below, the small business share does significantly differ under the title 

approach.] 

(11) Dollar Transfers to Consumers from Originator Groups. As explained in Step 

(2), it is estimated that approximately 60 percent of mortgages will be originated by brokers (in a 

broad sense of the term), leaving 40 percent to be originated by lenders. This analysis assumes 

that total origination charges (i.e., direct origination fees and yield spread premiums) are 

distributed in a similar manner as mortgage origination activity. Thus, $25.2 billion of the $42.0 

billion in total origination charges is due to brokers and the remaining $16.8 billion is due to 

lenders. The transfers to consumers are distributed similarly, which means that $3.53 billion of 

the $5.88 billion in consumer savings comes from brokers and the remaining $2.35 billion comes 

from lenders.

(12) Dollar Transfers to Consumers from Third-Party Groups. The $2.47 billion in 

third-party savings can also be distributed among the various third-party providers (under the 

comprehensive approach). Based on the average third-party fees for each individual provider 

from Step (6), the $1,979 in total third-party fees is distributed as follows: (a) 17.7 percent for 

appraisal, (b) 1.3 percent for credit reporting, (c) 3.5 percent for tax service, (d) 0.8 percent for 

the flood certificate, (e) 1.3 percent for pest inspection, (f) 2.9 percent survey, and (g) 72.5 

percent for title insurance and settlement agent charges. These percentages indicate the 

distribution of revenues among the third-party providers. It is assumed that transfers to 

consumers (or consumer savings) are distributed among third-party industries according to these 

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revenue shares.77 Thus, to obtain transfers to consumers from specific third-party industries, one 

multiplies the $2.474 billion in transfers by the just-listed revenue shares, which yields the 

following: (a) $438 million for appraisal, (b) $31 million for credit reporting, (c) $88 million for 

tax service, (d) $19 million for the flood certificate, (e) $33 million for pest inspection, (f) $73 

million survey, and (g) $1,794 million for title insurance and settlement agent charges. These 

figures highlight that the largest source of consumer savings is the title insurance and settlement 

industry, which would experience a $1.794 billion reduction in revenue. Under the title 

approach, $2,500 million, or 100 percent, of the savings is drawn from the title industry. A 

related approach assumes savings (totaling $440 million) would also come from the second 

largest third-party industry, the appraisal industry. 

(13) Small Business Revenue Impacts: Originators. Step (11) reported that $3.53 

billion of the $5.88 billion in consumer savings in originator costs came from brokers. Section II 

of Chapter 5 reports that approximately 70 percent of broker revenues are due to small brokers 

(as defined by the Small Business Administration). Thus, small brokers account for $2.47 billion 

of the $3.53 billion in consumer savings that comes from brokers. The remaining $2.35 billion 

of the $5.88 billion comes from lenders (non-brokers), which include commercial banks, savings 

institutions, and mortgage banks. In addition, the small percentage of loans originated by credit 

unions in included with the lender category.78 The share of revenue due to small lenders is 

estimated to be 23 percent79; but, as explained in Section III of Chapter 5, there is some 

uncertainty around this estimate so sensitivity analyses are provided below (varying the small 

lender percentage from 20 percent to 26 percent). Readers are referred to Chapter 5 for a 

detailed discussion of the estimation of the small business percentage and for an analysis of the 

 

77 For the non-title industries in the comprehensive (base) approach, this is a practical assumption. Otherwise, one 

would have to hypothesize that the shopping and tolerance features of the GFE would have differential impacts on 

the various non-title industries, or that the various industries currently have different propensities to overcharge 

consumers. It may be the case that an activity (say the flood determination) will not be as affected by the new GFE 

as other industries; however, an activity such as flood determination is such a small percentage of the new overall 

costs that the more practical assumption used here should not distort the results in any significant manner. Thus, this 

practical assumption is also likely a reasonable one. The title approach takes the opposite perspective – that, based 

on available evidence, most of the potential savings will come from title and settlement firms, not the other 

industries where there is less evidence of non-competitive prices. In some of the sensitivity analyses of the title 

approach, the appraisal industry is included in order to account for most of the third-party industry. The appraisal 

industry has only a small impact on the results; and the data for the appraisal industry will be presented separately, 

allowing it to be excluded from the title approach if the reader thinks it should be. 

78 Section III of Chapter 5: (a) describes difficulties in estimating the small business percentage for lenders; (b) 

explains the reasons sensitivity analyses are needed due to the uncertainty with the estimates; (c) presents and 

critiques the estimates of small lender revenue from the Bureau of Census data; (d) estimates the number of banks, 

thrifts, mortgage banks, and credit unions affected by the RESPA rule; (e) explains the HMDA-based methodology 

used to derive the small business share of lender revenues; (f) allocates (with some uncertainty) the lender transfers 

and small lender transfers among the various lender groups; and (f) expresses the bank and thrift transfers as a 

percentage of bank and thrift revenues. If the small business percentage for lenders had been based on the Census 

data, it would have been lower (see Chapter 5). The economic analysis of the proposed rule, which relied heavily on 

the Census data, assumed that small lenders accounted for 12 percent of lender revenues. This analysis projects the 

small lender share to be 20 to 26 percent, with the base case being 23 percent (or 22.8 percent to be exact, as 

discussed in Chapter 5). 

79 The analysis uses 22.8 percent, for reasons discussed in Chapter 5. 

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transfers among the various lender groups. Compared with the broker market, small businesses 

account for a much smaller share of the lender market. Small lenders account for $0.54 billion of 

the $2.35 billion in consumer savings that comes from lenders. Combining the small business 

figure for brokers ($2.47 billion) with that for lenders ($0.54 billion) yields $3.01 billion for 

transfers by small originators to consumers. Thus, small originators account for 51.1 percent 

($3.01 billion of $5.88 billion) of the transfers that are going from loan originators to consumers. 

The 70 percent figure from Chapter 5 is based on more complete data for non-employer broker 

firms, so it is probably the more accurate figure; however, the sensitivity analysis in Step (24) 

below will consider estimates higher than 70 percent. As explained in Section III of Chapter 5, 

the 23 percent figure for the revenue percentage of small lenders used here incorporates 

additional data from HMDA and other sources, and more systematically incorporates bank and 

thrift data into the analysis. Along with the 20 to 26 percent range examined below, the 23 

percent base case could be too high, but that seems more appropriate than having a low estimate 

of the small lender share. 

(14) Small Business Revenue Impacts: Third-Party Providers. Step (12) reported the 

distribution of the $2.47 billion in third-party transfers to consumers by industry; for 

convenience it is reproduced here as follows: (a) $438 million for appraisal, (b) $31 million for 

credit reporting, (c) $88 million for tax service, (d) $19 million for the flood certificate, (e) $33 

million for pest inspection, (f) $73 million survey, and (g) $1,794 million for title insurance and 

settlement agent charges. Using data from Chapter 5, the share of each industry's revenue that 

goes to small businesses is estimated to be the following: (a) 83.1 percent for appraisal, (b) 10.5 

percent for credit reporting, (c) 0.0 percent for tax service,80 (d) 0.0 percent for flood insurance, 

(e) 53.9 percent for pest inspection, (f) 81.3 percent for survey, and (g) 38.1 percent for title 

insurance and settlement agent charges. For each industry, multiplying the transfer amount by 

the small business percentage yields the following transfers from small businesses: (a) $364 

million for appraisal, (b) $3 million for credit reporting, (c) $0.0 for tax service, (d) $0.0 for 

flood insurance, (e) $18 million for pest inspection, (f) $59 million for survey, and (g) $683 

million for title insurance and settlement agent charges.81 Combined, small businesses account 

 

80 There are basically three large tax service companies in the country and the tax service companies do at least some 

of the flood determinations. Similar to the economic analysis of the proposed rule, tax services and flood 

certifications are assumed to be done by large businesses. 

81 As explained in Chapter 5, the title and settlement industry has four components, with varying small business 

shares: (a) Direct Title Insurance Carriers (4.8 percent); (b) Title Abstract and Settlement Offices (49.8 percent); (c) 

Offices of Lawyers (47.8 percent); and (d) Other Activities Related to Real Estate (86.9 percent). To obtain an 

overall small business percentage, one has to weigh the relative importance of these four industries, which is 

particularly difficult given that single-family real estate activities may represent a small percentage of an industry 

such as (c), and that the single-family-real-estate-related firms in such an industry may have a different small 

business make-up than the other firms in that industry. There is also the problem of the double counting of title 

insurance commissions, rendering it difficult to estimate the revenue of Direct Title Insurance Carriers. Because 

Direct Title Insurance Carriers (DTIC) industry is dominated by large businesses, their treatment in the analysis can 

significantly affect the overall small business percentage for the title and settlement industry. The reader is referred 

to Chapter 5 for a detailed discussion of these issues. Section IV of Chapter 5: (1) explains the difficulties in 

estimating the share of industry revenues going to large insurers (i.e., the DTIC sector); (2) presents several 

sensitivity analyses of the small business share of the settlement and tile industry, depending different revenue 

projections of the DTIC sector and different splits in revenues among the remaining sectors, b, c, and d; (3) presents 

estimates of the number of small title and settlement firms based on the Bureau of Census data; (4) allocates 

transfers due to the GFE among the various industry sectors and their small business components; and (5) expresses 

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for $1.127 billion of the $2.474 billion in third-party transfers, or 45.5 percent of all third-party 

transfers. Again, the dominant industry is the title insurance and settlement industry, which 

contributes 62 percent ($0.683 billion of $1.127 billion) of the transfers from small businesses. 

As noted above, small businesses account for 38.1 percent of the revenue of the title insurance 

and settlement industry.82 This percentage, which is the subject of much analysis in Chapter 5, 

depends importantly on the role assigned to large title insurers, or the Direct Title Insurance 

Carriers (DTIC) industry. A smaller (larger) share for the DTIC sector of the settlement and title 

industry increases (reduces) the small business share for the overall title and settlement industry. 

Section IV of Chapter 5 conducts several sensitivity analyses examining different revenue shares 

for large insurers; these analyses suggest that the small business share of the overall title and 

settlement industry could vary from 34 percent to 43 percent. Therefore, in addition to the 38.1 

percent used above, additional analyses will be conducted later assuming these alternative small 

business shares for the title and insurance industry. 

(15) Small Business Revenue Impacts: Combined. From Step (13), small originators 

account for $3.01 billion of $5.88 billion in transfers from loan originators to consumers. From 

Step (14), small third-party providers account for $1.13 billion of $2.47 billion in transfers from 

third-party providers to consumers. Thus, in total, small businesses account for $4.13 billion of 

$8.35 billion in transfers from originators and third-party providers to consumers. In percentage 

terms, small businesses account for 49.5 percent of all transfers. 

VII.E.3. Summary of Above Steps 

(16) Summary of (1)-(15). The estimated price reduction to borrowers comes to $8.35 

billion, or 12.5 percent of the $66.7 billion in total charges (i.e., origination fees, appraisal, credit 

report, tax service and flood certificate and title insurance and settlement agent charges). Thus, 

there is an estimated $8.35 billion in transfers from firms to borrowers from the improved 

disclosures and tolerances of the new GFE. Originators contribute $5.88 billion of this and thirdparty settlement service providers, $2.47 billion. It is estimated that $4.13 billion of the $8.35 

billion comes from small businesses -- $3.01 billion from small originators and $1.13 from small 

settlement service providers. Sensitivity analyses will be presented below that focus, among 

other things, on the results for the approach where most of the consumer savings comes from the 

title industry, and for the base approach with a smaller rate of consumer savings. 

 the transfers as a percentage of industry revenues and small business revenue. Also see next two footnotes for more 

details of the analysis of the title and settlement industry. 

82 The base case in Chapter 5 that produces the 38.1 percent estimate is represented by the following three sets of 

industry shares (listed first) and small business percentages (in parentheses): (a) 43 percent for DTIC (4.8 percent); 

(b) 38.0 percent for Title Abstract and Settlement Offices (49.8 percent); and (c) 19.0 percent for a combined 

lawyers-escrow sector (90 percent). Combining these industry shares and small business percentages gives the 

overall small business percentage of 38.1 percent for sector (g), the title and settlement industry. Because of the 

uncertainty surrounding these estimates, Chapter 5 conducts sensitivity analyses varying the DTIC share and the 

split between (b) and (c). These analyses suggest that the overall small business percentage could vary from 34 

percent to 43 percent. 

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VII.E.4. Sensitivity Analyses 

This section provides several sensitivity analyses examining the effects on consumer 

savings and small business impacts of alternative assumptions about important parameters, such 

as the projected savings in originator and third-party costs. This analysis allows readers to gauge 

the range of dollar savings and transfers that are possible with the new GFE. 

(17) Base Case. The above steps for the comprehensive approach will be called the 

“base case.” The base case, which is taken from the above summary in Step (16), can be 

characterized by the following key figures: 

 Consumer Savings Small Business

Origination Services $5.88 $3.01

a. Brokers 3.53 2.47 

b. Lenders 2.35 0.54 

Third-party Services 2.47 1.13

c. Title and Closing 1.79 0.68 

d. Other Third-party 0.68 0.44 

Total Settlement ($ billion) 8.35 4.13

There are $8.35 billion in consumer savings representing 12.5 percent of the $66.7 billion 

of projected settlement costs. $4.13 billion of the transfers to consumers are projected to come 

from small businesses, with small originators contributing $3.01 billion and small third-party 

firms, $1.13 billion.83 Within the small originator group, most of the transfers to consumers 

come from small brokers ($3.01 billion, or 83 percent); this is because small firms account for 

most of broker revenues but for only a small percentage of lender revenues. Within the small 

third-party group, most of the transfers come from title and closing agents ($0.68 billion, or 60 

percent); this is mainly because the title and closing industry accounts for most third-party fees. 

(18) Results for Title Approach. As explained in Step (8), one approach for estimating 

consumer savings under RESPA reform focuses on the title industry, as there is much more 

evidence available on the potential for cost reductions in the title and settlement industry than in 

the other third-party industries. Savings of $200 per loan are projected for title costs. The 

aggregate dollar effects are as follows:

 

83 The small business share of transfers to consumers is somewhat smaller in this economic analysis compared with 

the economic analysis of the proposed rule (49.5 percent versus 55.6 percent). Steps (13)-(15) explain reasons for 

the lower small business share. 

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 Consumer Savings Small Business

Origination Services $5.88 $3.01

a. Brokers 3.53 2.47 

b. Lenders 2.35 0.54 

Third-party Services 2.50 0.95

c. Title and Closing 2.50 0.95 

d. Other Third-party 0.00 0.00 

Total Settlement ($ billion) 8.38 3.96

In the title approach, the title industry accounts for $2,500 million of the transfers. In this 

case, small title companies account for $952 million (38.1 percent). In this case, consumer 

savings in the title industry are 40 percent higher than in the base case ($2.50 billion versus 

$1.79 billion). Lower estimates of consumer savings were also considered -- $150 dollars per 

loan savings in title costs. In this more conservative case, aggregate consumer savings in title 

costs total $1,875 million, with $714 million (or 38.1 percent) of the savings coming from small 

title companies. 

(19) Results for Title and Appraisal Approach. As explained in Step (8), another 

approach for estimating consumer savings under RESPA reform focuses on both the title and 

appraisal industries. Savings of $200 per loan are projected for title costs and $35 per loan for 

appraisal costs. The aggregate dollar effects are as follows:

 Consumer Savings Small Business

Origination Services $5.88 $3.01

a. Brokers 3.53 2.47 

b. Lenders 2.35 0.54 

Third-party Services 2.94 1.32

c. Title and Closing 2.50 0.95 

d. Appraisal 0.44 0.36 

Total Settlement ($ billion) 8.82 4.32

In this case, the title industry accounts for $2,500 million of the transfers and the appraisal 

industry, the remaining $440 million. Small title companies account for $950 million (38.1 

percent) and small appraisal firms, $360 million (83.1 percent). Combined, the small business 

transfers for these two third-party industries total $1.32 billion, or 45 percent of total transfers. 

(20) Lower Origination Fees with Constant Overall Fees. The above analysis (i.e., 

Steps 1-19) assumed that origination fees were 1.75 percent of the loan amount, or $42 billion if 

total mortgage originations are $2.4 trillion. Adding third-party fees of $24.7 billion (or 1.03 

percent of total originations) yielded total settlement costs of $66.7 billion, or 2.78 percent of the 

total originations. This and the next step examine the effects of lower percentages for origination 

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fees. First, the origination fee is reduced to 1.5 percent (or $36.0 billion) but the overall 

settlement cost percentage (2.78 percent) remains the same. So in this case, third-party fees are 

assumed to rise to 1.28 percent (from 1.03 percent), or to $30.738 billion (from $24.738 billion). 

Thus, this scenario allows one to examine the effects of shifting the mix between origination fees 

and third-party costs. 

 Consumer Savings Small Business

Origination Services $5.04 $2.58

a. Brokers 3.02 2.12 

b. Lenders 2.02 0.46 

Third-party Services 3.07 1.40

c. Title and Closing 2.23 0.85 

d. Other Third-party 0.84 0.55 

Total Settlement ($ billion) 8.11 3.98

In this case, the estimated price reduction to borrowers falls slightly to $8.11 billion, or 

12.2 percent of the $66.7 billion in total charges. Compared with the base case, there are fewer 

savings from originator fees ($5.04 versus $5.88 billion) but more savings from third-party fees 

($3.07 versus $2.47 billion) -- not unexpected given that this sensitivity analysis shifts fees from 

originators to third-party providers. It is estimated that $3.98 billion (or 49.0 percent) of the 

$8.11 billion comes from small businesses -- $2.58 billion from small originators and $1.40 

billion from small settlement service providers. The next step examines a more intermediate 

case. 

(21) Lower Origination Fees with Constant Third-party Fees. In this case, 

origination fees are assumed to be 1.50 percent, or $36.00 billion, while third-party fees are kept 

constant at $24.7 billion. Thus, total settlement costs are reduced from $66.74 billion (2.78 

percent) to $60.74 billion (2.53 percent). In this case, the following results are obtained: 

 Consumer Savings Small Business

Origination Services $5.04 $2.58

a. Brokers 3.02 2.12 

b. Lenders 2.02 0.46 

Third-party Services 2.47 1.13

c. Title and Closing 1.79 0.68 

d. Other Third-party 0.68 0.44 

Total Settlement ($ billion) 7.51 3.70

(22) Lower Origination and Third-party Savings Rates. In the base case, the GFE 

was projected to reduce the $66.74 billion in settlement costs by 12.5 percent, or $8.35 billion. 

In this sensitivity analysis, the following changes were made that lower projected savings to 

consumers: (1) the rate at which the new GFE would save origination costs was reduced from 

14.0 percent ($5.88 billion) to 11 percent ($4.62 billion), as explained in Step (4); and (2) the 

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projected savings for third-party fees was reduced from 10 percent (or $2.47 billion) to 7.5 

percent (or $1.86 billion). Thus, savings under these changes total $6.48 billion (or 9.7 percent), 

instead of $8.35 billion (or 12.5 percent) in the base case. The key figures from this analysis are 

as follows: 

 Consumer Savings Small Business

Origination Services $4.62 $2.36

a. Brokers 2.77 1.94 

b. Lenders 1.85 0.42 

Third-party Services 1.86 0.84

c. Title and Closing 1.35 0.51 

d. Other Third-party 0.51 0.33 

Total Settlement ($ billion) 6.48 3.21 

There are reasons to believe that the savings rate of 12.5 percent is conservative, although 

it is recognized that some would disagree. The above-listed changes producing a somewhat 

lower savings rate of 9.7 percent are even more conservative than the base case (e.g., only 7.5 

percent savings in third-party fees), and yet there remains $6.48 billion in savings for consumers. 

Thus, the 9.7 to 12.5 percent savings rate is consistent with approximately $6.5-$8.4 billion in 

consumer savings. 

(23) Different Small Business Percentage Estimates for Lenders and Brokers. Step 

(13) above noted the uncertainty with estimating the small business percentage for lenders. 

Section III.B.5 of Chapter 5 develops the 23 percent share used in the base case but suggests that 

the percentage could range from 20 percent to 26 percent. If the share is 20 percent, transfers 

from small lenders fall by $70 million, from $540 million to $470 million. If the share is 26 

percent, transfers from small lenders increase to $610 million. 

As explained in Section II of Chapter 5, data from the Census Bureau suggest that small 

brokers account for almost 70 percent of that industry's revenue. If small brokers accounted for 

80 percent of industry revenue, then transfers from small brokers would increase by $350 

million, from $2.47 billion (base case of 70 percent) to $2.82 billion. If small brokers accounted 

for 75 percent of broker originations, then transfers from small brokers would total $2.65 billion. 

These impacts are large because brokers account for 60 percent of market originations. 

It is also possible that the small business share of revenues on broker loans could be less 

than the 70 percent figure. In the case of broker loans, the base case assumes that the entire 

1.75 percent in origination fees goes to brokers; hence, the analysis assumes that all the savings 

due to lower origination fees (both direct and indirect) come from reductions in broker revenues. 

But part of the origination fee could go to the purchasing lender (i.e., the wholesale lender) for 

specific services such as underwriting. Competition under the RESPA reform will lead to lower 

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origination fees for both brokers and their wholesale lenders.84 To the extent that the consumer 

savings on broker originations are due to price reductions of the wholesale lender (such as a 

lower underwriting fee charged on a broker loan), then the broker and small business share of 

consumer savings on broker loans are overstated in the above analysis. For example, assume 

that wholesale lenders' services account for 10 percent of origination fees on broker loans (or 

0.175 percent of the 1.75 percent in origination fees), leaving brokers the remaining 90 percent 

of origination fees (or 1.58 percent of the 1.75 percent). In the base case, consumers save $3.53 

billion in origination fees on broker loans, with small brokers contributing $2.47 billion of the 

$3.53 billion. In other words, 70 percent of the savings come from small brokers. If part of the 

consumer savings were from wholesale lenders (as described above), then brokers would have 

instead contributed $3.18 billion of the savings, and small brokers, $2.22 billion. (The numbers 

are obtained by simply multiplying the initial broker numbers by 90 percent, which is the broker 

share of origination fees in this example.) Wholesale lenders contribute the remaining $0.35 

billion savings in origination fees in this example. Since wholesale lenders are not likely to be a 

small business, the small business share of the $3.53 billion in transfers is 63 percent -- the $2.22 

billion in transfers from small brokers divided by the $3.53 billion in total transfers on broker 

loans. This is lower than the 70 percent small business (small broker) share of the base case. 

Thus, to the extent that part of the 1.75 percent origination fee on broker loans goes to wholesale 

lenders for their services (rather than being earned by the broker), the small business share of 

origination fees on broker loans will be lower than the 70 percent share used in the base case. 

This example suggests that using the 70 percent figure (which is the share of broker revenue that 

is due to small businesses) could overestimate the small business impact of the RESPA rule. 

However, the overestimate, if any, is probably not much and it seems reasonable to use the 

70 percent figure for the estimate of the small business share on broker loans. Still, readers 

should interpret the term “Brokers” underneath “Origination Services” in the above tables as 

indicating the consumer savings and small business transfers on broker loans. To the extent that 

wholesale lenders receive a portion of the origination fees on broker loans, the fees are not going 

to “brokers”, as the above example illustrates.85

(24) Different Small Business Percentage for Title and Settlement Services. As 

discussed in Step (14) and in Section IV of Chapter 5, there is also some uncertainty with respect 

to the small business percentage of the title and settlement industry. Given that this industry 

accounts for 72.5 percent of third-party fees, it is important to have good information on the 

small business share of this industry. The driving factor is the market share that one assigns to 

large title insurance companies, a higher (lower) share reducing (increasing) the small business 

share of the overall title and settlement industry. Chapter 5 discusses this issue in some detail, 

 

84 However, as discussed throughout this economic analysis, wholesale lenders are viewed as being highly 

competitive, which means that there may not be much excess in the fees that they charge their brokers and loan 

correspondents. (On the other hand, with respect to their retail operations, there is no reason to believe that they do 

not overcharge borrowers as much or more than brokers.) 

85 The Fannie Mae study, Mortgage Focus (2003), provides some origination-related cost data for wholesale lenders 

for different methods of originating a loan. The costs ranged from $164-$205 for the correspondent channel and 

$470-$513 for what appears to be the broker channel (labeled “wholesale” on page 5). For the 101 lenders included 

in the Mortgage Focus sample, the report also indicated that, on average, brokers received $1,586 in fees in 2002; 

there were additional costs of $916 to originate a loan, yielding a total cost of $2,502. 

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examining several market estimates for large title companies. The results of that analysis are the 

base case, which projects that large title companies account for 43 percent of industry revenue, 

and a suggestion to vary that percentage between 35 percent and 50 percent. If the large title 

companies account for 35 percent of industry revenue, then the small business share of transfers 

would increase, as follows: 

 Consumer Savings Small Business

Origination Services $5.88 $3.01

a. Brokers 3.53 2.47 

b. Lenders 2.35 0.54 

Third-party Services 2.47 1.21

c. Title and Closing 1.79 0.77 

d. Other Third-party 0.68 0.44 

Total Settlement ($ billion) 8.35 4.22

In this analysis, a reduction in the share of industry revenues accounted for by large 

insurers means that a greater portion of consumer savings will come from smaller firms (title 

agents, closing attorneys, escrow companies). In this specific case (a reduction in the large 

insurer share from 43 percent to 35 percent), transfers from small businesses in the title and 

settlement industry increase by $90 million, from $680 million to $770 million. On the other 

hand, if large insurers account for 50 percent of industry revenue, then transfers from small title 

and settlement firms fall by $70 million, from $680 to $610 million. 

(25) Different Mortgage Origination Estimates for Market. As explained in Step (1), 

mortgage volume projection of 12,500,00 loans, or $2.4 trillion, is much lower than recent 

mortgage volume. Projected consumer savings and transfers would be much higher in market 

environments with 15-17 million originations (as in 2001-02 or 2004-05) or over 24 million as in 

2003. To illustrate the shifts, mortgage originations were increased by 3,000,000 to 15,500,00 

loans. The following results were obtained. 

 Consumer Savings Small Business

Origination Services $7.29 $3.73

a. Brokers 4.37 3.06 

b. Lenders 2.92 0.67 

Third-party Services 3.07 1.40

c. Title and Closing 2.22 0.85 

d. Other Third-party 0.84 0.58 

Total Settlement ($ billion) $10.36 $5.12 

There are $10.36 billion in consumer savings representing 12.5 percent of the $82.755 

billion of projected settlement costs; this compares with $8.35 billion in consumer savings in the 

base case, which assumed a lower volume of mortgage originations (12.5 million originations). 

In this case, $5.12 billion of the transfers to consumers are projected to come from small 

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businesses, with small originators contributing $3.73 billion and small third-party firms, $1.40 

billion. 

It is possible that costs may be lower in a high volume year, particularly one 

characterized by more refinances (for example, less expensive automated appraisals and reissue 

rates on title insurance are more likely on refinance loans than they are on home purchase loans). 

If third-party costs were 80 percent of those in the above projection, and origination fees were 

only 1.50 percent, then total consumer savings would be $8.70 billion (instead of the $10.36 

billion above) and transfers from small businesses would be $4.31 billion (instead of the $5.12 

billion above). 

VII.E.5 Comments on Estimates 

Few comments were submitted on the estimated consumer savings of the proposed rule. 

The National Association of Realtors renewed their questioning of the benefits of the proposed 

rule in the 2008 report by Ann Schnare86 . The NAR cites a study87 by Mark Shroder as 

evidence that “bait and switch” is not a widespread phenomenon. Such a conclusion can not be 

based on Shroder’s study. The sample in the study suffers from a selection bias that limits its 

usefulness in investigating the “bait and switch” phenomenon. Mark Shroder examined 146 

FHA insurance binders. The GFE was present in only 47 of the 146 FHA binders. FHA does 

not require lenders to include GFEs in case binders. It is natural to suspect that those lenders that 

voluntarily submitted a GFE had nothing to hide. One can only speculate about those GFEs that 

are not present, but would a lender that purposefully tried to mislead a borrower knowingly 

report their activity to the FHA? HUD concludes that it is not likely that one would be able to 

detect “bait and switch” behavior from a study where disclosure by the lender is voluntary. 

The primary purpose of the rule is to limit the practice of charging excessive fees, 

regardless of whether this is achieved through “bait and switch” or any other misleading business 

practice. A Study of Closing Costs for FHA Mortgages88 analyzes all loan and other closing 

fees, primarily title fees, associated with FHA purchase mortgages. The data were obtained from 

the HUD-1s on thousands of FHA loans made in May and June of 2001. HUD is able to 

distinguish brokers from lenders and look at each group separately. The results strongly indicate 

that HUD’s RESPA reform efforts are aimed directly at very serious problems in the market for 

these loan origination and other settlement services. 

The YSP problem is worse than previously thought. Ideally, each dollar of YSP 

generated by a higher interest rate would result in a one dollar reduction in upfront fees, or total 

fees (upfront fees plus YSP) should not increase as the YSP increases. The reality is that this is 

 

86 The Estimated Costs of HUD’s Proposed RESPA Regulations. National Association of Realtors, June 3, 2008, 

Washington, D.C 

87 Mark Shroder, “The Value of the Sunshine Cure: The Efficacy of the Real Estate Procedures Act Disclosure 

Strategy,” Cityscape: A Journal of Policy Development and Research, Vol. 9, Number 1, 2007 

88 Susan E. Woodward, A Study of Closing Costs for FHA Mortgages, Urban Institute, May 2008.

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not even close to being true for either brokers or lenders. On average, borrowers see nearly 

dollar-for-dollar increases in total fees on brokered loans when loans are made at the higher rates 

that generate YSPs (total fees increase by 93¢ for every $1 of YSP). For loans made by large 

mortgage banks, total fees increase by 78¢ for every $1 of YSP. On average, borrowers save only 

20¢ in up-front cash for every $1 they pay in yield-spread premium, for a net loss (or extra cost) of 

80¢. These results are awful for borrowers. Clearly, the average FHA borrower has no idea that 

a higher interest rate can be used to reduce upfront charges. The GFE is designed to promote 

understanding of the trade-off between the interest rate and upfront charges with the combination 

of the trade-off table on page 3 and the YSP disclosure at the top of page 2. 

Total loan fees can vary by thousands of dollars from borrower to borrower even for the 

same loan amount. In addition, African-Americans pay an average of $313 to $532 more than 

non-minorities while Latinos pay an extra $290 to $450. Those with less education pay more 

than those with more. Loan charges vary considerably from state to state even for similar sized 

loans. Brokers charge more than lenders by an estimated $300.89 This is not what we would 

expect from a highly competitive market. 

The total charges on “no cost” loans, where the YSP is used to pay all loan originator 

fees, are estimated to be $1200 lower than for loans where loan originator fees are paid by a 

combination of YSP and up-front fees. These are the easiest loans to shop for because there is 

only one loan cost, the interest rate. The ease of shopping for this kind of loan would be 

consistent with a more competitive outcome. A borrower might call three lenders, get three 

interest rates, and pick the lowest one. Lenders realizing this might be more likely to offer more 

competitive rates for the no-cost loans because of market necessity. 

The cost savings for these no-cost loans might be a good indicator of the savings 

consumers could obtain for any loan if the market became more competitive. The 

standardization of the presentation of the GFE and the grouping of fees, the use of the front page 

as a simple summary page, and the shopping chart are all designed to simplify comparison 

shopping and exploit the gains available from an increase in competition. 

Title charges are analyzed as well. Title fees vary widely both within states and among 

states. Even holding property values constant, those in the highest four states pay more than 

$1,000 more for title services than those in the lowest state. A comparison of Texas and North 

Carolina, where home prices were the similar, shows no Texan paid less than $1,000 and only 

seven North Carolinians paid more than $1,000. The question that sticks out is why this 

difference exists. 

Thousand dollar differences in total title costs within a given state and for similar loan 

amounts are not uncommon. Given that most of the title insurance premium is a commission to 

 

89 This result may stem from an inherent identification problem bias in classifying broker loans. Broker loans are 

identified as those having YSPs. Only loans with higher interest rates are likely to have YSPs. For all loans in the 

dataset, total origination fees (upfront plus YSP) increase with the interest rate. Therefore, identified broker loans 

are likely to be measured as costlier than non-broker loans. 

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the title agent, there is not a good explanation for this variation in charges within a given state. It 

is not what we would expect in a competitive market. The tolerances on the GFE title costs give 

the lenders an incentive to search out lower priced title companies. It reduces the lender’s or 

broker’s bottom-line cost figure presented to the borrower and protects them from tolerance 

violations. The large variation in total charges paid by borrowers indicates that consumer 

savings could be substantial by having a knowledgeable shopper procure these services rather 

then the consumer who is an amateur. 

As with loan fees, minorities pay more for title services and the better educated pay less. 

More competition should reduce these effects as well. 

VII.F. Additional Shopping Benefits From the GFE and Other Market Impacts 

Efficiencies. In addition to the above consumer benefits, there will also be efficiencies 

associated with the shopping incentives of the new GFE. Borrowers will save time shopping for 

loans. If the new forms save the average applicant one hour in shopping time, borrowers will 

save $935 million.90 Originators will save time as well. If half the borrower time saved comes 

from less time spent with originators, then originators spend a total of half an hour less per loan 

originated talking to borrowers for a saving of $774 million.91 

Impact of RESPA Reform on Increased Homeownership and Refinancing. There are 

other potential shopping efficiencies that are anticipated from the rule that are difficult to 

estimate. As discussed in Section VII.A, many people (and particularly low-income and 

minority families) feel that the process of getting a loan to buy a home is complicated, 

mysterious, and intimidating.92 All of these features will be reduced under the new rule. Many 

of those who have the financial resources and credit along with the desire to own a home shy 

away from the process as a result of these negative features. These people may decide to become 

homeowners under the new schemes as these deterrents to homeownership are reduced (see 

above discussion). While there is good reason to believe the new scheme will be viewed more 

positively by potential homebuyers, we see no way to quantify this beneficial impact and the 

time it takes to occur. But the new GFE approach outlined in this chapter should increase the 

certainty of the lending process and, over time, should reduce the fears and uncertainties 

expressed by low-income and minority families about purchasing a home. 

 

90 This calculation is based on applicants, rather than borrowers. It is assumed that the number of applicants 

(21,250,000) is 1.7 times the number of borrowers (12,500,000). The average applicant income is $92,000, or $44 

per hour based on 2,080 hours per year. Multiplying the 21,250,000 applicants times $44 yields the $935 million 

reported in the text. 

91 This assumes $72 per hour for originator’s time (or $150,000 per year). Multiplying $72 times 0.50 times 

21,250,000 yields the $774 million reported in the text. 

92 For example, studies indicate that one impediment to low-income and minority homeownership may be 

uncertainty and fear about the home buying and lending process. See Donald S. Bradley and Peter Zorn, “Fear of 

Homebuying: Why Financially Able Households May Avoid Ownership,” Secondary Mortgage Markets, 1996. 

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The lower upfront costs and the user-friendly nature of the new GFE will lead to 

additional homeowners entering the market, as well as making it more likely that existing 

homeowners will refinance their loans when market rates fall below their contract rates. 

Therefore, there should be an increase in both home purchase and refinance business as the 

lending process becomes more palatable to the average borrower. There will be an increase in 

access to the capital market, and the relatively low mortgage rates at which mortgages are made. 

Previous sections have established that the RESPA reforms will both simplify the process 

and reduce the cost of obtaining a mortgage loan. The volume of home purchase and refinancing 

would be expected to increase with mortgage finance made more consumer-friendly and less 

costly. The new GFE will result in mortgage pricing and settlement cost information being 

readily available to shoppers in simple, easy-to-understand terms – this increase in information 

will improve the mortgage shopping part of the home buying process. Home purchase would 

increase as households who although qualified for home purchase have remained renters out of 

fear of the mortgage finance process move forward in the new more consumer-friendly 

environment to purchase a home. The same would be true for refinancing as the apprehension 

keeping many homeowners locked into above market rate mortgages dissipates with reform. 

Moreover, the reduction in costs resulting from reform would enable renter households just on 

the cusp of home purchase to cross over the threshold or accelerate their purchase ahead of the 

time they would otherwise qualify. The reduction in refinancing costs would also lead to more 

refinancing as homeowners with more modest levels of present value payment savings could 

thereby offset and justify the cost of refinancing. 

While there can be no doubt of the qualitative impact of reform outlined above, assessing 

its quantitative impact is more difficult, particularly given the most recent extended period of 

very low interest rates. Nevertheless, past research and analysis that follows using data from 

periods prior to the latest low interest period suggests that the quantitative impact, particularly 

over the longer run, will not be trivial. 

Bradley and Zorn (1996) conducted focus group studies that found many renter 

households who were financially capable of becoming homeowners remained renters out of fear 

or lack of information about the lending process.93 And, a study by Galster and others (1999) 

confirmed that there is a significant fraction of renter households that appear attractive prospects 

for homeownership with low credit risk and high probabilities of transitioning to homeowner 

status but who nonetheless remain renters.94 They estimated that approximately 9.6 percent or 

2.7 million of renter households (excluding individuals) represented in the 1990 Survey of 

Income and Program Participation (SIPP) who remained renters over an 18-month period had 

estimated probabilities of transitioning to homeownership in excess of the median probability for 

renters who actually became homeowners over the same period while having no greater 

likelihood of default.95 Hence, the rule might be expected to bring about an increase of a half 

 

93 Donald S. Bradley and Peter Zorn (1996) “Fear of Homebuying: Why Financially Able Households May Avoid 

Homeownership,” Secondary Markets 13(2):1, 24-30. 

94 George Galster, Laudan Aron, and William Reeder (1999) “Encouraging Mortgage Lending in ‘Underserved’ 

Areas: The Potential for Expanding Home Ownership in the US,” Housing Studies 14(6):777-801. 

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million more homeowners if only 20 percent of that group (2 percent of renter households) 

transitioned to homeownership as a result of more consumer-friendly reforms.96

In addition to a more consumer-friendly environment, RESPA reform will reduce closing 

costs thereby reducing home acquisition costs and releasing a corresponding amount toward a 

prospective homebuyer’s equity down payment. Hence, one might expect this cost savings to 

provide some increased number of renter families with the assets necessary to be able to cross 

over the threshold to become homeowners or otherwise accelerate their home purchase ahead of 

the time they might otherwise qualify. It was estimated earlier that the impact of the new GFE 

would on average provide an up-front borrower savings of 0.37 percent of the loan amount 

financed.97 That amounts to a savings of approximately $463 for a $125,000 loan or 1/6th of the 

required 2.25 percent down payment for a high LTV FHA mortgage.98

Insufficient savings to pay required up front down payment and closing costs has long 

been understood to be the single greatest obstacle to buying a home. Research studies by 

Linneman and Wachter (1989), Savage and Fronczek (1993), Savage (1997), Haurin and others 

(1997), Listokin and others (2002), and most recently Herbert and Tsen (2005) have consistently 

found a lack of sufficient wealth to pay down payment and closing costs is a significant 

limitation on the ability of renter households to become homeowners.99 

The Listokin (2002) study estimated the proportion of renter families that might qualify 

for financing to purchase a modestly priced home at various levels of down payment assistance. 

By applying an overlay of various underwriting criteria to SIPP data, they found that 9.2 percent 

of 25.8 million renters in 1993 could qualify to purchase a modestly priced home at the 25th

 95 Galster and others (1999), 798-799. 

96 As noted above, Galster and others limited their analysis to renter households excluding individuals. 

97 Estimated consumer savings range from $6.48 billion to $8.35 billion for the new GFE. As a percentage of total 

origination and settlement costs ($66.7 billion), consumer savings range from 9.7 to 12.5 percent for the new GFE. 

There are 12,500,000 loan originations. The average savings per loan would range from $518 to $705. As a 

percentage of the average loan amount ($192,000), consumer savings range from 0.27 to 0.37 percent, which is the 

figure in the text.

98 The saving represents a somewhat lower proportion of a high LTV conventional mortgage requiring a minimum 

down payment of 3 percent. 

99 Peter D. Linneman and S.M. Wachter (1989) “The Impacts of Borrowing Constraints on Homeownership,” 

Journal of the American Real Estate and Urban Economics Association 17:389-402. Howard Savage and Peter 

Fronczek (1993) “Who Cannot Afford to Buy a House in 1991,” Current Housing Reports, U.S. Bureau of the 

Census. Howard Savage (1997) “Who Cannot Afford to Buy a House in 1993,” Current Housing Reports, U.S. 

Bureau of the Census. Donald R. Haurin, Patric Hendershott, and Susan Wachter (1997) “Borrowing Constraints 

and Tenure Choice of Young Households,” Journal of Housing Research 8:137-154. David Listokin, Elvin K. 

Wyly, Brian Schmitt, and Ioan Voicu (2002) “The Potential and Limitations of Mortgage Innovation in Fostering 

Homeownership in the United States,” Housing Policy Debate 12(3):465-513. Christopher E. Herbert and Winnie 

Tsen (2005) The Potential of Downpayment Assistance for Increasing Homeownership Among Minority and LowIncome Households (Washington, DC: Office of Policy Development and Research, U.S. Department of Housing 

and Urban Development, pp. 1-30). 

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percentile of the home price distribution without any additional assistance, and with a cash grant 

of $1,000, 9.9 percent of renters could purchase the modestly priced home. Roughly half those 

proportions could qualify to purchase the target home each renter family was individually 

estimated to choose. Thus, Listokin and others estimated an increase of 0.035 to 0.7 percent of 

renters--that is, 90,300 to180,600 renters--could purchase homes depending on the price of the 

home with an additional $1,000. However, the authors caution that these estimates are 

conservative and that the impact could be substantially higher given that their analysis would 

have understated the number of renters who actually transitioned to homeownership over the 

course of the survey period. They caution that SIPP data may understate the resources available 

to renters and renters electing to become homeowners frequently bootstrap themselves 

financially—i.e., accelerate savings in the year prior to purchase. 

Herbert and Tsen (2005) utilized data from the 1996 SIPP Panel that followed 11,000 

renter households for a period of 3 years from fourth quarter 1996 through February 2000 

recording their income and assets every year and their tenure status (renter/homeowner) every 3 

months. Over that period, 18 percent of the renter sample became homeowners where house 

values in the markets studied were about $120,000. The authors estimated a parametric 

proportional hazard model of transitions to homeownership based on demographic and financial 

characteristics as well as some market conditions and then simulate the impact of cash grants 

varying size on the probability of becoming a homeowner over time. They find that a modest 

increase in liquid assets of $1,000 provides the greatest impact, increasing the number of 

homebuyers by an estimated 943,000 overall, including 708,000 low-income buyers, 152,000 

black buyers, and 143,000 Hispanic buyers.100

Hence, one might expect the reduction in closing costs of roughly half the $1,000 grant 

employed in both the Listokin and Herbert analyses to increase the number of homeowners by 

approximately half their estimates. Thus, the rule’s resulting cost savings could at a minimum 

bring about anywhere from 100,000 to 400,000 additional homeowners beyond those responding 

to the more consumer-friendly environment and the increase could range significantly higher.101

As mentioned above, the reduction in closing costs would also lead to more refinancing 

as homeowners with more modest levels of present value payment savings could thereby offset 

and justify the cost of refinancing. Given the major refinancing opportunities of 2002 through 

2005, analysis was conducted using the 2001 American Housing Survey in order to estimate an a 

more long term steady state order of magnitude of this effect. Table 3-4 shows the distribution 

of mortgage loans outstanding broken by remaining balance and interest rate interval and 

grouped by term of less than 5 years remaining to maturity, 5 to 15 years, and more than 15. 

 

100 See Herbert and Tsen (2005), pp. v-vi, and 25-26. 

101 The estimated increase is from the stock of renter households measured at a point in time and as such represents a 

one time change, but one might expect a continuing steady state effect as population dynamics usher new renter 

households into existence. 

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For each balance and rate combination, a potential net present value (NPV) savings that 

could be obtained over the average remaining term forward after refinancing at a lower rate and 

paying $1,500 in closing costs could be calculated producing a wide range of potential savings 

depending on the remaining balance and difference between the coupon and refinance rate. 

Clearly, few would refinance for no savings and closing costs are not likely to keep mortgagors 

with substantial net savings in excess of several thousand dollars from refinancing and securing 

the savings. Hence, the mortgagors most likely to refinance as a result of the reduction in 

closing costs are those whose net saving would cross a threshold justifying the time and trouble 

of refinancing which is assumed here to be $2,000. Others with higher NPV well in excess of 

$2,000 would have reason to refinance without the reduction in closing costs and so a $500 

dollar savings in closing costs could not be presumed to be the inducement to refinancing. 

Calculating the potential savings at varying refinance rates ranging from 5 percent through 8 

percent and netting out $2,000 inclusive of a $500 reduction in closing costs produced estimates 

of potential refinancers ranging from 500,000 to 3,000,000. This would remain a large effect if 

only a third of these homeowners refinanced. On the other hand, there might be an even larger 

increase to accompany public awareness of a simplified process. 

VIII. Loan Originators and Third-Party Providers: Small Business Impacts 

This section summarizes the effects of the rule on different industries, including brokers 

(Section A), lenders (Section B), and third-party service providers such as title and closing 

agents (Section C). Each section reviews HUD’s response to concerns raised by industry 

comments and provides an overall conclusion with respect to competitive impact on the industry. 

The effects of the rule on small businesses are emphasized. As has already been explained in 

this chapter, HUD took several steps in the rule to lessen the adverse effects of the rule on small 

businesses. These major changes and alternatives considered are summarized below. This 

section presents a qualitative analysis of the competitive and other impacts of the rule on 

industry actors and small businesses. See Section VII above for the estimates of the dollar 

impacts on small businesses. Readers are also referred to Chapter 5 for a more detailed 

description of the various component industries and their small business characteristics.102

VIII.A. Mortgage Brokers: Small Business Impacts and Competitive Issues 

This section summarizes the key competitive issues that have been discussed in this 

chapter with respect to the impact of the rule on the broker industry. Most of their comments (as 

represented by those of the National Association of Mortgage Brokers) were directed toward the 

2008 proposed rule's treatment of yield spread premiums. The YSP issue is discussed first, 

followed by issues related to tolerances and other aspects of the rule related to brokers. 

 

102 The individual industries are covered in the following sections of Chapter 5: brokers (Section II); commercial 

banks, thrift institutions, mortgage banks, credit unions (Section III); large title insurers, title and abstract firms, 

lawyers, and escrow firms (Section IV); and appraisers (Section V.A), surveyors (V.B), pest inspectors (V.C), and 

credit reporting firms (V.D). 

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Section III of Chapter 2 and Section II of Chapter 5 provide information on the nature 

and growth of the broker industry.103 The number of brokers increased to approximately 30,000 

during the 1990s, with some industry observers placing the number at over 40,000 and even over 

50,000 during the past few years. It is estimated that brokers originate at least 60 percent of all 

mortgages and in some recent years as high as 68 percent.104 As an industry, brokers are seen as 

being efficient, flexible, low-cost mortgage providers that vigorously compete among themselves 

for the consumer's business. The fact they are not burdened by large fixed costs allows them to 

offer very competitive rates. They are especially important at the front-end of the mortgage 

process, assisting consumers in understanding various mortgage products and options available 

to them. Practically all brokers are small businesses. According to the Bureau of Census, small 

brokers account for almost 70 percent of industry revenue. See Section II of Chapter 5 for 

additional characteristics of the industry (number of employees, size of firms, etc.) 

As discussed in this section, HUD has made improvements to the GFE form to reduce the 

potential for any anti-competitive impacts on the broker industry or small businesses within that 

industry. HUD has designed the final GFE form so as to minimize the potential for confusion 

over yield spread premiums. The intent is to avoid borrower mistakes on loans with yield spread 

premiums that would lead the borrower to believe the brokered loan was more costly than it was 

in fact. Such mistakes would harm the comparison shopper who would make errors in 

evaluating loans and be biased against brokers. The summary page that has been added to the 

GFE form includes the key numbers for comparison-shopping and provides identical treatment 

of lenders and brokers. The Department’s goals include making comparison shopping easier for 

borrowers and maintaining a level playing field between brokers and lenders (see Chapter 2 and 

Section III above). Tests of the final GFE form indicate that consumers correctly choose the 

cheapest loan over ninety percent of the time. 

Thus, brokers, as a group, will remain highly competitive actors in the mortgage market, 

as they have been in the past. There will be an impact on those brokers (both large and small) 

who over-charge consumers, and there is convincing evidence that some do (see Section VII.A 

above). Improved consumer shopping with the new GFE will lead to reduced revenues of those 

brokers who are charging non-competitive prices. Thus, the main negative impact on brokers 

(both small and large) of the final rule will be on those brokers (as well as other originators) who 

have been overcharging uninformed consumers, through the combination of high origination fees 

and yield spread premiums. 

Section VI.E of this chapter estimates that transfers from brokers could range from $2.77 

billion to $3.53 billion, or from 11.0 percent to 14.0 percent of their revenues. For small brokers, 

the transfers are projected to be $1.94 billion to $2.47 billion. 

 

103 Section II of Chapter 5 examines several topics related to the broker industry: (a) the nature and characteristics of 

the broker industry (number of firms and employees, size of firms, etc.); (b) various revenue estimates for the broker 

industry; (c) estimates of the small business share of industry revenues; and (d) consumer savings and transfer 

estimates under the new GFE for the broker industry as a whole, and for small brokers in particular. 

104 See Section II.B of Chapter 5 for estimates of the number of brokers and their market share. 

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VIII.A.1. Treatment of Yield Spread Premiums 

The main issue raised by the brokers concerned the treatment in the 2008 proposed rule 

of yield spread premiums on the proposed Good Faith Estimate (GFE). This was also the main 

small business issue with the proposed GFE since practically all brokers qualify as small 

businesses. Mortgage brokers and their trade groups expressed vigorous opposition to HUD’s 

singling out indirect compensation to the broker and disclosing the yield spread premium as a 

lender credit to the borrower. They maintained that such a characterization is misleading, unfair 

and anti-small business.105 Mostly, mortgage brokers and their representatives generally felt that 

yield spread premiums being disclosed as credits to borrowers would place mortgage brokers at a 

competitive disadvantage. They said that the broker fee disclosure in the proposed GFE would 

severely disadvantage mortgage brokers as compared to lenders (i.e., mortgage bankers and 

conventional lenders) because mortgage brokers would not be able to advertise certain mortgage 

loans and remain competitive. Section III of this chapter dealt with this issue in some detail; a 

summary of this issue and HUD's response is provided below. 

The 2008 proposed rule and final rule treatment of yield spread premiums fundamentally 

changes the way in which mortgage broker compensation will be reported by requiring in all 

loans originated by mortgage brokers, that any payments from a wholesale lender based on an 

above par interest rate on the loan (“yield spread premiums”) be reported as offsets to settlement 

costs and brokers will have to report their total compensation. The Department believes this is 

the best way to disclose the existence of yield spread premiums. But Section III of this chapter 

describes the extensive forms development and testing process that HUD has undertaken to 

produce the final GFE because of concerns that shoppers could be given a false impression 

regarding mortgage brokers’ fees as compared to lenders’ fees. The Department has dealt with 

the potential for bias in six ways. First, the discussion of the yield-spread premium itself places 

emphasis on the effect on closing costs. Borrowers are more likely to recognize that it is netted 

out. Second, is the third option included in “Your credit or charge (points) for the specific 

interest rate chosen.” so that borrowers’ suspicions would not be aroused over the difference in 

the way a broker loan would be presented vis-à-vis a lender loan. This option is for lenders to 

check if they do not report a figure besides zero for either the credit or discount points. Third, 

there is a summary page that includes only one summary cost figure along with the loan terms. 

This summary page is the first page of the form. Yield spread premiums are not disclosed on the 

first page and otherwise identical loans from a broker and lender would have identical cost 

figures on the first page. The details of the first page cost figures are on the second page.106 The 

summary page limits the chance of borrower error by displaying only the net figure on the most 

prominent page of the form that borrowers are most likely to use when comparing loans. 

 

105 A variety of reasons for opposition were provided including that HUD’s proposal: 1) creates confusion for the 

borrower; 2) will unnecessarily increase HOEPA transactions; 3) will stifle FHA and low/mod lending; 4) unfairly 

targets brokers; 5) creates an uneven playing field with retail lenders; and 6) may adversely affect tax treatment of 

borrowers. See Section III of this chapter for a detailed discussion of YSP issues and industry concerns. 

106 For purposes of comparing lender and broker offers, the second page of the new GFE highlights (in bold and 

larger print) the numbers that the borrower should focus on, which are “Your Adjusted Origination Charges” and 

“Total Estimated Settlement Charges.” For identically priced loan, these numbers will be the same for brokers and 

lenders. 

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Borrowers who compare summary pages of different forms are very unlikely to make 

comparison-shopping errors – lenders and brokers are treated identically on the summary page. 

Fourth, the trade-off table also emphasizes how interest rates affect settlement costs. 

This integration of the yield spread premium discussion and the trade-off table enhances 

understanding of yield spread premiums. In the trade-off table, shoppers are given detailed 

examples of how they can reduce their settlement costs by paying a higher interest rate (i.e., the 

yield spread premium case) or reduce their interest rate by paying higher settlement costs (the 

discount point case). Language in this table is in line with the language used to describe yield 

spread premiums and discount points. The presentation of yield spread premiums and discount 

points combined with the trade-off table should improve borrower shopping and reduce abuses in 

this area (see Section III.C above). A major objective of the trade-off table is to increase 

consumer understanding of their mortgage options and of the notion that yield spread premiums 

are supposed to offset their origination and settlement costs, on a dollar for dollar basis. Studies 

indicate that borrowers do not understand this trade-off and, as a result, are overcharged on loans 

with yield spread premiums. 

Fifth, a mortgage shopping chart is included on page 3 of the GFE. It has columns for 

different loan offers and rows for major loan features and the total estimated settlement costs. It 

is designed to help borrowers comparison shop. All these features to reduce potential errors will 

benefit all borrowers, as comparison-shopping will work better leading to a more competitive 

market for mortgages. Sixth, arrows on page 2 highlight the adjusted origination charge and the 

subtotal for all other settlement charges as well as the total estimated settlement charges at the 

bottom of page 2, and the mortgage shopping chart. This is designed to focus the borrower on 

overall charges, rather than one component. 

These features of the GFE are designed to make comparison-shopping easier for 

borrowers and to avoid bias against brokers. The elimination of confusion surrounding yieldspread premiums should do just that. As reported in Section II.F, tests of the new GFE indicate 

that consumers were able to choose the least expensive loan (when the choice was between a 

lender’s GFE and a broker’s GFE) in practically all the cases. Once the improvements suggested 

by the results of the earlier rounds of testing were incorporated into the forms, borrowers 

generally identified the cheaper loan with great success. In response to FTC findings based on 

an abbreviated version of the GFE, HUD engaged in three more rounds of testing and 

improvement involving 600 subjects per round. The end result on the forms adopted was that 

borrowers consistently identified the cheapest loan with an overwhelming success regardless of 

whether the broker or the lender was cheaper. The pattern of the results was quite similar 

regardless of whether the broker or the lender was cheaper. The Department believes that the 

forms adopted in the final rule perform well resulting with borrowers having little difficulty 

identifying the cheapest loan offered in the market whether from a broker or a lender. 

VIII.A.2. Conclusions 

Brokers operating in today’s market are efficient and low-cost providers of mortgages. 

They are mainly small businesses that assist consumers in applying and obtaining a mortgage 

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loan. Brokers typically work though wholesale lenders in order to fund loans. Studies indicate 

that some brokers overcharge consumers, particularly on loans involving yield spread premiums. 

The final GFE continues to require that brokers report their total compensation, which is 

then reduced by the yield-spread premium to arrive at net or adjusted origination fees. HUD 

includes several features in the GFE form to reduce the potential for any anti-competitive 

impacts on the broker industry. The GFE in the final rule: (a) places more emphasis on the effect 

of yield spread premiums on closing costs; (b) includes a summary page that has the key 

numbers for comparison shopping and provides identical treatment of lenders and brokers (yield 

spread premiums are not even mentioned on this first, summary page); and (c) improves the 

presentation of the trade-off table by showing consumers how they can reduce their settlement 

costs by paying a higher interest rate (i.e., the yield spread premium case) or reduce their interest 

rate by paying upfront points (the discount point case). These changes should make comparisonshopping easier and minimize any anti-competitive impacts between brokers and lenders. Tests 

of the final GFE form indicate that consumers correctly choose the cheapest loan over ninety 

percent of the time. 

While there is no evidence to suggest that there would be any anti-competitive impact of 

the new GFE on the broker industry as a whole, there will be an impact on those brokers who are 

charging non-competitive prices. There is convincing evidence that some brokers (as well as 

some lenders) overcharge consumers. As emphasized throughout this chapter, the new GFE will 

lead to improved and more effective consumer shopping, for many reasons -- the new GFE is 

simple and easy to understand, it includes reliable cost estimates, it ensures that consumers are 

shown options, and it explains the trade-off between closing costs and yield spread premiums (as 

well as discount points). This increased shopping by consumers will reduce the revenues of 

those brokers who are charging non-competitive prices. Thus, the main impact on brokers (both 

small and large) of the final rule will be on those brokers (as well as other originators) who have 

been overcharging uninformed consumers, through the combination of high origination fees and 

yield spread premiums. As explained in Section VI.E of this chapter, transfers from brokers 

could range from $2.40 billion to $2.86 billion, or from 11.8 percent to 14.0 percent of their 

revenues. For small brokers, the transfers are projected to be $1.68 billion to $2.00 billion. 

As emphasized throughout this chapter, it is anticipated that market competition under 

this final rule will have a similar impact on those lenders (non-brokers) who have been 

overcharging consumers through a combination of high (effective) yield spread premiums and 

origination costs. 

VIII.B. Lenders: Small Business Impacts and Competitive Issues 

VIII.B.1. Introduction 

This section summarizes the key competitive issues that have been discussed in this 

chapter with respect to the impact of the rule on lenders 

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This chapter and Chapter 4 provide a detailed discussion of the anticipated impacts of the 

rule on lenders, and the pros and cons of the various policy alternatives that the Department 

considered.107 Market impacts on lenders, both large and small, are discussed. It should be 

noted that lenders did not raise a pressing small business issue such as the yield spread premium 

(or “level playing field”) issue raised by brokers. There was less concern expressed by lenders 

about potential anti-competitive impacts on small businesses. This reflects the fact that the GFE 

in the 2008 proposed rule did not have any anti-competitive impacts against small lenders. The 

inclusion of a summary page, the trade-off table, and the yield spread premium language should 

improve consumer shopping, but have no specific anti-competitive impacts on small or large 

lenders. Small lenders and community banks and thrifts will remain highly competitive actors in 

the mortgage market. There will be an impact on those lenders (both large and small) who are 

charging non-competitive prices, and there is convincing evidence that some do. Improved 

consumer shopping with the new GFE will reduce the revenues of those lenders who are 

charging non-competitive prices. Thus, as with brokers, the main negative impact on lenders 

(both small and large) of the new GFE will be on those lenders who have been overcharging 

uninformed consumers. 

As explained in Section VII.E of this chapter and in Section III.B of Chapter 5, transfers 

from lenders could range from $1.85 billion to $2.35 billion, or from 11.0 percent to 14.0 percent 

of their revenues from mortgage originations.108 It is estimated that small lenders account for 23 

percent of the revenue of all lenders. Thus, the transfers are projected to be $422 million to $537 

million for small lenders.109

 

107 The preamble to the proposed rule also discusses the issues raised by those commenters expressing views 

concerning the impacts of the 2002 proposed rule on lenders – examples of commenters include the Mortgage 

Bankers Association (MBAA), American Bankers Association (ABA), American’s Community Bankers (ACB), 

Consumer Mortgage Coalition (CMC), National Home Equity Mortgage Association (NHEMA), as well as 

individual firms such as Bank of America, Countrywide, Wells Fargo, World Savings, and Branch Banking and 

Trust Company (BB&T). This section briefly summarizes the key issues raised by lenders (or groups representing 

them), and notes the Department’s responses and any major impacts of the rule on lenders. Also, there is no attempt 

here to list all of the comments raised by lender groups, but rather the main ones dealing with economic and market 

impacts. For example, there were several comments concerning coordination with the Truth in Lending Act; issues 

such as this are dealt with in the preamble to the proposed rule. 

108 Readers are also referred to Chapter 5 for a technical discussion of the following topics concerning the transfer 

estimates for lenders: (a) the methodology for estimating the small business share of lender originations (22.8 

percent) and for the range (20 to 26 percent) around that share (Section III.B.2 of Chapter 5); (b) a reporting of the 

transfers for lenders including various sensitivity analyses related to various consumer savings projections and to 

different small business estimates (III.B.3); (c) the methodology for disaggregating the overall lender transfers and 

small lender transfers among the various lender types -- commercial banks, thrifts, mortgage banks (III.B.4); and (d) 

a reporting and sensitivity analysis of the transfers for commercial banks, thrifts, mortgage banks, and credit unions, 

including an analysis of transfers as a share of industry revenue (III.B.5).

109 As explained in Step (23) of Section VII.E.4 of this chapter, it is estimated that the small business share of lender 

revenue could vary from 20 percent to 26 percent. Thus, in the case of overall lender transfers of $1.85 ($2.35) 

billion, the transfers from small businesses are projected to range from $370-$481 million ($470-$611 million), 

around the baseline estimate of $422-$537 million. 

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VIII.B.2. HUD's Response to Market and Other Issues 

Sections V and VI of this chapter discuss numerous issues raised by lenders and HUD's 

responses to them. Some lenders were concerned about their ability to produce firm cost 

estimates (even of their own fees) within a three-day period, given the complexity of the 

mortgage process. Lenders wanted clarification on their ability to make cost adjustments as a 

result of information they gain during the full underwriting process. Practically all lenders 

wanted clarification on the definition of application, as well as a provision to allow lenders and 

other settlement service providers a short period of time in which to correct certain violations of 

the new disclosure requirements. The principal concern small lenders had with the 2008 

proposed rule were the provisions regarding discounts, and that any discounts be passed on to 

consumers. Some said small lenders would be at a disadvantage relative to large lenders in 

seeking discounts from third parties, while others said there was no incentive to negotiate 

discounts if all of the savings had to be passed on to consumers. 

Changes were made to tolerances to reflect the fact that unforeseeable events could lead 

to unanticipated cost changes: the final rule makes clear that “zero tolerance” does not 

pertain in the case of “changed circumstances” beyond the originator’s control. 

Consistent with the above, the rule establishes the new definition of “changed 

circumstances” to include circumstances that could not be reasonably foreseen at the time 

of GFE application that are particular to the transaction and that result in significant 

increased costs – examples include the need for a second appraisal or flood insurance, 

and boundary disputes or environmental problems that were not described to the loan 

originator at the time of GFE application. Where a lender (or broker) cannot perform 

because of changed circumstances, the lender (or broker) must include documentation of 

the costs occasioned by the changed circumstances. In situations where the borrower 

changes the loan terms, the borrower should be given a new GFE. 

The definition of an application was simplified into a single process, with fees limited to 

the cost of a credit report until a borrower decides to go forward with a particular GFE. 

This should alleviate concerns raised by lenders about the 2-stage process in the 2008 

proposed rule. 

The final rule includes a provision for a 30-day period in which originators can cure 

violations of the tolerances by refunding to the borrower any amount by which charges 

covered by tolerances on the HUD-1/1A exceed the tolerances. 

Regarding discounts and that they must be passed on to consumers, HUD is merely 

clarifying existing policy regarding discounts with the final rule; they are not illegal if 

passed on to consumers in their entirety. Any market effects of discounts would have 

occurred without the rule because HUD would not have found violations of RESPA for 

any discount arrangements where the price paid by consumers is the same as the price 

paid to the third-party provider under either the existing or the new final rule. Any 

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increase in discount arrangements under the new rule is due to the new GFE and 

tolerance requirements as discussed above. 

The above changes address a number of practical and implementation problems raised by 

lenders and others about the GFE and tolerances. They particularly make the GFE easier to use 

for small lenders. 

Similar to the situation with brokers, it is important to emphasize that lenders will benefit 

from a framework that encourages competitive negotiations, discount arrangements, and average 

cost pricing (thus not having to keep up with every “nickel and dime” in a transaction). Under 

the new GFE approach, lenders will have the incentive to negotiate lower third-party fees, enter 

into cost-reducing, discount arrangements with their vendors, and take full advantage of average 

cost pricing techniques. The rule allows an overall 10 percent tolerance on charges for all of the 

required third-party services, except for those where the borrower selected the provider without a 

referral from the originator (and, of course, tolerances do not apply to these borrower selected 

services since the borrower goes off on his or her own to obtain the service).110 This final rule 

will lead to cost reductions by clarifying that lenders and settlement service providers may 

discounts for settlement services, providing the price charged on the HUD-1 is no more than the 

price paid to the third-party settlement service provider for the discounted service. This should 

lead to lower third-party settlement service prices. They will have an incentive to do so to ensure 

they are offering competitive estimates on their GFEs. In addition, lenders and settlement service 

providers will be allowed to use average cost pricing for third-party services they purchase so 

long as the average is calculated using an documented method and the charge on the HUD-1 is 

no greater than the average paid for that service. This will make internal operations for the 

lender simpler and less costly and competition among lenders and brokers will put pressure for 

these cost savings to be passed on to borrowers as well. 

VIII.B.3. Conclusions 

In general, there was less concern expressed by lenders (as compared with brokers) about 

potential anti-competitive impacts of the GFE on small businesses. Small lenders -- relative to 

both brokers and large lenders -- will remain highly competitive actors in the mortgage market, 

as they are today. Nothing in the final GFE rule changes that. HUD also made several changes 

that responded to lender concerns about tolerances and implementing the GFE. These changes 

address day-to-day business problems that are likely to be faced by small lenders, such as the 

need to adjust for new of changed circumstances. These changes will make the GFE easier to 

use for small lenders. 

 

110 In other words, the 10 percent tolerance now applies to both (a) services where the third-party provider was 

selected by the originator (e.g., the broker) and (b) services where the borrower utilized a referral from the 

originator. In the 2002 proposed rule, lender-selected services (a) had a zero tolerance; that has now been relaxed to 

10 percent. Also, the 10 percent tolerance in the 2008 proposed rule is an overall tolerance rather than a set of 

individual tolerances. 

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There will be an impact on those lenders (both large and small) who are charging noncompetitive prices. Improved consumer shopping with the new GFE will reduce the revenues of 

those lenders who are charging non-competitive prices. Thus, as with brokers, the main negative 

impact on lenders (both small and large) of the new GFE will be on those lenders who have been 

overcharging uninformed consumers. Transfers from lenders could range from $1.85 billion to 

$2.35 billion, or from 11.0 percent to 14.0 percent of their revenues from mortgage originations. 

In the base case, small lenders account for 23 percent of industry revenues. Transfers are 

projected to be $422 million to $537 million for small lenders. 

The benefits of the final rule are significant for consumers and the marketplace. The rule 

provides for originators to use the old GFE for 12 months. This permits some to begin with the 

new regime within 60 days, but those who prefer to wait (and observe others working with the 

new system) can do so. This implementation issue, and one-time costs associated with 

instituting the new GFE form, are discussed in Section III.B of Chapter 6. 

VIII.C. Title and Settlement Industry: Small Business Impacts and Competitive Issues 

VIII.C.1. Discussion 

The title and settlement industry accounts for the major portion of third-party fees. This 

section briefly summarizes the key competitive issues for this industry with respect to the final 

rule. The title and settlement industry consists of large title insurers carriers, title agents, escrow 

firms, lawyers, and others involved in the settlement process. Section IV of Chapter 5 describes 

these component industries and estimates the share of overall industry revenue going to small 

businesses. As noted in Section VII above, small businesses account for approximately half of 

industry revenue, although there is some uncertainty with this estimate. 

American Land Title Association (ALTA) and the Real Estate Services Providers 

Council (RESPRO), among others, provided comments on the 2008 proposed rule for the title, 

closing, and other related third-party industries. Most of their comments were directed toward 

ensuring that average cost pricing was allowable for settlement service providers other than 

brokers and lenders, and that discounting would be harmful to small providers of settlement 

services. 

Overall, competitiveness within the title and closing industry should be enhanced by 

HUD's GFE proposal. It is true that increased shopping by consumers, as well as increased 

shopping by loan originators to stay within their tolerances, will reduce the revenues of those 

title and closing companies that have been charging non-competitive prices. The reasons why the 

new GFE and its tolerances will lead to improved and more effective shopping for third-party 

services by consumers and loan originators have been discussed extensively in this chapter, and 

need not be repeated in detail here. This rule will lead to cost reductions by clarifying that 

settlement service providers may seek discounts for settlement services from other providers so 

long as the price charged on the HUD-1 is no more than the price paid to the third-party 

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settlement service provider for the discounted service. This should lead to lower third-party 

settlement service prices. In addition, settlement service providers will be allowed to use 

average cost pricing for third-party services they purchase so long as the average is calculated 

using an acceptable method and the charge on the HUD-1 is no greater than the average paid for 

that service. This will make internal operations simpler and less costly and competition among 

providers will put pressure for these cost savings to be passed on to borrowers as well. 

Essentially, excess charges will be reduced and competition will ensure that reduced costs are 

passed through to consumers. 

Because it accounts for almost 73 percent of third-party fees, the title and settlement 

industry is an important source of the consumer savings associated with the final rule. As 

explained in Section VII.E above and in Section IV of Chapter 5, transfers from this industry 

could range from $1.35 billion (7.5% savings) to $1.79 billion (10% savings) to $2.5 billion 

($200 per loan). It is estimated that small businesses account for 38.1 percent of the revenue of 

the title and settlement industry. Thus, the transfers are projected to be $0.51 billion to $0.68 

billion to $0.95 billion, respectively, for small settlement and title agents.111 As explained in Step 

(8), one approach to estimating consumer savings is based mainly on price reductions in the title 

industry. Under this “title approach,” title costs are projected to fall from $150 to $200 per loan 

due to increased shopping, discounting, and the 10% tolerances on third-party fees. In this case, 

aggregate savings in title costs are estimated to range from $1.88 billion to $2.50 billion; 

transfers for small settlement and title agents would be from $0.71 billion to $0.95 billion. 

ALTA noted that HUD’s proposals reflect the view that all settlement services, including 

title and closing-related services, are provided for the lender’s benefit, rather than the consumer’s 

benefit.112 ALTA argues that consumers (buyers and sellers) have an interest in the nature and 

quality of title and closing services and that consumers have a right to select who will provide 

these services – in other words, consumers, in order to ensure that their interests are protected, 

should deal directly with the title and closing agents, not work through the lender, as they would 

under HUD’s GFE. 

The issue of itemization was discussed in Section II of this chapter. ALTA noted that at 

least with regard to the category for title services on the proposed GFE, greater itemization is 

 

111 As discussed in Section IV of Chapter 5, there is some uncertainty about the small business percentage for this 

industry. Also see Section VI.E.3 above for sensitivity analysis using a higher small business percentage for the title 

and settlement industry. Section IV.B.5 of Chapter 5 discusses several technical topics related to these estimates, 

including: (a) the methodologies for determining the revenue shares of the component industries and the overall 

small business share of the title and closing industry; (b) sensitivity analyses of the revenue shares and small 

business estimates; and (c) total transfers and small business transfers from the component industries (large title 

insurers, title agents, and escrow agents and lawyers). 

112 According to ALTA, it is HUD’s view that (a) it is therefore appropriate for lenders to bear the responsibility for 

the selection of settlement-service providers and for the amounts charged; and (b) the consumer’s only interest is 

getting a low price and completing the transaction. ALTA, as well as others, gave examples how lenders and 

consumers might have different objectives with respect to title insurance, with lenders possibly accepting a reduced 

form of title insurance that is appropriate for them but not for consumers. 

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needed in order for consumers to be able to adequately comparison shop among estimates.113 114 

HUD’s view is that the consolidated categories on the new GFE form provide consumers with 

the essential information needed for comparison-shopping. The new GFE gives an estimate of 

the services required by the lender to close the loan. Borrowers may purchase additional services 

at their option. Itemized prices for third-party services would only continue the practice of some 

today of generating a long list of incomprehensible terms, making it difficult for consumers to 

comparison shop. It should be noted that this rule does not prohibit any provider from giving 

more detail (e.g., on a separate document) on services and prices than is required on the GFE. 

VIII.C.2. Market and Competitive Issues 

Representatives of the title insurance industry have made a lot of claims concerning the 

mortgage industry that this analysis strongly disagrees with. Specifically, title representatives 

claimed there is no evidence of “fat” (excess fees) in the system; or if there were any reduction in 

third-party fees, lenders would not pass the reduced costs through to consumers. 

Section V of Chapter 2 analyzed these issues and reached the following conclusions: (a) 

with respect to consumer shopping for third-party services, it is not clear how closely consumers 

shop for and monitor third-party costs; (b) on the issue of whether third-party fees can be 

reduced, most independent observers believe that third-party fees are too high, that is, there is 

evidence of “fat” in title fees; (c) regarding the question of whether lenders will pass through any 

fee reductions to consumers, there is substantial evidence that competition will ensure any cost 

reductions will be passed through to consumers, rather than retained by lenders. Section VII.C 

above discussed issue (a) when reviewing the shopping benefits of the new GFE. Section V of 

Chapter 2 includes a detailed discussion of issues (b) and (c). Given that they are so fundamental 

to any policy analysis of RESPA reform, the main points regarding these latter two issues are 

restated below.115

 

113 According to ALTA, “more information has to be provided to the borrower so that (a) the borrower (and her real 

estate agent and/or attorney) can determine whether the services the lender is including in the total that will meet the 

lender’s needs for the loan transaction are sufficient to meet the buyer’s needs in the sale/purchase transaction, and 

(b) to avoid confusion and problems at settlement, if as may well be the case, the buyer/borrower has agreed to 

purchase other 1100 series services beyond those that are needed by the lender and covered by the lender’s 

estimate.” 

114 Similar to some lender comments, RESPRO noted that including third-party fees as part of the binding GFE 

(with 10 percent tolerance) imposes liability risks for those originators who do not control third-party fees. 

According to RESPRO, these fees are difficult to predict at application. This is the same issue that NAMB and 

lender groups raised concerning tolerances on fees in the proposed GFE. As discussed in Section V, HUD 

addressed this issue by increasing the tolerance to a overall 10 percent on lender selected or referred third-party 

services from the zero or ten percent individual tolerances in the 2002 proposed rule; and by clarifying the 

“unforeseeable circumstances” under which the tolerances could be exceeded. 

115 In addition, these same commenters predicted that large providers of third-party services (e.g., independent title 

agents) would replace small providers of these services, thus reducing options available to consumers. Concerning 

this argument that small independent third-party settlement service providers will be disadvantaged relative to large 

providers, there is no evidence to support arguments that these “locally-provided” services will shift to larger 

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VIII.C.2.a. Can Title and Closing-Related Fees Be Reduced? 

In their comments on the 2002 proposed rule, the American Land Title Association 

(ALTA) says there is no comprehensive study (or indeed, no responsible study at all) that 

supports the conclusion that there is “fat” or unnecessary charges in the title industry.116 ALTA 

notes that other than some potential savings in marketing costs and modest operational 

efficiencies, there are no significant savings in the title-related or closing-related work.117 HUD 

finds that there is substantial evidence that title, closing, and other settlement fees can be 

reduced. This analysis reviews data and studies showing the existence of wide variability of 

prices in this industry. Section V of Chapter 2 and Step (8) of Section VI.E.1 of this chapter 

reviews evidence showing that title fees can be reduced; readers are referred to those sections for 

the details. It is also clear that consumers do not effectively shop for third-party services, often 

relying on the recommendations of real estate agents and lenders. In today’s market, originators 

too often simply pass high prices through to consumers, with little effort at controlling them. 

Thus, this economic analysis does not agree with conclusions reached by ALTA and 

others commenting on the 2002 proposed rule from the title and closing industry. This analysis 

concludes that there are legitimate cost savings that will result from RESPA reform – they are 

not “artificial” savings as suggested by ALTA, but rather are “real” savings based on a current 

situation of excess charges in this area. There is evidence suggesting that fees for title and 

closing-related services can be lowered, providing an important source of savings for consumers. 

VIII.C.2.b. Will Savings In Third-Party Costs Be Passed Through To Consumers? 

Chapter 2 explained that the mortgage market became more concentrated during the 

1990s, with the growth of large lenders that not only originated loans themselves on a retail 

basis, but also purchased loans from brokers and loan correspondents on a wholesale basis.118 

Most industry observers have concluded that these lenders operate in a highly competitive 

 businesses. As noted earlier, large national title companies have to rely on local title companies in order to serve all 

areas. 

116 See comments from James R. Maher, Executive Vice President, ALTA, to Rules Docket Clerk, HUD, regarding 

"Proposed Rule on Real Estate Settlement Procedures Act (RESPA); Simplifying and Improving the Process of 

Obtaining Mortgages To Reduce Settlement Costs to Consumers; Docket No. FR-4727-P-01; 67 Fed. Reg. 49134 

(July 29, 2002)," October 4, 2002. 

117 Ann Schnare, who prepared a report for the National Association of Realtors entitled "The Downside Risks of 

HUD's Guaranteed Mortgage Package" (dated October 24, 2002), expressed similar sentiments. According to 

Schnare, "there is no theoretical or empirical evidence to suggest that mortgage packaging will lead to lower 

settlement costs. In fact, one could easily argue just the opposite" (p. 22). However, in the same paper, Schnare 

suggests that third-party service fees can be reduced when she comments that HUD's enhanced GFE should increase 

incentives of lenders to seek out low cost service providers as a way of competing for market share. (p. 11) 

118 This increased consolidation of the mortgage market is referring to the growth in large wholesale lenders such as 

Countrywide and Wells Fargo. As explained throughout this economic analysis, mortgage origination has become 

dominated by brokers during this period. 

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market environment.119 Several of the commenters had a different view about the 

competitiveness of the mortgage market, arguing that lenders would retain any third-party 

savings, rather than passing them through to consumers.120 This economic analysis disagrees 

strongly with the suggestions that cost savings will somehow be retained by large lenders 

behaving monopolistically. Analyses of today’s mortgage market clearly suggest the reverse.

Chapter 2 reviews studies concluding that large as well as small lenders operate in a highly 

competitive market environment. While there has been increased consolidation of the mortgage 

market in recent years, this does not mean that large lenders can control prices; these are highly 

competitive markets. If one firm does not pass on its savings, then another firm reaping the same 

savings will enter the market and reduce prices. Thus, this economic analysis disagrees strongly 

with statements that the cost savings from RESPA reform will somehow be retained by large 

firms behaving monopolistically in the mortgage lending industry. There is simply no evidence 

to support those statements. There is substantial evidence of price competition in the mortgage 

market. Readers are referred to Section V.D of Chapter 2 for further discussion. 

VIII.C.2.c. Volume Discounting 

The 2008 proposed rule encouraged volume discount arrangements, which would lead to 

more competitive third-party prices, by clarifying that volume discounts are legal as long as the 

cost reduction is passed along to consumers. The final rule simply clarifies that any type of 

discount is permissible, so long as the discounted price paid is passed on to borrowers, without 

changing regulatory language. 

Comment. One of the primary concerns of small firms was the potential adverse effect of 

HUD’s clarification that volume discounting is legal as long as the savings are passed along to 

the consumer. ALTA, ICBA, NAMB, and NAR contend that volume discounts will favor large 

settlement service providers and loan originators/lenders at the expense of small businesses and 

place them at a disadvantage. The Office of Advocacy formally endorsed this position in their 

comment letter (June 11, 2008) and predicted that HUD’s proposed clarification “may cause 

small businesses to leave the market and result in higher prices for consumers in the long term.” 

Response. The purpose of HUD’s clarification was to set a clearer standard for 

compliance in the context of the new GFE. Firms that were profitable before the clarification 

should not be negatively impacted as the change would be superficial for those that understand 

the law. However, there is some confusion in the industry concerning the legality of discounts 

 

119 See LaMalfa (2002), Joint Center for Housing Studies (2002), Guttentag (2002), and Woodward (2003a). 

120 ALTA (2002), for example, argued that HUD's proposals would increase concentration in the mortgage industry 

and would allow larger lenders to retain any price discounts obtained from third-party providers (p. 28). Similarly, 

the National Association of Realtors (NAR, 2002) said that under HUD's packaging proposal lenders will have "no 

obligation to pass along discounts to borrowers" (NAR, 2002, p.4). A NAR-funded paper by Ann Schnare, entitled 

"The Downside Risks of HUD's Guaranteed Mortgage Package" (dated October 24, 2002) reached similar 

conclusions, noting that she had "some reason for concern" that packagers will not past through any savings to 

consumers but rather retain any savings for themselves. She states "more important, perhaps, there is no reason to 

conclude that any cost savings that do arise [from packaging] will be passed through to consumers" (p. 10). 

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and different courts have different interpretations of the law. Thus, the final rule could have had 

a considerable material impact on business practices. 

HUD does not expect the practice of discounting to have the adverse effects advanced by 

the Office of Advocacy and many industry groups. The importance of local orientation is a 

fundamental aspect of the real estate industry and one that ensures the continued success of small 

firms. Nevertheless, if there were to be adverse effects from discounting, they will occur without 

HUD clarifying that the practice is legal. 

HUD will not address volume discounts in the rule. However, the absence of any 

mention of volume discounting in the rule does not change the department’s long-held belief that 

volume discounts are not a violation of RESPA and will inform the industry how to record these 

discounted prices so as to avoid RESPA violations: so long as the price charged to the borrower 

on the HUD-1 is no greater than the discounted price paid to the third party, the discounted price 

poses no problems. 

VIII.C.3 Local Orientation of Title Industry 

Another issue that is important when considering the impacts of the final RESPA reform 

(new GFE, tolerances, volume discounting, etc.) on the title industry concerns the local nature of 

the industry. The title industry demonstrates a high degree of geographic specialization. 

Although title insurance companies do not need to be close to the properties insured, until there 

is widespread use of standardized electronic land record keeping accessible by the Internet, the 

information-gathering service the industry provides will require proximity to land title records 

(or the establishment of “title plants,” i.e., duplicates of local records, the maintenance of which 

requires proximity to local government records). ALTA (2002) 121 reports that more than twothirds of title companies have offices in only one county while only one-sixth have offices in 

three or more counties. These multi-county title companies averaged only 9 counties each. 

Further, multi-county title companies are concentrated in the highest-population metropolitan 

counties. According to the 2000 Census, there are 3,141 counties or equivalent areas in the 

United States. 

Even if a provider is efficient and charges low prices, it will not be able to compete 

against title and closing firms who are located sufficiently closer to the site in question. Thus, 

title and closing companies are by economic necessity provided by local firms. Reinforcing the 

local orientation are the value of local expertise and the importance of personal networks in 

receiving referrals. ABN-AMRO representatives told HUD that even when they dealt with a 

national third party intermediary, that firm typically used locally-based firms to do the work 

(e.g., local title agents, local closers, etc.). 

The local orientation of the title industry could change over time. However, it is unlikely 

that RESPA reform would be the catalyst. The advances in technology that would change 

 

121 “ALTA Abstracter and Title Agent Operations Survey 2002,” Fetzer-Kraus, Washington D.C. 

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business practices are independent of what HUD does about RESPA. 122 The only change that 

the final rule will introduce is that title and closing services may occur at lower prices negotiated 

between providers and lender originators. There will be no significant change in the local 

provision of title and closing work. Nor will there be a reduction of the number of these services 

purchased since this reform will not result in a drop in the number of mortgages that require 

these services. Large lenders will have to deal with multiple settlement services providers in 

order to ensure complete geographic coverage, and large multi-jurisdictional title firms have no 

apparent cost advantages over smaller title firms.123 In fact, large multi-jurisdictional title firms 

may have location-related cost disadvantages.124 There is no reason to believe that small title 

firms charging competitive prices will be adversely impacted by the changes in this rule. 

VIII.C.3. Conclusions 

Sections IV of both Chapters 2 and 4 explain that the title and closing industry is, in 

general, characterized by local firms providing services at constant returns to scale. Overall, 

competitiveness within the title and closing industry should be enhanced by the rule. It is true 

that increased shopping by consumers, as well as increased shopping by loan originators to stay 

within their tolerances, will reduce the revenues of those title and closing companies that have 

been charging non-competitive prices. Transfers from this industry could range from $1.35 

billion to $2.5 billion. It is estimated that small businesses account for 38.1 percent of the 

revenue of the title and settlement industry. Thus, the transfers are projected to be $0.51 billion 

to $0.95 billion for small settlement and title agents. 

 

122 For example, the First American Title Insurance Company launched a new automated title search platform that 

reduced the time and cost associate with conducting title searches. By linking various data bases and automating the 

search process, First American reduced the time for the search process in half. See “First American Introduces New 

Automated Title Search System” at www.alta.org. There have also been recent efforts to use vendor-management 

platforms and other technologies to order title and other third-party settlement services, an area that has lagged in the 

use of technology. According to the Fannie Mae study, Mortgage Focus (2003), automated systems are now 

commonly used to order credit reports (by 93 percent of the 101 lenders sampled in the Mortgage Focus study), 

flood certifications (by 90 percent), and mortgage insurance (by 88 percent). However use of such technology is 

much less prevalent for delivering disclosures (by 36 percent), ordering escrow services (by 33 percent), and loan 

closings (by 23 percent). The Fannie Mae study states that costs should drop as participants turn to vendormanagement platforms to order third-party services. (p. 3) Freddie Mac is adapting its Loan Prospector (LP) system 

to provide a platform for originators to process, underwrite, close and deliver loans. For example, the LP system 

could be used to order title products and other third-party services such as appraisals and pest inspections. See 

“Freddie Launches LoanProspector.com,” National Mortgage News, December 2, 2002. 

123 As noted in Section VII.A.3, representatives of ABN-AMRO told HUD staff that even when ABN-AMRO dealt 

with a national intermediary, that firm typically used locals to do the work (e.g., local appraisers, local title agents, 

local closers). 

124 Much title work is done at the local courthouse either directly or through the maintenance of “title plants.” The 

transportation cost of visiting individual sites, especially the opportunity cost of the time spent in transit, adds to the 

cost of providing the service. These transportation costs counterbalance any scale economies that may otherwise 

exist in the production of title services. These countervailing cost pressures create an effective constant returns to 

scale production function for the title and closing and explains the wide range of firm size as well as the continued 

success of small title firms.

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The reasons why the new GFE and its tolerances will lead to improved and more 

effective shopping for third-party services by consumers and loan originators have been 

discussed extensively in this chapter, and need not be repeated here. Excess charges will be 

reduced and market competition will ensure that reduced costs are passed through to consumers. 

VIII.D Other Third-Party Providers : Small Business Impacts and Competitive Issues 

VIII.D.1 Introduction 

Other industries affected by the rule are third-party settlement service providers such as 

the appraisal, surveying, credit reporting, and pest inspection industries. Of these, the appraisal 

industry accounts for the largest share of third-party settlement costs, an estimated 17.7 percent 

of all third-party settlement fees, as compared to 2.9 percent for surveys and 1.3 percent for pest 

inspections.125 For each industry, Chapter 5 discusses: (a) the nature and characteristics (number 

of firms, number of employees, revenue, etc.) of the industry; (b) estimates of consumer savings 

and revenue transfers for the industry under the rule; and (c) the small business share of 

projected industry transfers. In Chapter 5, readers are referred to the following sections: Section 

V.A for the appraisers, Section V.B for the surveyors, and Section V.C for the pest inspectors. 

The next section provides an overview of the appraisal industry, summarizes comments 

on the proposed rule by industry groups, and examines anticipated competitive impacts of the 

RESPA rule for appraisers. Section 0 describes the same for the survey and pest inspection 

industries. 

VIII.D.2 Appraisal Industry 

The central task for an appraiser is to prepare a written description of the real property 

and submit an estimate of its market value. The role of the appraiser in the settlement process is 

to provide a lender with an estimate that would allow the lender to verify whether the selling 

price is high enough to justify the loan requested. For this reason, the appraiser plays an 

important role in the loan qualification and settlement processes. Given the potentially 

conflicting interests in the appraised value of a property, professional ethics (Uniform Standards 

of Professional Appraisal Practice) emphasize the appraiser’s role as an objective, independent, 

and unbiased third-party. As discussed in Chapter 5, an emerging trend in the appraisal industry 

is the use of Automated Valuation Models (AVMs) to provide an objective and statistical 

estimate of the property value, based on statistical models. 

 

125 Government fees and escrow items are excluded from these calculations. 

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VIII.D.2.a Background 

Census data from the year 2004 indicate that the real estate appraisal industry employed a 

total of 45,021 people at 15,689 employer firms in the U.S. with estimated total annual revenue 

of $5.0 billion. Most of these were small firms: the real estate appraisal firms averaged 2.9 

employees per firm with estimated revenue of $316,080 per firm. In addition to the 15,689 

employer firms, the Census Bureau reports that there were 49,802 non-employer establishments 

in 2004, most of which are sole proprietorships. A conservative approximation of the percentage 

of small businesses in the industry can be calculated from 2002 Economic Census data. Of the 

total employer firms, 99.0 percent had annual revenue less than $2.5 million, which 

approximates the SBA definition of small. 126 These small employer firms accounted for 

75.1 percent of revenue, 82.8 percent of employees, and 78.4 percent of annual payroll. Of all 

firms in the appraisal industry, employer and nonemployer, 99.8 percent are small. These small 

businesses account for less than 83.1 percent of the revenue earned by the entire appraisal 

industry. A more in-depth description of the real estate appraisal industry can be found in Section 

V.A of Chapter 5. 

VIII.D.2.b Comments 

The comments on the 2002 proposed rule from the appraisal industry, represented by the 

American Guild of Appraisers and the American Society of Appraisers, highlight the importance 

of high-quality appraisals for the residential real estate sector and raised some potential negative 

impacts that packaging will have on the quality of appraisals. Some of their primary objections to 

the rule are noted below. 

First, it was felt that consumers would not benefit from any cost savings due to the rule. 

According to the American Guild of Appraisers, lenders would charge borrowers more for an 

appraisal than it would actually cost because RESPA does not place a ceiling on what lenders 

and brokers can charge borrowers for settlement services. 127 However, while overcharging may 

be legally possible, it will not be economically possible. Borrower shopping should expose those 

lenders who ask for noncompetitive prices for what they are when they are compared to 

mainstream offers. High-priced originators will face pressure to change their ways or leave the 

market. As discussed earlier this chapter, the shopping and cost-reducing benefits of the rule 

would lead to lower prices for consumers. 

Second, it is argued that the rule would lead to a decrease in the quality of appraisals that 

would harm borrowers. The American Guild of Appraisers states that: “the incentive to find the 

lowest price without regard to quality is very likely to lead to poor appraisals, particularly 

 

126 Unfortunately, the breakdown of the 2002 Economic Census data by revenue does not allow us to calculate the 

share of firms earning less than $1.5 million (the official SBA size standard). 

127 Comments from William Sentner, President, American Guild of Appraisers, to Rules Docket Clerk, HUD, 

regarding “Docket No. FR-4627-P-01, Real Estate Settlement Procedures Act (RESPA); Simplifying and Improving 

the Process of Obtaining Mortgage Settlement Costs to Consumers,” October 23, 2002, page 2. 

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because many lenders have shown that they are less concerned with the quality of the appraisal 

than with simply ‘papering the file.’”128 The fear is that the lender will be able to buy lowerquality services because the consumer will not know exactly what they are paying for.129 Of 

course, it is obvious that a lender who buys low quality appraisals may be hurt in the long run if 

the appraisals are not accurate and borrowers default. In addition, most lenders sell their loans on 

the secondary market and they may be required to buy back a loan that defaults due to poor 

underwriting and appraisal procedures. This suggests that lenders who do poor quality work 

would not last long or, at least, they would develop a poor reputation with the firms that purchase 

their loans. The quality standards of the originators that sell their loans will be governed by the 

requirements of the investors (Fannie Mae, Freddie Mac, and private conduits), the guidelines of 

their insurance company (FHA), or the rating agency that rates their mortgage-backed securities. 

RESPA reform is not going to change that. 

Third, there was a concern that many appraisers would be driven out of business. An 

issue for some is that the tight tolerances could have a harmful impact on the appraisal industry. 

The ten percent tolerance of the GFE on third-party services is believed to be too restrictive 

because some appraisals are more costly than others. It is argued by the American Society of 

Appraisers that not allowing appraisers to recoup the costs of the more difficult appraisals will 

discourage some from performing appraisals and even from entering the industry.130 However, 

under the rule, the provider of a third-party settlement service is permitted to charge an average 

cost for their service. This allows appraisers to build into their price the occasional appraisal that 

takes a significantly larger amount of time to complete. In addition, the rule clarifies the 

situations (such as the need for a second appraisal) where lenders can deviate from their initial 

estimates. There could be lower prices for appraisals due to the tighter tolerances on third-party 

costs under the rule and due to allowing settlement service providers to seek discounts for 

settlement services. Improved shopping for third-party costs and discount business arrangements 

are encouraged under the rule. The tight tolerances of the new GFE will provide a strong 

incentive for professionals and experts to shop for appraisal services in order to reduce their 

costs. But as noted above, it is in their self-interest to ensure that quality appraisals are 

performed. Thus, probably not unlike their situation today, appraisers will be operating in a 

highly competitive environment with many opportunities to compete. Traditional appraisers will 

continue to be affected by technological changes in the industry, such as the use of automated 

valuation models, which is an ongoing process that is not due to RESPA reform. 

VIII.D.2.c Competitive Impacts 

Like surveys and pest inspections, traditional appraisals are provided on-site at the 

mortgaged property. The transportation cost of visiting individual sites, especially the 

 

128 Page 3, Ibid. 

129 Comments from Thomas A. Motta, President, Appraisal Institute, and John J. Connolly, President, American 

Society of Appraisers, to Rules Docket Clerk, “Docket No. FR-4627-P-01, Real Estate Settlement Procedures Act; 

Simplifying and Improving the Process of Obtaining Mortgage Settlement Costs to Consumers; Proposed Rule,” 

October 28, 2002, page 3. 

130 Motta and Connolly, op. cit., page 4. 

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opportunity cost of the time spent in transit, adds substantially to the cost of providing the 

service. The transportation costs counterbalance, or overwhelm, any scale economies that may 

otherwise exist in the production of these services. The countervailing transportation cost 

pressures creates an effective constant returns to scale production function for this industry and 

can serve to explain the wide range of firm size as well as the continued success of small 

businesses in the appraisal industry. This explains why approximately 99.8 percent of traditional 

appraisal firms qualify as small businesses. 

Even if an appraisal firm is efficient and charges low prices, it will not have the same 

advantage as providers who are located sufficiently closer to the site in question. Thus, 

traditional appraisals are by economic necessity provided by local firms. Reinforcing the local 

orientation of the appraisal industry is the value of local expertise. A profound understanding of 

the characteristics of the local real estate market is essential for a successful appraisal. In 

addition, local appraisal firms maintain local networks of customers and clients, based on their 

established track records, which should give them a solid business advantage. 

There will be no significant change in the local provision of traditional appraisals because 

of this rule. Nor will there be a reduction of the number of these services purchased since the 

RESPA reform will not result in a drop in the number of mortgages that require these services. 

As noted above, traditional appraisers will continue to be affected by the increasing use of 

automated valuation models, but that is a trend that has already started. Since large lenders will 

have to deal with multiple appraisal firms in order to ensure complete geographic coverage, and 

large multi-jurisdictional appraisal firms have no apparent cost advantages over smaller 

providers (and may have location-related cost disadvantages), there is no reason to believe that 

small appraisal firms will be excluded from the market by lenders of any size, even those that are 

seeking volume-based discounts. 

The local orientation of the appraisal industry could change over time. As noted above 

and as discussed in Section V.A.1 of Chapter 5, there has been a trend towards the increasing use 

of automated valuation appraisals, particularly for appraising properties that are being refinanced 

and properties that are being used as collateral for home equity loans. The necessity for 

appraisers to visit all homes in need of an appraisal could be reduced by the AVM, but the data 

needed to determine that there is water in the basement may not be readily available for AVM 

models so visits to properties will continue to be important. However, it is unlikely that RESPA 

reform would be the catalyst for increases in the use of AVMs, as the technological advances are 

already taking place. While RESPA reform could accelerate the use of AVMs, it will not likely 

have an impact as to whether AVMs are eventually adopted more broadly by the appraisal 

industry. The adoption of AVMs will depend on the accuracy of these estimation models and 

their appropriateness for different types of properties.131 

 

131 The Fannie Mae study, Mortgage Focus (2003), reported that 34 percent of that study’s sample of 101 lenders 

were using AVMs for a variety of reasons throughout the mortgage process, including point-of-sale property 

valuation, pre-funding validation, post-closing quality control, home equity lender tolerances, and portfolio 

retention. (p. 8) 

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The tolerances and incentives for volume-based discounts will encourage originators to 

seek cost reductions in all third-party services. The cost savings for consumers of the GFE are 

estimated to be from 7.5 to 10 percent of current fees, which translates to a loss of $326 million-

$438 million for appraisers. Because it is not expected that small business will bear a 

disproportionate burden of the reform than large business (see argument above), one can apply 

the small business revenue percentage of 83.1 percent can be used to estimate the impact of the 

rule on small business: the estimates of the economic impact of the GFE will be from $273 

million to $364 million. 

VIII.D.3 Other Third-Party Settlement Services 

The issues facing surveyors and pest inspectors are similar to those of the appraisal 

industry. These services are not required as frequently as are appraisals; still, as noted, surveys 

represent 2.9 percent of all third-party settlement costs and pest inspections, 1.3 percent. Surveys 

are vital in ensuring that property line disputes do not threaten the collateral value of the 

property. Pest inspections are needed to reassure lenders that termites have not infested a 

property before extending a mortgage loan. Similar to traditional appraisals, both of these 

services are locally provided and the majority of industry revenue is earned by small businesses. 

In 2004, small businesses accounted for 81.3 percent of the revenue earned by all firms 

(nonemployer and employer) in the surveying and mapping services industry and for 

53.9 percent of the revenue of the exterminating and pest control industry. 132 A more in-depth 

description of these industries can be found in Sections V.B (surveyors) and V.C (pest 

inspectors) of Chapter 5, which also report the estimated revenue impacts on these two 

industries. For the surveying industry, the cost savings for consumers of the GFE are estimated 

to range from $54 million to $73 million. Because it is not expected that small business will bear 

a disproportionate burden of the reform than large business (for the same reasons that apply to 

appraisers), the economic impact of the GFE will be $44 million-$59 million on small surveyors. 

For pest inspectors, the revenue impact of the GFE translates to a loss of $24 million - $33 

million. The economic impact of the GFE on small businesses in the pest control industry will be 

$13 million - $18 million. 

One trend of some concern to surveyors is that lenders appear to be substituting survey 

coverage in their title insurance for an actual survey.133 If there were to be a dispute over 

property lines that led to a decrease in the property value, then the homeowner would bear the 

brunt of that loss. However, if the decrease in property value were to exceed the owner’s equity, 

then the excess loss would be a cost paid by the lender. To avoid such a situation, lenders have 

traditionally required surveys before closing. An alternative strategy is for lenders to insure 

themselves against the remote possibility that such a loss would occur. As represented by the 

 

132 Note that credit reporting is different because it is characterized by a high-level of concentration and is dominated 

by three large firms. 

133 Comments from Curtis W. Sumner, President, Executive Director, American Congress on Surveying and 

Mapping, to Rules Docket Clerk, HUD, regarding “Docket No. FR-4627-P-01, Real Estate Settlement Procedures 

Act (RESPA); Simplifying and Improving the Process of Obtaining Mortgage Settlement Costs to Consumers,” 

October 28, 2002, page 1. 

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American Congress on Surveying and Mapping, surveyors worry that this trend could be 

hastened by the RESPA rule to the disservice of the consumers.134 However, it is important to 

note that this practice has already become widespread and is not likely to be affected by RESPA 

reform. 

Again, it is important to emphasize that the impacts of the rule on these two industries 

must be considered in the context of their local nature. As discussed above for appraisals: 

• The transportation cost of making on-site visits adds substantially to the cost of 

providing these third-party services if the firm were not local. Transportation 

costs and the value of local expertise could outweigh any advantages that a larger 

firm would have. 

• It is not expected that there will be a significant change in the local provision of 

these third-part settlement services because of this rule. Since large lenders will 

have to work with many smaller firms in order to ensure complete geographic 

coverage, there is no reason to believe that small firms will be excluded from 

business under this rule. 

• The local orientation of these industries could change over time with the 

introduction of various technologies; however, it is not likely that RESPA reform 

will initiate such a trend. 

VIII.D.4 The Real Estate Industry 

Beyond bringing the buyer and seller together, real estate agents generally do not provide 

settlement services per se, but they can be involved in the settlement process in number of ways. 

Real estate agents provide information about the settlement process and may accompany their 

clients to the settlement table. Frequently real estate agents refer potential buyers to lenders and 

title and settlement companies. While some homebuyers may limit their relationship with their 

real estate agent, many homebuyers depend on the real estate agent for wide-ranging advice and 

referrals throughout the entire purchasing process. Homebuyers usually develop a business 

relationship with a real estate agent prior to establishing such relationships with lenders, 

settlement agents, or other professionals involved in the settlement process. Consequently, 

homebuyers tend to view real estate agents as a trusted source of information about the homebuying process. Moreover, real estate agents and builders increasingly encourage homebuyers to 

use affiliated or in-house mortgage and settlement service providers.135 136

 

134 Ibid. 

135 Individual real estate agents are generally not directly affiliated with mortgage and settlement service providers. 

Rather, the affiliation is generally indirect; the agent is affiliated with a real estate broker and the broker is affiliated 

with a mortgage or settlement service provider. 

136 The real estate agency Coldwell Banker Residential Brokerage provides an example of the trend towards using 

affiliates and in-house mortgage and settlement service providers. The firm launched a new joint venture to offer its 

 3-152 
Census data from the year 2004 indicate that the Real Estate Agents Brokers industry 

employed 323,045 people at 86,258 firms. These firms had estimated annual revenue of $91.7 

billion. Thus, the industry averaged 3.7 employees per firm and had estimated annual revenue 

per firm of $1,062,995. Most of those employed within the industry are employed by relatively 

small firms: 70.3 percent of the employees worked at firms employing fewer than 100, and 

53.9 percent worked at firms employing fewer than 20. In addition to the 86,258 firms in the 

Real Estate Agents Brokers Industry offices that had employees in 2004, the Census reports there 

were 702,898 nonemployer firms in the Real Estate Agents Brokers industry. (See Section VI 

of Chapter 5 for further details on the characteristics of the real estate industry, including a 

definition of nonemployer firms.) 

Most real estate agents and their brokers are represented by National Association of 

Realtors (NAR). NAR primarily commented on aspects of the RESPA rule having no direct 

impact on their members such as the YSP disclosure requirements on the GFE. NAR also 

commissioned a study on the compliance costs of the proposed rule which is reviewed in Chapter 

6 of this analysis. 

IX. Summary of Transfers, Benefits, Efficiency Gains, and Costs 

This section pulls together estimates about the benefits, costs, transfers, and efficiency 

gains associated with the rule that have either been discussed in this chapter or are discussed in 

Chapter 6. Specific quantitative estimates are provided below. As discussed throughout this 

chapter and in Chapter 6, it is difficult to estimate these effects, given available data. The reader 

is referred to the relevant sections for the specific assumptions and the range of possible 

estimates around those reported below. Still, the estimates provide a sense of the substantial 

benefits of the rule to consumers. 

IX.A. Transfers 

It is estimated that borrowers would save $8.35 billion in origination and settlement 

charges. This $8.35 billion represents transfers to borrowers from high priced producers, and 

constitutes 12.5 percent of total charges. 

• The assumption that consumers will benefit by a reduction of settlement costs of at least 

$668 per loan has not been challenged. 

 customers title and escrow services in California. Coldwell implemented an online records-management service 

whereby property sellers, lenders agents and title and escrow officers have electronic access to the latest documented 

events in a property’s sale, such as an appraisal or an inspection report. Coldwell already offered mortgage 

financing through its parent Cendant Corporation. Coldwell explained the push towards affiliates and in-house 

service providers is driven by “customer demand for greater convenience.”Sharon Simonson, “Residential Real 

Estate Brokers Push Customer Convenience,” San Jose Business Journal, June 16, 2003. 

 3-153 
 3-154 

• Indeed, results from a recent statistical analysis of FHA data imply that the savings to 

consumers may be as much as $1,200 per loan. 

IX.B. Efficiencies 

While most of the effect of this rule comes in the form of transfers from originators and 

settlement firms to consumers, many efficiencies have also been discussed in this chapter and 

elsewhere. They are listed below. 

• Mortgage applicants and borrowers realize $1,169 million savings in time spent shopping 

for loans and third-party services. This amount is derived from a time savings worth $55 

per applicant (75 minutes at $44 per hour) over 21.25 million applications. 

• If half the borrowers’ time saved comes from less time spent with originators and thirdparty settlement service providers, then originators and borrowers will spend 37.5 

minutes less answering borrowers’ follow-up questions. 

• The value of the time savings from dealing with follow-up questions is $956 million 

(37.5 minutes at $72 an hour multiplied by 21.25 applications). Loan originators receive 

a saving of $765 million (30 minutes per application) and third-party settlement $191 

million (7.5 minutes per application). 

• There will be reductions in compliance costs from average cost pricing. It is estimated 

that the benefits of average cost pricing will lead to a reduction in originator costs of 0.5 

percent, or $210 million. 

• The lower profitability of seeking out vulnerable borrowers for non-competitive and 

abusive loans should lead to a reduction in this activity. If the decline in this activity 

represented one percent of current originator effort, this would result in $420 million in 

savings to firms. 

• Some or all of industry’s total of $1,586 million in efficiency gains have the potential to 

be passed through to borrowers through competition. 

IX.C. Costs of the Rule 

Chapter 6 examines the compliance and other costs associated with the new GFE form 

and its tolerances. Additional costs could arise from the new GFE and changes to the HUD-1. 

The total one-time compliance costs to the lending and settlement industry of the GFE and HUD1 are estimated to be $571 million, $407 million of which is borne by small business. Total 

recurring costs, in the high-cost scenario, are estimated to be $918 million annually or $73.40 

per loan. The share of the recurring costs on small business is $471 million. For a more 

detailed discussion of these recurring costs, as well an analysis of one-time adjustment costs, the 

reader is referred to Chapter 6..
Exhibit 1: Items from an Actual Good Faith Estimate 

800 Series: Items Payable in 

Connection With Loan

801. Origination Fee 

802. Loan Discount (Permanent 

Buydown) 

Loan Discount (Points) 

803. Appraisal Fee 

804. Credit Report Fee 

808. Tax Service Fee 

810. VA Funding Fee 

811. Application Fee 

812. Underwriting Fee 

813. Document Preparation Fee 

815. Flood Hazard Certification Fee 

821. Processing Fee 

822. Temporary Buydown Fee 

828. CCCS Homebuyer/ 

 Education/Counseling Fee 

831. Appraisal Recertification Fee 

833. Satisfactory Completion 

 Certificate Fee 

837. Float Down Fee 

838. Commitment Fee 

839. Courier Fee-Bank 

844. Condo/PUD/Co-Op/ Approval 

 Fee 

845. Condo/PUD/Co-Op/ Waiver 

 Fee 

846. Loan Coordination Fee 

848. Fire & Police Service Fee 

856. Escrow Waiver Fee 

858. Consolidation Extensions 

 Modification Fee 

861. Modification Option Fee 

862. Construction Underwriting Fee 

863. Construction Loan Origination 

 Fee 

872. Close EXTN Rate Lock Fee 

873. Close Rate Xtend Fee 

874. Accelerator Program Fee 

1100 Series: Title Charges

1101. Settlement/Closing FeeRefinance 

1102. Abstract or Title Search 

1103. Title Examination 

1104. Title Insurance Binder 

1105. Document Preparation Fee 

1106. Notary Fee 

1107. Attorney’s 

Settlement/Abstract/Title Fee 

1108. Title Insurance Fee 

1109. Lender’s Coverage 

1110. Owner’s Coverage 

1111. Special Assessment 

1115. Endorsement Fee 

1122. Special Assessment Search 

Fee 

1124. Tax Certification Fee 

1125. Courier Fee-Settlement Agent 

 3-155 
Exhibit 2: Items Payable in Connection With Loan (800 Series), 

from sample of 3,000 HUD-1 forms across five metropolitan areas

2nd Application Fee 

2nd Credit Report Fee 

2nd Document Preparation Fee 

2nd Mortgage Fee 

2nd Servicing Fee 

4506 Fee 

Access Fee 

Additional Credit Report 

Additional Origination Fee 

Additional Appraisal Fee 

Additional Loan Charges 

Additional Loan Discount 

Additional Loan Processing Fee 

Additional Underwriting Fee 

Amortization Schedule Fee 

Application Fee 

Appraisal Conversion Fee 

Appraisal Fee 

Appraisal Retype Fee 

Appraisal Review Fee 

Appraiser Re-inspection Fee 

Assignment Fee 

At Home Service Fee 

Attached Charges 

Automated Underwriting System Fee 

Authority Fee 

Balance of Set-up Fee 

Bond Application Fee 

Bond Delivery Fee 

Bond Fee 

Bond Participation Fee 

Bond Procurement/Compliance Fee 

Bond Program Fee 

Broker Admin Fee 

Broker Application Fee 

Broker Commitment Fee 

Broker Courier Fee 

Broker Credit Report Fee 

Broker Fee 

Broker Loan Discount 

Broker Origination Fee 

Broker Origination Fee 

Broker points 

Broker Processing Fee 

Brokerage Fee 

Business Credit Report Fee 

Buy-down Deposit 

Buy-down Expense 

Buy down Fee 

Closing Fee 

Closing Redraw Fee 

Commitment Fee 

Commitment Update Fee 

Compliance Inspection Fee 

Compliance Review Fee 

Credit Review Fee 

Desktop Underwriter Fee 

Deposit Verification Fee 

Discount Fee 

Document Fee 

Document Processing Fee 

Document Review Fee 

Down Payment Assistance Fee 

Energy Efficient Mortgage Fee 

Energy Improvement Fee 

Engineering Report Fee 

Escrow Set Up Fee 

Express Fee 

Extension Fee 

Field review Fee 

FHA Commitment Fee 

FHA Compliance Fee 

FHA Funding Fee 

FHA Mortgage Insurance Premium 

Final Inspection Fee 

Final Appraisal Inspection Fee 

Final Compliance Review Fee 

Flood Hazard Certification Fee 

Flood Hazard Determination Fee 

Flood Inspection Fee 

Funding Delivery Fee 

Home Buyers Counseling Fee 

 3-156 
Home Inspection Fee 

Homestretch Participation Fee 

Inspection Fee 

Insurance Tracking Fee 

Insurance Fee 

Interim interest 

Investor Delivery Fee 

Leader Fee 

Lender Processing Fee 

Lender's Inspection Fee 

Lenders Charge 

Loan Discount fee 

Loan Fee 

Loan Processing Fee 

Loan Set-up Fee 

Lock-in Fee 

Management Fee 

Mortgage Credit Certificate Fee 

Mortgage Electronic Registration 

System Fee 

Miscellaneous Fee 

Mortgage Offer Conditions Fee 

Mortgage Service Fee 

Participation Reservation Fee 

Preliminary Preparation Fee 

Pennsylvania Housing Finance 

Authority Bond Fee 

Pennsylvania Housing Finance 

Authority Qualifying Fee 

Post-closing Fee 

Premium Pricing Fee 

Prepaid on 2nd Deed of Trust 

Principal Curtailment 

Processing Fee 

Property Inspection Fee 

Qualifying Fee 

Rate Extension Fee 

Real Estate Tax Service Fee 

Recertification Fee 

Redraw Fee 

Re-inspection Fee 

Repair Certification 

Review Appraisal 

Review Fee 

Roof Certification Fee 

Roof Report 

Rush Fee 

Southern California Mortgage Exchange 

Recording Fee 

Second Mortgage Fee 

Septic Inspection Fee 

Servicing Fee 

Set-up Fee 

Settlement Fee 

Sacramento Home Loan Counseling 

Center Fee 

Storage Fee 

Submission Fee 

Tax Administration 

Tax Lien Fee 

Tax Service Fee 

Temporary Buy-down Fee 

Termite Inspection Fee 

Title Review Fee 

Underwriting Fee 

US Fee to Sacramento Housing and 

Redevelopment Agency 

Virginia Housing Development 

Authority Bond Loan Fee 

Verification of Deposit Fee 

Warehouse Fee 

Wire fee 

Yield Spread Premium 

 3-157 
 3-158 

Exhibit 3: Title Charges (1100 Series), 

from sample of 3,000 HUD-1 forms across five metropolitan areas

Abstract Recertification Fee 

Abstract Update Fee 

Abstract Update Search 

Accommodation Signing & Notary Fee 

Accommodation Signup Fee 

Additional Attorney Fees 

Additional Charges 

Additional Closing Fee 

Additional Pin Search Fee 

Additional Policy Fee 

Additional Risk Fee 

Additional Work Charge 

Administrative Fee 

After Hours Closing Fee 

ALTA (American Land Title 

Association) Inspection Fee 

ALTA Loan Policy Fee 

Assessment Letter Fee 

Attorney Fees 

Binder Step-up Rate 

Bond in Lieu of Probate Fee 

Broker service Fee 

Buyer recording Fees 

Buyer Title Insurance 

Certification and License to Lawyers 

Title Fee 

Cancellation Fee 

Case Examination Fee 

Certification of Abstract Fee 

City Certification Fee 

City Lien Inquiry Fee 

Closing Fee 

Commitment Update Fee 

Commitment Fee 

Commitment Later Date Fee 

Condo Estoppel Request Fee 

Construction Title Charges 

Conveyance Fee 

Copies of Tax Bills Fee 

Courier Fee 

Court Case Exam Fee 

Government Recording and Transfer 

CPL (Cost per Lead) Fee 

CTS (Commission Tracking System) 

Fee 

D/T Recon/Release Fee 

Data Down Fee 

Deed & Mortgage Recording Fee 

Deed Preparation Fee 

Delay Closing Fee 

Delivery Charges 

Disbursing / Closing Service Letter Fee 

Disclaimer Deed Fee 

Document Processing Fee 

Domestic Relations Search Fee 

Drawing Fee 

Drawing Interspousal Deed Fee 

Duplicate Policy Fee 

Early Hour Closing Fee 

Electronic Recording Fee 

Encroachment Endorsement Fee 

EPA Endorsement Fee 

EPA/Later Date Fee 

EPA/LOC (Level of Concern) Note Fee 

EPL Endorsement Fee 

Escrow Fee 

Escrow Holdback Fee 

Estate Search Fee 

Estoppel Fee Request 

Estoppel/Municipal/Water/Tax Search 

Exam Fee 

Extra Policy Fee 

Extra Risk Premium 

Fee for Water Certification and Zoning 

FHA Broker Service Fee 

FHA Repair Reimbursement 

Final Abstract Endorsement Fee 

Final Abstract Update Search Fee 

Final Certification Fee 

Final Recertification Fee 

Final Search Title Recertification Fee 

Final Title Fee 

Final Update Search Fee 

Florida form 9 Fee 
GAP (Guarantee Asset Protection) 

Coverage Fee 

Government Recording and Transfer 

Charges 

Grass Cut Fee 

Handling Fee 

Hard Copy Fee 

Hazard Insurance Reimbursement 

Homeowners Association (HOA) 

Estoppel Letter Fee 

Homestead Endorsement Fee 

Homestead Waiver Endorsement 

HUD Closing Fee 

Impact Fees 

Insured Closing Protection Letter Fee 

Interspousal Deed 

Joint Protection Policy Fee 

Judgments 

Later Date Fee 

Lender Policy Fee 

Lender's ALTA Policy Fee 

Lenders Title Insurance Fee 

Lien Search Fee 

Loan Tie-in Fee 

Location Endorsement Fee 

Locksmith Fee 

Misc. Income/ Service Fees 

Misc/Telephone Tolls/ Faxes 

MLS (Multiple Listing Service) Fee 

MLS/Conveyance Fee 

Mortgage Release Tracking Fee 

MPA (Mortgage Purchase Agreement) 

Charge 

Municipal Lien Search Fee 

Municipal/Water/Tax Search Fee 

Origination Fee 

Out-claim Deed Fee 

Overnight Courier Fee 

Overnight Mortgage Package Fee 

Overnight Payoff Fee 

Overnight Processing Fee 

Owners Policy Fee 

Payoff Processing Fee 

Payoff/PKG Processing fee 

Plumbing Fee 

Post-Closing Certification Fee 

Post-Closing Fee 

Post Recording Title Search Fee 

Pre-Computer Title Chain Fee 

Pre-Computer/ Gap Search 

Preparation Fee 

Principal Repayment Fee 

Pro Option Fee 

Processing Fee 

PUD (Planned Unit Development) 

Endorsement Fee 

R-5 Form Processing Fee 

Radon Test Fee 

Realty Fee 

Recording Deed Fee 

Recertification Fee 

Recertification Update Fee 

Reconveyance Tracking Fee 

Recording Assignment of Mortgage to 

Board of County Commissioners Fee 

Recording of Buyers Deed & Mortgage 

Fee 

Recording Power of Attorney Fee 

Recording Fees 

Recording of Release Fee 

Recording Post Plg/Admin Fee 

Recording Release Fee 

Recording Service Fee 

Release Processing Fee 

Reimburse Tax Printouts Fee 

Reimburse Domestic Relations 

Repairs Termite Fee 

Restriction Endorsement Fee 

Revised Commitment Fee 

Risk Premium 

Roof Certification Fee 

Roofing Fee 

Runner Fee 

Rush Fee 

S&H (Shipping & Handling) Fee 

Search Fee 

Second Recording Fee 

Service Closed Letter Fee 

Service Fee 

Signing Fee 

Simultaneous Issue Fee 

Special Services Fee 

 3-159 
 3-160 

Spousal Deed Fee 

Standard Lenders Fee 

Standard policy Fee 

Survey Escrow Fee 

Tax and City Lien Searches Fee 

Tax and Water Search Fee 

Tax Certificate Fee 

Tax Printout Fee 

Tax Search Fee 

Technology Service Fee 

Termite Certification Fee 

Title Insurance Fee 

Title Indemnity Set-up Fee 

Title Recertification Fee 

Title Review Fee 

Title Search Fee 

Title Update Recertification Fee 

Tracking Fee 

Transaction Processing Fee 

Transfer Fee 

Title Recon Tracking (TRT) Fees 

Trust Deed Fee 

Trustee Fees 

Title Recertification Fee 

Use and Occupancy (U&O) Fee 

Update Fee 

Update Search Fee 

Update Title Recertification Fee 

UPS fee 

UPS Payoff Fee 

Waiver Exam Fee 

Water & Zoning Cert Fee 

Water Accommodation Service Fee 

Water Certification & Messenger Fee 

Water Processing Fee 

Water Revenue Bureau Fee 

Water Sewer Rents 

Wire Fee 

Zoning Certification Fee 

Zoning Ordinance Fee 
CHAPTER 4 

ALTERNATIVES TO THE FINAL RULE 

I. Introduction................................................................................................................................................................1

II. Status Quo.................................................................................................................................................................1

III. Alternative Manners of Implementing the New GFE..............................................................................................2

III.A. Do Not Include the Yield Spread Premium Calculation in the New GFE .......................................................3

III.B. Trade-off Table ................................................................................................................................................6

III.C. Tolerances........................................................................................................................................................6

III.D. Opportunity to Cure.........................................................................................................................................7

III.E. Definition of Application .................................................................................................................................7

III.F. Other Changes to the GFE................................................................................................................................7

III.G. Alternative Methods of Implementing the GFE...............................................................................................7

III.H. Other Proposed Forms ...................................................................................................................................11

III.I. Comparing the GFE with the HUD-1..............................................................................................................11

I. Introduction 

In this chapter, we discuss alternatives to the final rule. We also discuss the arguments 

pro and con for each alternative and why the alternatives were not adopted. First, we discuss the 

status quo as an alternative to the final rule (Section II). Second, we present alternative means of 

implementing the final GFE such as whether or not the YSP should be presented and different 

versions of the GFE form (Section III). We also explain why (or why not) HUD made changes 

in response to comments on the 2008 proposed rule. 

II. Status Quo

The most basic alternative, of course, was to maintain the status quo, that is, make no 

change to the current GFE and HUD-1. This alternative was rejected for reasons given in 

Section II of Chapter 1, entitled “Need for Final Rule.”1

 As explained there, the current GFE 

does little to help consumers overcome the many problems they face when shopping for a 

mortgage – there is convincing evidence that many borrowers pay non-competitive prices in 

today’s markets for both loan originator and third-party services. Today’s GFE is not an effective 

tool for facilitating borrower shopping nor for controlling third-party settlement costs. The 

current GFE format contains a long list of charges that often overwhelms consumers, rather than 

succinctly informing them of the major costs that they need to know for effective comparison 

shopping. The proliferation of charges that has evolved under the current GFE makes consumer 

shopping and the mortgage settlement process difficult, even for the most informed shoppers. 

Long lists of charges certainly do not highlight the bottom-line costs so consumers can shop and 

compare mortgage offers among different originators. 

 

1

 For a detailed discussion of problems with the current system, and thus the need for this proposed rule, see 

Sections V, VI, and VII of Chapter 2 and Sections I and VII of Chapter 3. 

 4-1 
In addition, under today’s rules, the estimated costs on GFEs may be unreliable or 

incomplete, or both, and final charges at settlement may include significant increases in items 

that were estimated on the GFE, as well as additional unexpected fees, which can add 

substantially to the consumer’s ultimate closing costs. The process of shopping for a mortgage 

can also involve complicated financial trade-offs, which are not always clearly explained to 

borrowers. Today’s GFE is neither an effective tool for facilitating borrower shopping nor for 

controlling origination and third-party settlement costs. 

Thus, not to change the GFE would continue the current system of consumers paying 

non-competitive prices for mortgage services. The enormous potential for cost reductions in 

today’s market is indicated by studies showing that yield spread premiums do not always offset 

consumers’ origination costs and by studies showing relatively high and highly variable charges 

for third-party services, particularly for title and closing services that account for the major 

portion of third-party fees. This situation is particularly onerous on those cash-constrained 

families who are seeking a home for the first time. Changes to the GFE are needed to make the 

settlement process more transparent, to get rid of junk fees, to increase comparison-shopping, 

and to reduce costs for consumers. 

For the above reasons, HUD rejected this alternative. As discussed in Chapter 3, the 

current GFE can be improved to make it an effective shopping document, which will lead to 

substantial savings for consumers (see estimates in Section I.A of Chapter 3). The new GFE 

format simplifies the process of originating mortgages by consolidating costs into a few major 

cost categories. The GFE of the final rule ensures that in brokered transactions, borrowers 

receive the full benefit of the higher price paid by wholesale lenders for a loan with a high 

interest rate; that is, so-called yield spread premiums. On both the GFE and HUD-1, the portion 

of any wholesale lender payments that arise because a loan has an above-par interest rate is 

passed through to borrowers as a credit against other costs. Thus, there is assurance that 

borrowers who take on an above-par loan receive funds to offset their settlement costs. The GFE 

also includes a trade-off table that will assist consumers in understanding the relationship 

between higher interest rates and lower settlement costs. The GFE includes a set of tolerances 

on originator and third-party costs: originators must adhere to their own origination fees and 

estimates of transfer taxes, and give estimates of many third-party charges and government 

recording charges subject to an overall maximum 10% increase. Finally, HUD conducted 

consumer tests to develop the GFE form. During the tests, consumers said that the new GFE was 

user-friendly and written at the right level, and that they liked the summary sheet and trade-off 

table, among other things. Consumers could also identify the cheaper loan using the new GFE. 

(See Section II.F of Chapter 3 for discussion of the consumer tests.) 

III. Alternative Manners of Implementing the New GFE 

In this section we discuss major, as well as minor, variations on the new GFE. In Section 

III.A, the issue as to whether or not the yield spread premium calculation should be included in 

the new GFE is discussed. In Section III.B, we discuss changes to the trade-off table between 

loan charges and the interest rate. In Section III.C, changes to the tolerances on the new GFE are 

described. In Section III.D., we discuss how allowing average-cost pricing will yield many of 

the advantages of the Settlement Service Package, which was a major alternative. In Section 

 4-2 
III.F, a host of minor variations to the new GFE are discussed. Section III.H discusses 

alternative GFE forms that were considered. In Section III.I, different ways of implementing the 

GFE to HUD-1crosswalk are described. 

III.A. Do Not Include the Yield Spread Premium Calculation in the New GFE

HUD considered and rejected the alternative of not including the yield spread premium 

calculation in the GFE.2 The main issue raised by the brokers concerned the treatment in the 

2008 proposed rule of yield spread premiums on the 2008 proposed Good Faith Estimate (GFE). 

This was also the main small business issue with the 2008 proposed GFE since practically all 

brokers qualify as small businesses. Mortgage brokers and their trade groups expressed vigorous 

opposition to HUD’s singling out indirect compensation to the broker and disclosing the yield 

spread premium as a lender credit to the borrower. They maintained that such a characterization 

is misleading, unfair and anti-small business.3

 Mostly, mortgage brokers and their 

representatives generally felt that yield spread premiums being disclosed as credits to borrowe

would place mortgage brokers at a competitive disadvantage. They said that the broker fee 

disclosure in the 2008 proposed GFE would severely disadvantage mortgage brokers as 

compared to lenders (i.e., mortgage bankers and conventional lenders) because mortgage brok

would not be able to advertise certain mortgage loans and remain competitive. Section III of 

Chapter 3 dealt with this issue in some detail; a summary of this issue and HUD's resp

rs 

ers 

onse is 

provided below. 

losed as 

of, 

nation to the borrower, except any 

amounts denominated by the lender as discount in Block 2. 

 GFE 

s 

 

Under the March 2008 proposed rule, the first page of the GFE presented the net 

origination charge as “your adjusted origination charges.” The second page of the proposed GFE 

informed the consumer how the adjusted origination charge was computed. Block 1 disc

“Our service charge” the originator’s total charge to the borrower for the loan. The rule 

proposed that in the case of loans originated by mortgage brokers, the amount in Block 1 would 

have to include all charges received by the broker and any other originator for, or as a result 

the mortgage loan origination, including any payments from the lender to the broker for the 

origination. In the case of loans originated by originators other than mortgage brokers, the 

amount in Block 1 would have to include all charges to be paid by the borrower that are to be 

received by the originator for, or as a result of, the loan origi

In loans originated by mortgage brokers, Block 2 of the second page of the proposed

would have disclosed whether there is any charge or credit to the borrower for the specific 

interest rate chosen for the GFE. The second check box would have indicated whether there wa

a payment for a higher interest rate loan, described as the “credit of $ ____ for this interest rate 

2

 There were at least three methods considered: 1) a separate mortgage broker disclosure of the yield spread 

premium; 2) a separate mortgage broker contract; 3) disclosure of the yield spread premium on the GFE but not 

integrated at the top of page 2. 

3

 A variety of reasons for opposition were provided including that HUD’s proposal: 1) creates confusion for the 

borrower; 2) will unnecessarily increase HOEPA transactions; 3) will stifle FHA and low/mod lending; 4) unfairly 

targets brokers; 5) creates an uneven playing field with retail lenders; and 6) may adversely affect tax treatment of 

borrowers. See Section III of this chapter for a detailed discussion of YSP issues and industry concerns. 

 4-3 
of ___%. This credit reduces your upfront charges.” The third check box would have indicated 

a “charge of $____ for the interest rate of ____%. This payment (discount points) increases you

upfront charges.” Any lender payment would have been subtracted and any points would have 

been added to arrive at “your adjusted origination charge” that would have also been disclosed 

on the first page of the form. The proposed rule provided that for mortgage brokers, the amounts 

of any charge or credit in Block 2 would have to equal the difference betw

r 

een the price the 

wholesale lender pays the broker for the loan and the initial loan amount. 

es 

’s 

enders did 

not have to report their total origination fees received on the 2008 proposed GFE. 

of 

 GFE, while 

listic changes to this portion of the form in the interest of borrower 

comprehension. 

 form because this is the section of the disclosure that sets 

forth the origination charges. 

es as “Our origination charge” the originator’s total charge 

to the borrower for the loan. 

n 

pt any amounts 

denominated by the lender as discount which are disclosed in Block 2. 

 

Only mortgage brokers would have been required to disclose their total origination fe

received: direct fees plus the yield spread premium. Lenders can also receive yield spread 

premiums when they sell mortgages into the secondary market but were not required to disclose 

yield spread premiums to consumers as a result of the secondary market exemption under HUD

rules. But, more practically, the pricing information for calculating yield-spread premiums is 

often simply not available at closing in lender transactions.4 Thus, unlike brokers, l

HUD has determined to retain the mortgage broker disclosure. HUD’s testing of the 

form demonstrated that consumers understood the relationship between the interest rate and the

settlement charges and no bias against brokers resulted from the form. While the substance 

the broker disclosure remains the same in the final rule as it was in the proposed rule, some 

minor stylistic changes have been made to draw the borrower’s attention to specific terminology 

in the disclosure. HUD maintained the disclosure on the top of page 2 of the revised

making some sty

• The top of page two refers to “Your Adjusted Origination Charges” instead of “Your 

Loan Details” on the proposed

• The box on the top of page two informs the borrower how the adjusted origination charge

is computed. Block 1 disclos

• The revised rule requires that in the case of loans originated by mortgage brokers, the

amount in Block 1 must include all charges to be paid by the borrower that are to be 

received by the broker and any other originator for, or as a result of, the mortgage loan 

origination, including any payments from the lender to the broker for the origination. I

the case of loans originated by originators other than mortgage brokers, the amount in 

Block 1 must include all charges to be paid by the borrower that are to be received by the

originator for, or as a result of, the loan origination to the borrower, exce

4

 Whereas the market price of the loan is always available at closing in brokered transactions (i.e., the price the 

wholesale lender is paying for the loan at closing), such a price is not necessarily available in lender transactions 

(e.g., the lender may be holding the loan in portfolio rather than selling the loan to a wholesale lender). 

 4-4 
• Block 2 discloses for loans originated by mortgage brokers whether there is any charge or 

a credit to the borrower for the specific interest rate chosen for its GFE. The heading for 

block 2 of the proposed form included the term “points” at the end of the sentence. In the 

interest of borrower comprehension, on the revised form this sentence now states “Your 

rate loan 

check 

ment” has replaced the word “upfront” from the proposed 

form. Any lender payment is then subtracted and any points are added to arrive at “your 

ock 2, 

hat 

r the 

s 

ders must also add any such positive amounts or deduct any 

negative amounts to arrive at “Your Adjusted Origination Charge,” listed on Line A of 

le 

n help reduce borrowers’ up-front origination charges and 

settlement costs in brokered loans; and 3) how payments to reduce the interest rate and monthly 

charges

g 

 will 

and discount points, making it more likely that interest rate variations are used to the consumer’s 

credit or charge (points) for the specific interest rate chosen.” 

• The second check box indicates whether there is a payment for a higher interest 

described as the “credit of ______for this interest rate of ______. This credit reduces 

your settlement charges.” In the interest of borrower comprehension, the word 

“settlement” has replaced the word “upfront” from the proposed form. The third 

box indicates any “charge of ______for this interest rate of _____. This payment 

(discount points) increases your settlement charges.” In the interest of borrower 

comprehension the word “settle

adjusted origination charge.” 

• At page two, while lenders are not required to check the second or third boxes of Bl

in loans where they do not make such disclosures, they are required to check box 1 t

indicates that “The credit or charge for the interest rate of ____ is included in ‘Our 

origination charge’.” If lenders denominate any amounts due from the borrower as 

“discount points,” they must check the third box indicating that there are charges fo

interest rate and enter the appropriate amount for points as a positive number. If lenders 

denominate any amounts as a credit to the borrower for the particular interest rate 

covered by the GFE, they must check the second box and enter the appropriate amount a

a negative number. Len

page two of the form. 

In reaching its determination, HUD considered providing only the adjusted origination 

charge without the calculation and disclosing yield spread premium and discount points 

elsewhere on the form. HUD concluded, however, that a complete disclosure of the payments to

the broker as presented on page 2 of the revised form, read in conjunction with the trade-off tab

on page 3, is essential to borrower understanding of: 1) the broker’s total compensation; 2) how 

rate based payments from lenders ca

 increase up-front charges. 

HUD believes that the disclosure of yield spread premiums as offsetting other closin

costs within the disclosure of the array of fees rather than as a separate disclosure elsewhere on 

the form is the best method for making the borrower aware of the existence of yield spread 

premiums. In addition, using it as an offset makes it more likely that yield spread premiums

be used to reduce settlement costs rather than increase broker compensation – in other words, 

using it as an offset seeks to change the behavior in today’s market where statistical studies 

indicate that yield spread premiums are too often used to increase broker compensation rather 

than to reduce consumer settlement costs. The disclosure was retained because HUD believes 

that it is important to improve borrower understanding of the basis for yield spread premiums 

 4-5 
advantage rather than by the originator to enhance profit at the consumer’s expense, which is

what often happens in today’s market, according to recent statistical studies of yield spread 

premiums. These statistical studies are reviewed in Section IV.D and E. of Chapter 2. 

e 

s 

ifficulty identifying the cheapest loan 

offered in the market whether from a broker or a lender. 

III.B. Trade-off Table

e to 

rt in the 

pares 

ate 

ble 

ir understanding of, and ability to shop for, mortgages with and without yield spread 

premiums. 

III.C. Tolerances

 definition 

In response to the concern that this treatment may lead to consumer errors that imped

comparison shopping that disadvantage brokers, HUD has taken several steps to reduce the 

likelihood that borrowers will make systematic errors in evaluating loan offers from brokers. 

(See Section III of Chapter 3.) Specifically, HUD has dealt with the potential for bias with six 

key features of the GFE. Once the improvements suggested by the results of the earlier rounds 

of testing were incorporated into the forms, borrowers generally identified the cheaper loan 90 

percent of the time or more. In response to FTC findings based on an abbreviated and previou

version of the GFE, HUD engaged in two more rounds of testing and improvement involving 

600 subjects per round. The end result on the forms adopted was that borrowers consistently 

identified the cheapest loan 90 percent of the time or more regardless of whether the broker or 

the lender was cheaper. The pattern of the results was quite similar regardless of whether the 

broker or the lender was cheaper. The Department believes that the forms adopted in the final 

rule perform well resulting with borrowers having little d

It is important that consumers fully understand the various options that are availabl

them, when considering trade-offs between interest rates and loan charges. Because these 

financial concepts are complicated, some consumers may not fully understand them, placing 

them in a vulnerable position when negotiating terms with originators. Brokers and lenders may 

not always inform consumers that there are alternative products with different combinations of 

interest rates, discount points, and settlement charges. While most comments supported the idea 

of a chart showing settlement cost and interest rate trade-offs, some wanted a generic cha

Settlement Cost Booklet rather than a customized chart that compares alternatives to the 

shopper’s own loan. The final rule GFE continues to include the customized chart that com

the borrower’s selected option with higher- and lower-interest rate options (assuming the 

originator offers such options). Originators have the option to fill out the chart, but it will be 

included in all GFE forms. Borrowers are encouraged to ask for additional information if the 

chart is not completed. The presentation has been improved so that the effect of the interest r

chosen on upfront charges ties in better with the explanation of how yield spread premiums 

affect the upfront charges. As noted in Chapter 3 (see Sections I.A.2 and II.D), the trade-off ta

will make borrowers aware of different interest-rate options available to them, which should 

improve the

Several comments expressed concerns about their ability to control costs and meet the 

specified tolerances in the 2008 proposed rule. The final rule makes clear that "zero tolerance” 

does not pertain in "changed circumstances" beyond the originator’s control; the new

 4-6 
of changed circumstances in the final rule expands on and clarifies the definition of 

“unforeseeable circumstances” in the proposed rule; and the tolerance for fees for gove

recording charges was increased to 10 percent. The rule’s new definition of "changed 

circumstances" includes circumstances that could not be reasonably foreseen at the tim

application; situations where the borrower changes the loan terms; bona fide business 

emergencies outside of a lender’s control; and changes in material information that was relied o

in providing the original GFE. Where a lender (or broker) cannot perform because of chan

circumstances, t

rnment 

e of GFE 

n 

ged 

he lender (or broker) must document the costs occasioned by the changed 

circumstances. 

III.D. Opportunity to Cure 

 give 

 harsh 

penalties if the estimate turns out to be lower than the actual charges at settlement. 

III.E. Definition of Application 

 of 

mum information required by the originator for a GFE, the 

GFE will be triggered within 3 days. 

III.F. Other Changes to the GFE 

ting the third and fourth pages but still retaining 

the essential trade-off table and shopping chart. 

III.G. Alternative Methods of Implementing the GFE 

o the GFE in the 2008 final rule as 

well as major alternatives raised during the comment period. 

The final rule provides loan originators with an opportunity to cure any potential 

violation of the tolerance by reimbursing the borrower within 30 days of closing any amount by 

which the tolerances were exceeded. The opportunity to cure will permit loan originators to

an estimate of expected settlement charges in good faith, without subjecting them to

Commenters objected to the bifurcated application process (a preliminary “GFE 

application” followed by the final “mortgage application”), which was designed to promote 

shopping. There was a fear of commitment by lenders to loan terms based on a preliminary 

underwriting, as well as fear that that the preliminary underwriting would be based on 

information that was too limited (borrower’s name, Social Security number, property address, 

gross monthly income, borrower’s information on the house price or best estimate of the value

the property, and the amount of the mortgage loan sought). In response, HUD has adopted a 

streamlined application process for the final rule and expanded the amount of information an 

originator may collect before issuing a GFE beyond the six pieces specified in the proposed rule. 

When the borrower provides the mini

HUD made several changes that address a number of practical and implementation

problems raised by lenders and others about the GFE and tolerances. For example, many 

industry groups complained that the four-page proposed GFE was too long. HUD reduced the 

form in the final rule to three pages by consolida

The below represent the main alternatives considered t

 4-7 
III.G.1. Itemization of Costs

Some commenters were concerned that lumping costs together into large categories 

would confuse consumers during shopping and later when they compare data on the GFE with 

data on the HUD-1. Based on consumer tests and for numerous other reasons discussed in this 

chapter, HUD decided that a standardized GFE with consolidated cost categories would serve as 

an effective cost disclosure that will facilitate borrower shopping. In addition, the use of the new 

GFE form does not preclude lenders from providing more detail or itemization of their charges. 

(See Section II.C of Chapter 3.) 

III.G.2. Volume Discounts 

Comment. One of the primary concerns of small firms was the potential adverse effect of 

HUD’s clarification that volume discounting is legal as long as the savings are passed along to 

the consumer. ALTA, ICBA, NAMB, and NAR contend that volume discounts will favor large 

settlement service providers and loan originators/lenders at the expense of small businesses and 

place them at a disadvantage. The Office of Advocacy formally endorsed this position in their 

comment letter on the 2008 proposed rule and predicted that HUD’s proposed clarification “may 

cause small businesses to leave the market and result in higher prices for consumers in the long 

term.” Rep. Donald A. Manzullo expressed concern over volume based discounts, which he 

described as a “thinly veiled attempt to reintroduce the concept of ‘bundling” services.” He 

reiterated his previously stated concerns that the long term impact of volume discounts will 

eliminate competition and destroy small businesses. 

Consumer groups, the National Consumer Law Center (NCLC) and the Center for 

Responsible Lending (CRL), supported volume based discounts as long as the discount is passed 

along to the consumer. However, CRL expressed concern that discounts may lead originators to 

steer consumers to certain settlement service providers, limiting consumers’ choice of servicers 

and therefore would support additional safeguards to ensure that volume based discounts in fact 

benefit the consumer. 

Response. HUD remains committed to a RESPA regulatory scheme that fosters 

mortgage settlement pricing mechanisms, that, as stated in the preamble to the March 2008 

proposed rule “result in greater competition and lower costs to consumers” (73 FR at 14050). 

Nevertheless, given the comments received on the proposed change to HUD’s current regulatory 

definition of “thing of value” and the significant operational and other questions raised by the 

proposed change, by both industry and consumer groups alike, HUD has decided to give further 

consideration beyond this rulemaking to a regulatory change that explicitly allows negotiated 

discounts, including volume-based discounts, between loan originators and other settlement 

service providers. HUD wants to ensure that any change will adequately protect consumers, 

while at the same time provide adequate market flexibility, and due consideration to small 

business concerns. 

The purpose of HUD’s clarification was to set a clearer standard for compliance in the 

context of the new GFE. Firms that were profitable before the clarification should not be 

negatively impacted as the change would be superficial for those that understand the law. 

 4-8 
However, there is a great deal of confusion in the industry concerning the legality of volume 

discounts and different courts have different interpretations of the law. Thus, the proposed rule 

could have had a considerable material impact on business practices. 

HUD did not expect the practice of volume discounting to have the adverse effects 

advanced by the Office of Advocacy and many industry groups. The importance of local 

orientation is a fundamental aspect of the real estate industry and one that ensures the continued 

success of small firms. Nevertheless, if there were to be adverse effects from volume 

discounting, they will occur without HUD clarifying that the practice is legal. 

HUD will not address volume discounts in the rule. However, the absence of any 

mention volume discounting in the rule does not change the department’s long-held belief that 

volume discounts are not a violation of RESPA when the discount is ultimately passed on to the 

borrower. As long as the price charged to the borrower on the HUD-1 is no greater than the 

discounted price paid to the third party, the discounted price poses no problem. Thus, in addition 

to further rulemaking, HUD will consider other avenues for providing guidance on negotiated 

discounts, including through the issuance of statements of policy. 

III.G.3. Interest-rate guarantee 

Only settlement and origination charges independent of the interest rate are required to be 

guaranteed. An alternative would be to require that all loan terms on the GFE be guaranteed for 

10 shopping days. 

Comment. In response to the March 2008 proposed rule, CRL also noted that the 10-day 

period does not apply to the interest rate, which can come with no guarantee at all. NCLC and 

CRL stated that an interest rate lock must be required in order for the GFE to be effective. 

According to CRL, not including a requirement for an interest rate lock will force consumers to 

shop on settlement costs alone, which are a relatively small component of the total home 

settlement cost. CLR stated that, in addition, not requiring a rate lock makes it too easy for loan 

originators to engage in baiting and switching, that is, they offer low settlement costs, only to 

recoup those costs by increasing the interest rate when the consumer comes back three days later. 

NCLC stated that, because interest is the largest component of the price of a mortgage, if interest 

rates are allowed to float, while settlement costs are fixed, consumers will be encouraged to shop 

on the smallest portion of mortgage costs, the settlement costs, and lenders are encouraged to 

play bait and switch games with the offered interest rate. Thus, according to NCLC, in order for 

the GFE to be an effective shopping tool, all costs, including the interest rate, must be fixed at 

the time the GFE is delivered. 

Response. Ann Schnare analyzed such an alternative in her 2008 report for the National 

Association of Realtors. If the GFE required that loan originators guarantee an interest rate, then 

this would impose hedging expenses. Issuers of GFEs would want to insure against interest rate 

movements to keep GFE offers open for the required 10 business days. According to the NAR 

report, the hedging costs could range from $136 to $272 per loan (see Exhibit 1 of the NAR 

report). HUD’s 2008 proposed rules did not require originators to guarantee an interest rate 

quoted on a GFE for a period of 10 days for precisely that reason. Interest-dependent items on 

 4-9 
the GFE (interest rate, monthly payment, YSP/discount points, adjusted origination fees, and 

daily interest charges) can have a separate availability period that can be as short as the time until 

a new rate sheet is issued. Only the prices on non-interest-dependent items on the GFE (total 

origination fees, appraisal fees, title fees, etc.) must remain available for 10 business days. These 

interest-rate-dependent items only become fixed, for purposes of comparison to the HUD-1 at 

closing, when the borrower locks the interest rate. HUD let these dates differ because HUD is 

aware that the hedging costs of an interest guarantee for a period as long as ten business days 

would be very costly. 

III.G.4. Ban the YSP 

The Urban Institute (2008) report shows that consumers do not get value for their money 

when implicitly paying a YSP to a mortgage broker. In one test, consumers lose 93 cents on the 

dollar and in another they lose $1.16 for every dollar. The concern over this issue has generated 

many policy proposals, one of which is to ban the YSP. 

Comment. The FDIC recommended that HUD ban YSPs to ensure that broker 

compensation will not be based on steering the consumer to a loan that is more expensive than 

one for which the borrower otherwise would qualify. FDIC recommended that HUD ban any 

mortgage broker compensation that is not a flat or point-based fee. 

Response. HUD believes that the YSP disclosure on the GFE form will go a long way in 

lowering excess fees pay to mortgage broker brokers (and lenders). Rigorous testing of the final 

GFE form across 1,200 subjects resulted in an average 95 percent success rate in identifying the 

cheapest loan with very little or no anti-broker bias. HUD maintains that while rate-based 

payments to mortgage brokers must be clearly disclosed to borrowers, at the same time, 

mortgage brokers also must not be disadvantaged in the marketplace since such disadvantage 

will only result in decreased competition and higher costs to consumers. Many mortgage brokers 

offer products that are competitive with and frequently lower priced than the products of retail 

lenders, and HUD wishes to preserve continued competition and lower prices for consumers. 

The most important determinant of a loan’s value on the wholesale market is its interest rate. 

Mortgage brokers would be greatly disadvantaged if restricted from earning income from 

originating high-interest loans if, at the same, lenders were allowed to be compensated by selling 

higher interest rate loans for a higher price. It is true that the Urban Institute (2008) found that 

consumers do not appear to gain much, if any, benefit by paying a YSP to a mortgage broker but 

the same study found that consumers do not benefit much more from (estimated) implicit YSPs 

to lenders. 

The principal problem with YSPs, both explicit and implicit, is that so many borrowers 

fail to understand that there ought to be a trade-off between interest rates and upfront charges, 

and both mortgage brokers and direct lenders exploit this ignorance to their gain. Consumer 

testing shows that the final GFE, with its YSP disclosure and trade-off table, is a highly effective 

tool for informing consumers about the existence of the interest rate/upfront cost tradeoff. In 

addition, once the total fees to be received by originators are established with the “Our 

origination charge” disclosure, the incentive to steer borrowers into higher interest rate loans 

disappears. Because of zero tolerance on “Our origination charge” the GFE, and the requirement 

 4-10 
that any amount paid to the broker by the lender in excess of the face value of the loan must be 

deducted from this total and credited to the borrower, the GFE serves as a fixed fee agreement 

for brokers. In the context of an agreement that the mortgage broker make a fixed fee on a loan, 

the mortgage broker no longer has an incentive to steer a borrower into a higher interest rate loan 

unless he is willing to commit fraud by violating the agreement. Within the constraint of a fixed 

fee agreement, the mortgage broker’s incentive is to find the borrower the loan with the 

combination of features (fixed rate or adjustable, monthly payment, closing fees, etc.) that makes 

the borrower happiest (so the broker can close the deal and collect the fixed fee) as quickly as 

possible (so the broker can move on to the next customer and collect more fixed fees). 

III.H. Other Proposed Forms 

HUD held RESPA Reform Roundtable discussions with representatives of the industry 

and consumers in 2005. As part of the roundtable process, HUD asked interested parties to 

submit proposals for revised GFE forms. In addition, other groups submitted redesigned GFE 

and HUD-1 forms as part of their comments on the 2008 proposed rule, or in meetings with 

OMB and HUD officials about the RESPA rule. While HUD considered ideas presented in these 

forms for potential improvements in the GFE and HUD-1, these forms presented to HUD did 

meet the policy goals of HUD.5

 Secondly, none of the forms presented to HUD was 

accompanied by evidence of extensive consumer testing that showed they could achieve all of 

HUD’s objectives for the redesign of the GFE and HUD-1 as well as, or better than, the forms in 

the rule. 

III.I. Comparing the GFE with the HUD-1 

One of the purposes of RESPA is to reduce unnecessarily high settlement costs. The 

final GFE promotes that goal in several ways. Through consolidation and of loan and title fees, 

the presentation of GFE settlement cost figures is greatly simplified by eliminating fee 

proliferation that often serves little purpose and that can easily overwhelm the borrower. 

Comparison shopping by borrowers that promotes competition is made easier through 

standardization and clear presentation of fees on the GFE. The need to adhere to the tolerances 

means that there GFE cost estimates can be more reliable compared to today, providing the 

borrower with more incentive to comparison shop. Since the GFE figures will be more reliable, 

it is more likely that the borrower who shops will wind up getting the lower price they found by 

comparison shopping. 

In order for the borrower to become an enforcer of the figures presented on the GFE from 

the loan source selected, the borrower has to be able to compare the figures on the HUD-1 to the 

figures on the GFE and determine that the HUD-1 figures are within the tolerances placed on the 

figures from the GFE. 

 

5

 Please see pp. 4-20 of Chapter 4 of the Regulatory Impact Analysis of the Proposed Rule for a discussion of the 

alternative forms considered for the proposed rule, 

 4-11 
In order to enhance comparability of the GFE to the HUD-1, HUD is modifying the 

HUD-1 so that, for each settlement cost item on the GFE, there is a line on the HUD-1 with 

exactly the same label as on the GFE. These matching categories on the HUD-1 also identify the 

location on the GFE where the corresponding entry is located. The borrower could simply hold 

the HUD-1 next to the GFE and compare the lines with the same labels. To facilitate 

comparison, there will be a third page added to the HUD-1. This new page shows the settlement 

charges as they appear on the GFE, the HUD-1, and whether tolerances on applicable figures 

from the GFE have been violated. An additional feature of this page is a summary, which 

mirrors the first page of the GFE, of the loan and the borrower’s obligations. 

Other methods have been suggested and considered for facilitating the comparison of the 

HUD-1 and GFE: a separate crosswalk, a GFE inserted into the HUD-1 form, and a read-aloud 

closing script including a crosswalk. The GFE insert was not chosen because it is a more 

significant change to the HUD-1 than the alternative of changing the labels on some of the lines. 

The read-aloud script was proposed in the 2008 proposed rule, but ultimately rejected because of 

cost and operational issues. In the final rule the format of the crosswalk from the proposed script 

was adopted as part of a new page 3 in the HUD-1, which also includes summary information on 

loan terms as on the GFE so the borrower can confirm at closing that he is getting the same loan 

as indicated on the GFE. 

III.I.1. Separate Crosswalk 

The intermediary document between the GFE and the HUD-1 is referred to as the 

separate crosswalk. The left side of the separate crosswalk would contain spaces for most of the 

items from page 2 of the new GFE. The right side would have corresponding spaces for entries 

from the HUD-1. They are grouped according to the different tolerances that apply. 

The first group includes (1) our service charge, (2) your credit or charge for the specific 

interest rate chosen, (A) your adjusted origination charges, and (6) Government recording and 

transfer charges. The service charge plus the charge or minus the credit for the specific interest 

rate chosen equals the adjusted origination charge. On the right side of the separate crosswalk 

are spaces for the same entries from the HUD-1. They are listed by the line number on the 

HUD-1 where the charge is located. Line 801 has our service charge, line 802 has your credit or 

charge for the specific interest rate chosen, and line 803 has your adjusted origination charge. 

Since the combination of the first two entries equals the third entry, there would be double 

counting if all three appeared as charges to the borrower or seller. The department decided to put 

the first two numbers to the left of the borrower’s column to show the numbers that lead to the 

adjusted origination charge and allow for their verification. 

As with any charge showing up on the HUD-1, the correct number to show on the 

separate crosswalk is the sum of any dollar values appearing as “paid outside of closing” (POC), 

in the borrower’s column, and in the seller’s column since any charge could be paid any of these 

three ways or in any combination of the three. So, all three potential sources of these dollar 

values must be checked: POC, buyer, and seller: in order to catch the full size of the charge. 

This is true for all items coming from the HUD-1. When we refer to the “HUD-1 figure,” we 

will always be referring to the sum of these three numbers. 

 4-12 
There is zero tolerance on this first set of items which means that the HUD-1 figure for 

our origination charge may not exceed the GFE figure for that same charge and that the HUD-1 

figure for your adjusted origination charge may not exceed the GFE figure for that charge either. 

The same applies to section eight, transfer taxes. So long as these HUD-1figures are less than or 

equal to their respective GFE figures, the tolerance has not been violated. 

The second set of figures on the left side of the separate crosswalk comes from sections 

three, four, five, six and seven on the GFE. Section three is required services that we select and 

all of its components can be listed: appraisal, credit report, tax service, Flood certification, and 

spaces for other charges. Next comes section four, title services and required title insurance, 

which is recorded as one figure. Section five is owners title insurance. Section six is required 

services that you can shop for and all of its components can be listed: survey, pest inspection, 

and spaces for other charges. Section seven is government recording charges. Finally, there is a 

space for the sum of all section three, four, five, six and seven charges. A ten percent tolerance 

applies to the sum of all of these charges where either the lender selected the service providers or 

the borrower used ones referred to him by the lender. 

On the right side are the corresponding entries from the HUD-1 along with the HUD-1 

line where these figures are located. The appraisal, credit report, tax service, flood certification, 

and spaces for other charges are listed as coming from lines 804 through 809. Title services and 

required title insurance comes from line 1101. Owner’s title insurance is from line 1102. The 

section six figures, required services that you can shop for: survey, pest inspection, and spaces 

for other charges are listed as coming from lines in the 1300 series of the HUD-1. Finally, there 

is a space for the sum of all the charges from these three areas. The sum of these HUD-1 figures 

should not exceed the sum of the GFE figures by more than ten percent for the services where 

either the lender selected the service providers or the borrower used ones referred to him by the 

lender. 

The last five items on the left side of the separate crosswalk are from section nine, 

reserves and escrow: section ten, daily interest charges; and section eleven, homeowner’s 

insurance. The corresponding entries come from lines 1001, 901, and 903 of the HUD-1. There 

is no tolerance constraint on any of these figures. 

The fees mentioned above from the HUD-1 should exhaust all of the required settlement 

service provider fees. If there are any other HUD-1 fees for loan origination, title work, or any 

other settlement service required to get the loan, they should be closely examined to see if they 

should have been included in the first section of the separate crosswalk and subject to the zero 

tolerance, or if they should have been included in the second section charges and subject to the 

10 percent tolerance. Real estate commissions, charges for roof repairs or termite extermination, 

charges for homeowner’s warranties, or escrowed amounts to satisfy some contingency are 

examples of figures that probably do not belong on the separate crosswalk since these are not 

likely to be fees that should be included in those to which tolerances apply. 

The changes that were made to the HUD-1 to enhance the ease of use and comprehension 

of the separate crosswalk are the relabeling of some of the HUD-1 lines mentioned above so that 

there are lines that exactly match the individual entries from the new GFE that are entered on the 

separate crosswalk. 

 4-13 
The separate crosswalk approach was not chosen. Instead, the related option of a 

crosswalk table as part of a new page 3 of the HUD-1 form was selected for the final rule. While 

this increases the length of the HUD-1 form, it increases the likelihood that the crosswalk will be 

reviewed. 

III.I.2. The HUD-1 with the GFE Insert 

The second alternative crosswalk would have modified the HUD-1 differently. It would 

have inserted the GFE information in between the “700” and “800” series. The figures from the 

GFE would have been reproduced exactly in the inserted GFE. 

“Our origination charge” and “Your charge or credit for the specific interest rate chosen” 

would be combined to get “A. Your Adjusted Origination Charge” just as on the GFE. 

Including all three would lead to a double counting error. The adjusted origination charges 

would be broken down the parts that were paid from the seller’s funds at settlement, the 

borrower’s funds at settlement, or paid outside of closing. The sum of these three components 

would be compared to the figure from the GFE the borrower had received. Items three through 

eleven on the GFE would likewise be broken out into the seller, buyer, and POC components and 

the sum of these components would be compared to the respective figure on the GFE. The 

breakdowns of items three, “Required services that we select,” and six, “Required services that 

you can shop for” would be shown on the inserted GFE but not put in the any of the three HUD1 categories to avoid double counting. 

If itemization of any combined GFE figure were desired, the details could be shown 

below in the appropriate category, but could not be shown in the seller column, borrower 

column, or as POC since that would result in double counting. So the escrow deposits could be 

broken out in the “1000” series, title charges could be broken out in the “1100 series, and 

government fees would go in the “1200” series.” Again, these dollar values would not be listed 

in the seller’s column, buyer’s column, or as POC since that would lead to double counting. 

Other legitimate charges that belong on the HUD-1 could be shown as they have before. 

For example, real estate commissions, roof repairs, or homeowner’s warranty could appear as 

they always have. The real estate commission would go in the “700” series just as before and the 

roof repair or homeowner’s warranty would go in the “1300 series just as before. These figures 

for items not necessary to get a loan should not be on the GFE. But they are a closing cost and 

should appear in the seller’s column, buyer’s column, or as POC. 

As with the previous rearrangement of the HUD-1, the intent was to leave places for all 

entries required to close the loan. In this case, the items that appear on the GFE are rearranged 

on the HUD-1 so that they appear just as they do on the GFE. But no lines required for a closing 

are eliminated. 

III.I.3. The Closing Script 

The 2008 proposed rule required an addendum to the HUD-1, which was a script to be 

completed and read aloud at closing. The closing script would: (1) compare the GFE to the 

 4-14 
 4-15 

HUD-1 and advise borrowers whether tolerances have been met or exceeded; (2) verify that the 

loan terms summarized on the GFE match those in the loan documents, including the mortgage 

note; and (3) provide additional information on the terms and conditions of the mortgage. 

Many comments were opposed to the proposed HUD-1 Addendum or “script.” The 

primary objection to the script was the time costs. HUD estimated that, in a worst-case scenario, 

the total cost of the script would be 45 minutes or $54 per loan. In a normal year (12.5 million 

originations), this would amount to $676 million. Settlement industry groups were concerned 

about these potential costs of preparing and reading the script. A second objection was that the 

script could place a settlement agent in the position of committing the unauthorized practice of 

law. This would occur if they were required to answer questions concerning issues such as the 

loan terms for which they had no responsibility. 

Given the concern expressed concerning the implications of the potential cost and legal 

implications of the script, HUD will not require a script in its final rule. To replace the script, 

HUD has added a page to the HUD-1 form. This will contain much of the same information but 

will be much easier to fill out and will not have to be read the settlement agent. The top half will 

contain a table that compares settlement charges with those on the GFE and shows the amount 

and percentage by which the charges have changed (in order to check whether the change is 

within the tolerance). The bottom half of the page consists of a summary of the loan terms, very 

similar to the first page of the GFE. 
Chapter 5 

Industry Sector Data Analysis 

I. INTRODUCTION....................................................................................................................................................3

II. MORTGAGE BROKERS .....................................................................................................................................5

II.A. OVERVIEW OF INDUSTRY ..................................................................................................................................6

II.B. DESCRIPTION OF ECONOMIC DATA..................................................................................................................10

III. MORTGAGE LENDING...................................................................................................................................18

III.A. OVERVIEW OF INDUSTRY ...............................................................................................................................18

III.B. DESCRIPTION OF ECONOMIC DATA ................................................................................................................22

IV. SETTLEMENT AND TITLE SERVICES........................................................................................................67

IV.A. OVERVIEW OF INDUSTRY...............................................................................................................................67

IV.B. DESCRIPTION OF ECONOMIC DATA ................................................................................................................78

V. OTHER THIRD PARTY SETTLEMENT SERVICES....................................................................................97

V.A. APPRAISERS ....................................................................................................................................................97

V.B. SURVEYORS...................................................................................................................................................103

V.C. PEST INSPECTORS ..........................................................................................................................................107

V.D. CREDIT BUREAUS..........................................................................................................................................110

VI. OFFICE OF REAL ESTATE AGENTS AND BROKERS INDUSTRY .....................................................113

VI.A. OVERVIEW OF INDUSTRY.............................................................................................................................113

VI.B. DESCRIPTION OF ECONOMIC DATA ..............................................................................................................114

VII. MISCELLANEOUS SERVICES ...................................................................................................................116

VII.A. NEW SINGLE-FAMILY GENERAL CONTRACTORS ........................................................................................116

VII.B. NEW HOUSING OPERATIVE BUILDERS ........................................................................................................118

TECHNICAL AND DATA APPENDIX FOR CHAPTER 5...............................................................................121

I. DESCRIPTION OF DATA SETS ......................................................................................................................121

I.A. EMPLOYER FIRMS...........................................................................................................................................121

I.B. DESCRIPTION OF BASIC TERMS.......................................................................................................................123

I.C. SIZE STANDARDS ............................................................................................................................................125

II. DESCRIPTION OF METHODOLOGY..........................................................................................................126

 5-1 
II.A. ESTIMATING NONEMPLOYER STATISTICS FOR SUB-INDUSTRIES....................................................................126

II.B. ESTIMATING REVENUE OF EMPLOYER FIRMS FOR 2004 ................................................................................127

II.C. MISCELLANEOUS ...........................................................................................................................................127

III. DESCRIPTION OF NAICS (NORTH AMERICAN INDUSTRY CLASSIFICATION SYSTEM) 

INDUSTRIES...........................................................................................................................................................128

III.A. MORTGAGE LENDING ..................................................................................................................................128

III.B. SETTLEMENT SERVICES................................................................................................................................128

III.C. MISCELLANEOUS SERVICES .........................................................................................................................130

IV. DATA APPENDIX............................................................................................................................................131

IV.A. MORTGAGE BROKERS..................................................................................................................................131

IV.B. REAL ESTATE CREDIT..................................................................................................................................133

IV.C. COMMERCIAL BANKS ..................................................................................................................................135

IV.D. SAVINGS INSTITUTIONS ...............................................................................................................................137

IV.E. CREDIT UNION INDUSTRY ............................................................................................................................139

IV.F. TITLE ABSTRACT AND SETTLEMENT OFFICES ..............................................................................................141

IV.G. OFFICES OF LAWYERS..................................................................................................................................143

IV.H. DIRECT TITLE INSURANCE CARRIERS ..........................................................................................................145

IV.I. OFFICE OF REAL ESTATE APPRAISERS...........................................................................................................147

IV.J. EXTERMINATION & PEST CONTROL SERVICES..............................................................................................149

IV.K. SURVEYING & MAPPING SERVICES..............................................................................................................151

IV.L. CREDIT BUREAU INDUSTRY .........................................................................................................................153

IV.M. OTHER ACTIVITIES REAL ESTATE RELATED TO REAL ESTATE....................................................................155

IV.N. OFFICE OF REAL ESTATE AGENTS AND BROKERS INDUSTRY.......................................................................157

 5-2 
I. Introduction 

This chapter has three main purposes. First, the chapter provides a description of the 

industries involved in mortgage origination, lending, and real estate settlement, including 

background information on recent trends in the industry. Census Bureau data and mortgage 

market data are used to describe the characteristics (number of firms, revenue, payroll, size, etc.) 

of the various industries involved in the mortgage origination and settlement process. The goal 

of this analysis is to deepen the understanding of the potential impacts of the RESPA rule on 

industry, especially small business as defined by the Small Business Administration (SBA). The 

discussion of industry trends (such as the growth of the broker industry) and special industry 

issues (such as concerns about excessive broker fees on loans with yield spread premiums) is 

often brief, as these topics have already been detailed in Chapters 2-4. 

Second, this chapter produces the parameters for estimating the economic impact of this 

rule on small business. The following Table 5-1 illustrates the type of results found in this 

chapter. The first column shows the proportion of firms that are considered a small business, 

while the second column shows the proportion of industry revenue that was earned by small 

business. The information in Table 5-1 is obtained by applying SBA definitions of a small 

business to industry data reported by the Census Bureau. It serves as the starting point for this 

chapter’s analysis of the small business share of mortgage origination revenue and settlement 

revenue. In some cases, this chapter relies solely on the Census Bureau data, but in other 

instances, it also relies on HMDA and industry data to produce a range of small business 

estimates. A range of estimates, rather than precise point estimates, reflects the uncertainty due 

to lack of complete information on the small business share of industry revenue, as well as other 

complications. For example, the relative importance of each sub-industry (e.g., thrift institutions 

in the case of the overall lending industry) in originating and processing single-family mortgages 

is necessary for estimating a small business share for the overall industry. Information is not 

always readily available on these weights, as the analysis in this chapter will show. Another 

complication concerns the fact that mortgage activity may be only a small part of the overall 

activity of an industry. Lawyers, for example, provide many services unrelated to real estate 

settlement, whereas title abstract and settlement offices work almost exclusively on residential 

real estate settlements. In such cases, the Census-Bureau-based small business percentage for an 

entire industry is replaced by an estimate developed in this chapter that is specific to mortgage 

activity. 

Third, this chapter examines the revenue impacts of the new GFE on each industry 

affected by the RESPA rule. The more disaggregated analyses in this chapter (e.g., lenders are 

divided into banks, thrifts, mortgage banks, and credit unions) complements the more aggregated 

analyses of revenue impacts presented in Chapters 3 and 4. In some cases, several sensitivity 

analyses are provided to account for different projections about the relative share (importance) of 

a specific industry, or to account for different approaches for estimating the small business share 

of a specific industry. Where possible, the transfers are also reported on a per firm basis and as a 

share of industry revenue. 

 5-3 
Table 5-1. 2002 Estimates of Proportion of Industry that is Small Business 

Industry 

Percentage of 

firms that are 

small 

Share of revenue 

earned by firms that 

are small 

Section of 

Chapter 5 

ORIGINATION 

1. Mortgage and non-mortgage loan brokers 99.1% 67.2% II 

2. Commercial banking 67.0% 4.9% III 

3. Savings institutions 48.0% 3.7% III 

4. Real estate credit 92.9% 6.7% III 

5. Credit unions 92.6% 32.2% III 

THIRD PARTY SERVICES 

6. Direct title insurance carriers 95.2% 4.8% IV 

7. Title abstract and settlement offices 98.5% 49.8% IV 

8. Offices of lawyers 99.1% 47.8% IV 

9. Other activities related to real estate 99.9% 86.9% IV 

10. Offices of real estate appraisers 99.8% 83.1% V.A 

11. Surveying and mapping (except geophysical) services 99.6% 81.3% V.B 

12. Exterminating and pest control services 99.5% 53.9% V.C 

13. Credit bureaus 96.0% 10.5% V.D 

14. Offices of real estate agents and brokers 99.5% 54.1% VI 

MISCELLANEOUS SERVICES 

15. New Single-Family General Contractors 99.1% 53.1% VII.A 

16. New Housing Operative Builders 97.4% 31.9% VII.B 

Note: See text for alternative estimates of the small business revenue share for 2-5 and 7-8. As discussed in Section IV.B, 

the Census Bureau-reported small business data for Direct Title Insurance carriers is likely inaccurate due to misreporting; 

All firms in this industry are likely large businesses.

The industries analyzed in this chapter are as follows: mortgage brokers, mortgage 

lenders (commercial banks, thrifts, mortgage banks, and credit unions), title and settlement 

agents (title insurance, title abstract and settlement services, lawyers, and escrow), other thirdparty settlement services (appraisers, surveyors, pest inspectors, and credit bureaus), real estate 

agents and brokers, and residential construction (new single-family general contractors and new 

housing operative builders). For every industry, a similar set of tables is presented in the 

Appendix and discussed in the industry section. The four tables are: 1) characteristics of 

employer firms in 2004; 2) a summary of all employer firms in the industry in 2004; 3) 

characteristics of employer firms in 2002; and 4) a summary of all firms in the industry in 2002. 

The data for the industry characteristics tables are taken from the 2002 Economic Census and the 

2004 Statistics of U.S. Businesses – both publications of the Census Bureau. These two data sets 

provide information on the number of firms, establishments, employees, the annual payroll, and 

size distribution of firms within an industry. The primary difference between the two series is 

that revenue data are available for 2002, but not for 2004. For this reason, revenue data for 2004 

are estimated based on payroll data. 

The industry characteristics tables are only for employer firms, that is, firms that pay 

payroll taxes. However, there are many small firms that are sole proprietorships or limited 

 5-4 
partnerships, or hire workers from an administrative support service. Most nonemployer 

businesses are very small, and many are not the primary source of income for their owners. 

There are many such firms in the settlement services industry. It should be noted that, although 

they are plentiful, they account for only a small portion of total revenue. For example, in all U.S. 

industries, nonemployers account for nearly 3/4 of all businesses but only 3% of business 

revenue. The Bureau of the Census releases an annual series of tabulations of nonemployers. 

These data are used to create the tables that describe total industry activity in 2002 and 2004 (see 

the Data Appendix at the end of this chapter). 

Frequently, other data are presented, as noted above. For industries where the competitive 

environment is a concern, data on industry concentration from the 2002 Economic Census are 

included in the industry description. Whenever industry data are available from other reliable 

sources, they are used to complement and verify Census data. Because the revenue of most of the 

industries analyzed is very sensitive to the mortgage origination activity, the revenue figures are 

adjusted when making some inter-year comparisons. 

To summarize, this chapter presents an overview of the industries involved in the 

origination and settlement of mortgage loans: mortgage brokers, mortgages lenders, settlement 

and title services, as well as other third-party settlement services. Industry trends are briefly 

summarized and special issues related to RESPA are noted. There is also a description of the 

economic statistics for each industry, with an emphasis on each industry’s share of small 

business activity. Both the estimation of the revenue share for various industry sub-sectors (e.g., 

large title insurers share of total revenue in the title and settlement industry) and the estimation of 

the small business share of mortgage-related revenue within the industry, often involve several 

technical analyses that pull together data from a variety of sources, in addition to the Census 

Bureau data. This leads to several sensitivity analyses to show the effects of alternative 

estimation methods and assumptions. This chapter also reports the revenue transfers from the 

RESPA rule for the specific industry sectors; these transfers are reported in dollar terms and, 

where possible, as a percentage of industry revenue. Finally, a number of technical issues and 

special topics, such as techniques for estimating the number of commercial bank employees 

engaged in mortgage origination activities, are discussed. 

Organization of Chapter. The chapter is organized as follows: brokers (Section II); 

lenders, including commercial banks, thrift institutions, mortgage banks, and credit unions 

(Section III), title and settlement industry, including large insurers, title and settlement agents, 

lawyers, and escrow firms (Section IV), appraisers (Section V.A), surveyors (Section V.B), pest 

inspectors (Section V.C), credit bureaus (Section V.D), real estate agents (Section VI), and 

background data for the private mortgage insurance industry is provided in Section VII. A 

technical appendix provides relevant definitions and explains the methodology associated with 

the economic data obtained from the Census Bureau. A data appendix includes tables with the 

economic data (number of firms, employment, revenue, etc.) for each industry sector. 

II. Mortgage Brokers 

It has been estimated that brokers originate 60% or more of all mortgages, and that 

practically all brokers are small businesses. It is therefore important to carefully consider the 

 5-5 
impact of the new GFE on brokers, as has been emphasized in Chapters 2-4. This section 

contributes to the analysis mainly by presenting Census Bureau data that characterize the broker 

industry and its small business components, and by pulling together into one place various 

findings from earlier chapters concerning the revenue impacts of the final rule on brokers. 

Section A provides an overview of the broker industry and issues that have been raised about this 

industry (also see Sections III and IV of Chapter 2). Section B.1 reports Census Bureau data for 

2002 and 2004 on the number and characteristics (payroll, revenue, etc.) of brokers. The Census 

Bureau data are important because they report the percentage of brokers who are small 

businesses and the percentage of industry revenue accounted for by small brokers. Following 

presentation of the Census Bureau data, Section B.2 examines industry data on broker 

characteristics, compares industry-based revenue estimates with Census-Bureau-based revenue 

estimates, estimates the revenue impacts of the new GFE on small brokers, and presents various 

estimates of the number of employees in the broker industry. 

II.A. Overview of Industry 

The mortgage brokerage industry includes establishments primarily engaged in arranging 

loans by bringing borrowers and lenders together on a commission or fee basis. Chapter 2 

includes a detailed analysis of brokers, explaining how they handle the front end of the mortgage 

application process, documenting their recent growth and their large share of the mortgage 

market,1

 discussing their efficiency in originating mortgages, and summarizing concerns about 

their overcharging consumers, particularly on loans that involve yield spread premiums.2 This 

section will provide some of the main highlights of that discussion. Readers are referred to 

Sections III.E and IV of Chapter 2 for a more detailed discussion. Readers are also referred to 

Section VIII.A of Chapter 3 and Section VII.A of Chapter 4 for discussions of the competitive 

impacts of the new GFE on small brokers. 

During the 1980s and 1990s, mortgage lending evolved from the traditional portfolio 

lender model where single companies (bank and thrift depositories) performed all steps in the 

mortgage process -- making, closing, funding, servicing, and holding the loan - to a more 

specialized industry of originators, funding lenders, warehouse lenders, separate secondary 

market buyers of loans, and servicers. 3

 Mortgage brokers, which hardly existed before 1980, 

were an important part of this development. Originations by mortgage brokers have greatly 

increased, from 20% of all originations in 1987 to over 60% for the years after 1996. Similarly, 

the number of brokers has risen from about 7,000 in 1987 to over 30,000 for the years after 1996. 

According to Wholesale Access (2005), there were approximately 37,000 brokers operating in 

 

1

 As noted in Chapter 2, the description of the role of brokers and wholesale lenders in the mortgage market has 

benefited from survey work conducted by Wholesale Access (2005) and LaMalfa (2006). 

2

 The discussion of recent concerns about brokers' overcharging consumers has benefited from recent work by 

Jackson and Berry (2001), Jackson (2002), Guttentag (2002), and Woodward (2002, 2003a). This work is reported 

in Sections IV.B and IV.D of Chapter 2 and is summarized in Section VII.E.1 of Chapter 3 and Section VI.E.1 of 

Chapter 4. 

3

 Michael G. Jacobides, "Mortgage Banking Unbundling: Structure, Automation, and Profit," Mortgage Banking, 

January 2001, pages 28-40. 

 5-6 
the mortgage market in 2001 (also see Section B below), although that number has fluctuated 

recently, rising from 31,000 in 1997 to 36,000 in 1998 (a heavy refinance year) before dropping 

to 30,000 in 2000 (a low volume year) and then rising to 37,000 in 2001, 44,000 in 2002 and 

50,000 in 2003 (all heavy refinance years). Based on his most recent survey, Wholesale Access 

concluded that there were 53,000 brokers during the heavy refinance year of 2004; the same 

survey placed the broker share of the mortgage market at 68 percent. 

A major driving force behind the unbundling of the mortgage functions, as well as the 

rise of mortgage brokers, has been the rise and eventual dominance of mortgage securitization, 

which separated the provision of capital from loan origination and servicing. Increasing technical 

sophistication and information technology were also important factors in the restructuring of the 

mortgage finance system and the rise of mortgage securitization. Jacobides (2001) also notes 

that the traditional mortgage banking function (defined by independent mortgage bankers that 

sell their originations in the secondary market but retain servicing) has recently been 

disintegrating, highlighted by birth of the mortgage brokerage function and the corresponding 

development of the wholesale segment of the market. 

As explained in Section III of Chapter 2, brokers originate loans mainly for wholesale 

lenders. Recently, there has arisen a group of “mega” wholesale lenders -- such as Countrywide, 

Wells Fargo, Chase Manhattan, and Washington Mutual – that have been a byproduct of the 

recent consolidation process in the banking and thrift industries. According to Inside Mortgage 

Finance (January 24, 2003), the mortgage market share of the top 25 wholesale lenders had 

increased to almost 80% by 2002. These wholesale lenders purchase loans from brokers and 

correspondents (such as a mortgage bank) as well as operate their own retail business. Brokers 

and correspondents allow these large wholesalers to expand their sales force in a low-cost way 

and to enter markets that they otherwise would not find profitable. 

Chapter 2 reviewed several studies that have examined the competitive nature of the 

mortgage market and the characteristics of mortgage brokers. In general, these studies paint a 

picture of a highly competitive market, with thousands of brokers and lenders originating loans 

for consumers, and with many of these loans being sold to large wholesale lenders who compete 

vigorously for mortgage market share (LaMalfa 2002, Woodward 2003a). 

Morgan Stanley (2002) concludes that the prime mortgage market is highly competitive 

and efficient, and that brokers are an important reason for this. The report notes that "tens of 

thousands of independent brokers" have competed away business from traditional (small and 

medium-sized) banks and thrifts; Morgan Stanley does not foresee any reversal in this trend. 

According to Morgan Stanley, brokers are not hampered by high fixed costs and are flexible 

enough to respond to the extreme cyclicality of the mortgage origination function. Morgan 

Stanley says there is little evidence of economies of scale in mortgage origination and cites 

evidence that brokers are more efficient originators than mid-size and large lenders. 

Olson (2002) also reports that his surveys find no economies of scale in mortgage 

production - a one-person firm produced as many loans per employee as a larger firm. Olson sees 

brokers as low-cost, highly-competitive firms, vigorously competing with one another and with 

little opportunity to earn above-normal profits. 

 5-7 
An examination of revenue statistics for 2002 provides further evidence of the 

competitive nature of the industry. The smallest firms, with less than five employees, generate 

$166,273 of revenue per employee. The largest firms, those with five hundred or more 

employees, generate considerably less revenue per employee ($87,266). A general decline in 

revenue per employee occurs from the smallest firm to those with 100 to 499 employees. 

Table 5-2. Revenue per Employee for Mortgage Brokers (NAICS 522310) (employer firms, 2002) 

Firm Size (number of employees) 1-4 5-9 10-19 20-99 100-499 500+ 

Revenue per employee $166,273 $134,273 $124,351 $121,288 $136,346 $87,266 

Data on industry concentration are available from the 2002 Economic Census. The four 

largest firms earn 4.2% of the total revenue, and employ 1.6% of all employees, who earn 2.5% 

of the annual payroll. 

Table 5-3. Concentration by Largest Firms 2002: Mortgage Brokers 

Concentration 

Ratios of Firms 

Share of 

Establishments 

Share of Sales, etc of 

largest firms 

Share of Annual 

payroll ($1,000) 

Share of 

Employees 

All firms 100.0% 100.0% 100.0% 100.0% 

4 largest firms 0.2% 4.2% 2.5% 1.6% 

8 largest firms 0.3% 6.1% 4.4% 2.6% 

20 largest firms 1.1% 10.1% 8.7% 5.9% 

50 largest firms 2.3% 15.6% 13.8% 9.7% 

With respect to overall competition in the prime mortgage market, Morgan Stanley 

(2002) echoed the comments of Jacobides (2001), who argued that intense competition has 

reduced mortgage fees by almost 40% in recent years. Morgan Stanley sees advances in 

technology continuing the trend toward lower origination costs. The Morgan Stanley report 

emphasizes that technology and automated underwriting systems are making big changes in the 

mortgage industry in areas such as servicing, pricing, connectivity, and unit costs. Brokers are 

increasingly using this technology supplied by lenders and the GSEs (Fannie Mae and Freddie 

Mac) when submitting loans for electronic approval. Morgan Stanley also concludes that the 

spread of automated underwriting and "open architecture" systems (allowing brokers to quickly 

qualify applicants and obtain prices from several lenders) should further improve brokers' price 

sensitivity and competitive position. 

The Joint Center for Housing Studies4 echoed the same theme when they stated: 

...these trends have also supported the growth of mortgage brokers, who working on 

a fee-for-service basis, handle the front end of the mortgage application process, a 

function that often still requires a presence in a local market area, and some face-toface communication with a loan applicant. Here, scale economies are decidedly less 

 

4

 Joint Center for Housing Studies, The 25th Anniversary of the Community Reinvestment Act: Access to Capital in 

an Evolving Financial Services System, March 2002. 

 5-8 
significant, and relatively small organizations continue to thrive as mortgage brokers. 

(p. 15) 

Despite the competitive structure of the industry, there is concern that brokers are 

overcharging consumers. Section IV of Chapter 2 presents this evidence and readers are referred 

there for the details. Much of the controversy has centered around brokers’ use of yield spread 

premiums (YSPs). Cash-constrained borrowers can avoid paying settlement costs (partially or 

even fully as in a “no-cost” loan) by choosing above-market-rate loans that generate YSPs that 

reimburse the originator (broker or lender) for settlement costs. In other words, consumers agree 

to an above-market-rate loan in exchange for not having to pay for settlement costs. As 

explained in Chapter 2, studies have found that consumers do not reap the full benefits of YSPs 

but, rather, brokers retain a portion of the YSP in excess of any payments for settlement 

services.5

 That is, yield spread premiums are not always used to offset closing costs. These 

studies present a picture of a market characterized by excessive fees, price dispersion, and price 

discrimination -- with some borrowers getting market-rate deals but others getting bad deals. 

As discussed in Chapter 2, it seems surprising to see such anti-competitive behavior in 

what appears to be a highly competitive market (see Section IV.D.4 of Chapter 2 for discussion 

of this issue). Search costs and asymmetry of information may be introducing noncompetitive 

elements into the market. Mortgage brokers may be able to price discriminate because of the 

significant costs of shopping around for better deals. A large part of the search costs would be 

developing an understanding of the origination process itself. When customers fail to become 

informed, then mortgage brokers would be able to charge higher prices. Jack Guttentag has 

stated that comparison-shopping for mortgages is difficult and that improved disclosure could 

reduce brokers’ fees by half.6 Howell Jackson, according to whom brokers often charge twice 

what would be a fair fee, confirms this view.7 According to Woodward (2003a), her data 

confirmed that shopping for a mortgage is not easy, particularly for borrowers attempting more 

difficult shopping strategies involving a tradeoff of interest rates and points. Borrowers choosing 

the more difficult strategy pay higher broker fees on average than borrowers who roll closing 

costs into the interest rate and thus can shop on the basis of rate alone.8 Woodward notes that 

“the discovery of just how ill-prepared some borrowers are to deal with the mortgage market and 

how much it costs them is disheartening” (p. 39). She says it is “shocking” that less welleducated borrowers pay nearly $1,500 more in broker fees than well-educated borrowers. Also 

according to Woodward, the race of the borrower matters – on average, African-Americans pay 

their brokers an additional $500 and Hispanic borrowers, $275, compared to other borrowers, 

after accounting for education and other characteristics. 

 

5

 See Jackson and Berry, 2001; Jackson, 2002, Woodward, 2002 and 2003a; and Urban Institute, 2007b. 

6

 Wall Street Journal, “Huge Fees Draw the Scrutiny of Regulators and Spawn Lucrative Small Companies,” 

February 24, 2003. Guttentag’s statements appear to be based on his observations of the market, as he offers no 

specific data. 

7

 WSJ, February 24, 2003. 

8

 Borrowers who roll at least the broker’s fee (plus possibly some or all other closing costs) into the interest rate pay 

broker fees that are $900 lower on average than other borrowers. Borrowers who roll all closing costs into the 

interest rate pay fees that are $1,500 lower than those paid by other borrowers. 

 5-9 
David Olson, on the other hand, has pointed out that information is readily available and 

that a shopper can easily obtain information from the Internet, television, or newspaper.9

 But 

Olson also points out that shoppers prefer local brokers to Internet firms, because a local broker 

“can walk them through the complex process of originating a mortgage.” Given the complexity 

of the process, it is possible that some consumers, especially first-time homebuyers, are not 

sufficiently sophisticated to avoid paying interest rates that are higher than normal. 

But, as noted above, recent studies by Jackson and Berry (2001), Jackson (2002), 

Guttentag (2002), Woodward (2002, 2003a), and Urban Institute (2007b) present evidence that 

brokers overcharge consumers and that yield spread premiums are not always used to offset 

closing costs. These studies present a picture of a market characterized by excessive fees, price 

dispersion, and price discrimination. Readers are referred to Section IV of Chapter 2 for a 

complete discussion of the YSP issue, concerns about excess fees, and the empirical findings 

from the various studies.

II.B. Description of Economic Data 

Section B.1 reports Census Bureau data on the mortgage brokerage industry for the years 

2002 and 2004. These data are important for determining the small business characteristics of the 

mortgage broker industry. Section B.2: (a) compares the Census Bureau revenue data with 

industry revenue estimates and attempts to reconcile some of the differences in data; (b) presents 

estimates of revenue transfers from brokers due to the consumer savings from the new GFE; and 

(c) provides estimates of the number of employees in the broker industry 

II.B.1. Census Bureau Data on Broker Industry 

The Census Bureau reports employment, payroll, and revenue10 for the Mortgage and 

Non-mortgage Broker industry, which includes: loan agencies, loan brokerages, mortgage 

brokerages, loan brokers' offices, mortgage brokers' offices, and independent loan brokers' or 

agents' offices. This industry comprises establishments primarily engaged in arranging loans by 

bringing borrowers and lenders together on a commission or fee basis. 

Census Bureau data from the year 2004 indicate that the Mortgage and Non-mortgage 

Loan Broker industry employed 138,328 people at 19,138 firms. These data are for “employer” 

firms, that is, a firm that has a payroll. The employer firms had an estimated annual revenue of 

eighteen billion dollars. Thus, in 2004, Mortgage and Non-mortgage Loan Brokers averaged 7.2 

 

9

 David Olson, Prepared Statement at Hearing on "Predatory Mortgage Lending Practices: Abusive Uses of Yield 

Spread Premiums," January 8, 2002 http://www.senate.gov/~banking/02_01hrg/010802/olson.htm. 

10 The 2002 data are from the 2002 Economic Census and the 2004 data are from Statistics of U.S. Businesses, an 

annual series. The primary difference between the two series is that revenue data are available for 2002, but not for 

2004. 

 5-10 
employees per firm and had estimated11 annual revenue per firm of $962,634. The majority, 

73.1%, of Mortgage and Non-mortgage Loan Broker employees worked at firms employing 

fewer than 100; 44.4% worked at firms employing fewer than 20. For the industry as a whole, 

the average annual salary for an employee was $50,982 in 2004. For firms with less than 20 

employees, the average annual salary was slightly less. 

In addition to the 19,138 broker offices that had employees in 2004, there were an 

estimated 31,014 nonemployer firms, which yields a total of 50,152. A nonemployer firm is one 

with no employees on its payroll for the entire year. Sole proprietorships and limited partnerships 

are examples. A firm could lease or contract workers and still retain the status of a nonemployer 

firm. While the data do not provide many details about these non-employer firms, Census 

methodology ensures that nonemployers meet a reasonable definition of small. 

The characterization of the mortgage broker industry by Wholesale Access is similar12. 

According to estimates based on an industry survey by Wholesale Access, there were 53,000 

independent brokerages in 2004. These are typically small firms -- the median firm has one 

office and four workers including the owner. The median firm is only five and a half years old. 

The median firm originated 200 loans in 1998, 125 loans in 2000, and 90 in 2004. It is estimated 

that mortgage brokers employed 240,000 workers in 2000, 297,000 in 2001 and 418,700 in 2004. 

This figure is at odds with the Census employee figure of 138,328 mortgage and non-mortgage 

loan brokers in 2004. A large part of this difference may be in how employees are defined. In 

the Census, an employee is defined as a worker on the payroll, whereas the estimates of 

Wholesale Access may define an employee as anyone who works for a firm (partners, sole 

proprietors, or employees of a temp agency). 

Census Bureau data from 2002 provide somewhat more detailed information about loan 

brokers. According to the Census, the employer firms in this sector employed 105,147 people at 

15,590 firms in 2002 (compared with 138,328 people at 19,138 firms in 2004). These firms had 

annual revenue of fourteen billion dollars. In contrast with the revenue estimate of eighteen 

billion dollars for 2004, the 2002 revenue figure is taken directly from Census publications. The 

average number of employees of a firm in 2002 was 6.7. Average revenue per firm was $906 

thousand, which is $943 thousand in 2004 dollars, slightly less than the 2004 estimate of $963 

thousand.13 In addition to the 15,590 brokerage firms that had employees in 2002, there were an 

estimated 25,105 non-employer firms.14 This yields a total of 40,695 firms, similar to other 

 

11 Revenue statistics for employer firms are available from the Economic Census of 2002, but are not available for 

more recent years. To estimate revenue for 2004, payroll statistics for 2004 are multiplied by a revenue-payroll ratio 

for the relevant firm size calculated from 2002 data. 

12 “Mortgage Brokers 2004”, Wholesale Access, July 2005. 

13 In order to convert 2002 dollars to 2004 dollars, multiply by 179.9/172.2, or 1.0447. The deflator is based on the 

U.S. Consumer Price Index for all items (Not Seasonally Adjusted). The base period is from 1982-84. 

14 The primary reason that the 2002 estimate of the number of nonemployer loan brokers is much less than the 2004 

estimate is that, according to the Census Bureau, the base from which the number of loan brokers was estimated 

(Activities Related to Credit Intermediation, NAICS 5223) increased dramatically. The Census reported that there 

were 28,100 nonemployers in 2002; 43,773 in 2003; and 45,392 in 2004. Thus, according to the Census Bureau, 

there was a 62 percent increase from 2002 to 2004. This continues a long-term trend from 14,477 in 1997; 20,321 in 

1998; 24,239 in 1999 and 24,723 in 2000. 

 5-11 
estimates for 2002. Wholesale Access provides an estimate of 44,000 broker firms for 2002. The 

differences in these estimates may be explained by the differences in their collection methods. 

The Census Bureau figures are calculated using IRS data so there is no sampling error. However, 

there is the possibility of non-sampling error, that is, of firms classifying themselves incorrectly. 

Whereas the results of Wholesale Access are based on surveys where there is the potential of 

sampling error, their estimates are even more consistent with the previously discussed 2004 

estimate (50,152) based on Census Bureau numbers. For this reason, the analysis uses the 2004 

estimate as the preferred Census Bureau estimate of firm totals in the loan broker industry. 

If this estimate is correct, then there were 50,152 firms in the loan broker industry. This 

represents a difference of just over 5% from the 53,000 firm estimate of Wholesale Access for 

2004. One reason for the difference between the estimates is that many loan correspondents, 

which are defined as belonging to Real Estate Credit industry by the Census, may have been 

defined by Olson as mortgage brokers because Olson’s more expansive definition includes 

brokers with warehouse lines of credit that also operate through correspondent arrangements 

with larger wholesale loan purchasers. As explained in Chapter 2, Olson defines a broker as any 

independent firm (i.e., not connected with a bank, thrift, or credit union) that table funds more 

than half its production, doesn’t service loans, and doesn’t buy whole loans from other firms. 

Thus, his broker definition includes brokers that use lines of credit to finance up to half their 

production.

II.B.1.a. Census Bureau Data for Small Businesses: Loan Brokers 

The greater financial detail provided in the 2002 data makes the 2002 data better suited 

for the task of determining how many firms meet the SBA’s definition of small. The 2002 size 

standard for Mortgage and Nonmortgage Loan Brokers is $6 million in revenue. Census Bureau 

data, however, reports data on firms with annual revenue of less than $5 million and between $5 

million and $10 million. Of the 15,590 employer firms in this sector, it is estimated that 97.3% 

had annual revenues less than $6 million and would have been considered small by the SBA. 

Considering both employer and nonemployer firms, it is estimated that 99.1% of all broker firms 

are small according to the SBA’s definition.15 Data on the revenue of employer firms indicate 

that at least 96.9% of employer firms would be considered small in 2002 according to Census 

data.16 These small employer firms earned 64.2% of the industry’s revenue, employed 73.9% of 

its employees, and paid 66.0% of the payroll. Applying these ratios to employer firm totals and 

counting nonemployer firms as small businesses provides an estimate of the prevalence of small 

businesses in 2002: 99.1% of all firms in 2002 are estimated to be small and 67.2% of the 

industry revenue is earned by these small firms. The share of revenue earned by small businesses 

 

15 The 99.1 percent is derived by adding the estimated 25,105 nonemployer firms to the 12,029 employer firms 

operating the entire year earning less than $6 million and dividing by the sum of all 12,365 employer firms operating 

the entire year and the number of nonemployer firms; in other words, 37,134 divided by 37,470. As explained in the 

text, it appears that the 37,470 figure underestimates the number of loan brokerages. 

16 The 2002 Economic Census data are the percentage of firms operating for the entire year earning less than $5 

million. Although this omits firms earning between $5 million and $6 million, Census data indicates that the 

number of omitted firms is small, approximately 50. 

 5-12 
increases by only two percentage points when adding nonemployers because the average revenue 

of a nonemployer broker is estimated to be fairly low ($48,871) in 2002.

“Very Small” Brokers. As described above, estimating the proportion of broker firms 

that are “small” involves some estimation. However, data are available in 2004 to describe the 

characteristics of those firms that are “very small” as defined by the number of employees (less 

than twenty employees). Employer firms, employing less than twenty employees, accounted for 

93.0% of all employer firms in the Mortgage and Non-Mortgage Loan Broker industry, 

employed 44.4% of its employees, and received 47.5% of its (estimated) revenue. Including the 

(estimated) data on nonemployer firms would yield that “very small” firms constitute 97.3% of 

all firms and earn 51.4% of the revenue received by loan brokers in 2004. 

II.B.2. Brokers: Revenue Estimates, Small Business Transfers, and Other Data 

Considerations 

As discussed above, the Census-Bureau-based estimate of 50,152 firms in mortgage loan 

broker industry in 2004 was only 2% less than the 53,000 estimate of David Olson of Wholesale 

Access.17 The characterization of the broker industry provided by the Census Bureau data was 

also similar to that provided by Olson. This section continues this analysis by combining the 

Census and industry data on brokers. Section II.B.2.a compares industry-based revenue estimates 

with Census-Bureau-based revenue estimates, Section II.B.2.b estimates the revenue impacts of 

the new GFE on small brokers, and Section II.b.2.c presents various estimates of the number of 

employees in the broker industry. 

The Census Bureau data suggest that at least 99.0% of all brokers are small businesses, or 

37,470 firms based on the Census-Bureau-based estimate of 40,695 provided above. If there 

were 53,000 broker firms in 2004, as Olson suggested, then there were 52,470 small brokers; or 

49,500 small brokers based on Olson’s estimate of 50,000 brokers in 2003 and 43,560 small 

brokers based on Olson’s recent estimate of 44,000 brokers in 2002. The recent increases in the 

number of brokers are due to the large volume of refinancing activity associated with record low 

mortgage rates. 

 

17 As noted in the text, Wholesale Access defined a broker as any independent firm (i.e., not connected with a bank, 

thrift, or credit union) that table funds more than half its production, doesn’t service loans, and doesn’t buy whole 

loans from other firms. This broker definition includes brokers that use lines of credit to finance up to half their 

production; it is therefore broader than the definition used by HUD and LaMalfa (2006). As discussed in Chapter 2, 

LaMalfa estimates that approximately one-third of mortgage production has come through the brokerage channel 

(defined as table funding and concurrent funding) while another quarter has come through the correspondent 

channel. Wholesale Access’ larger estimate that brokers account for 68 percent or more of market originations is due 

to his more expansive definition that covers brokers with warehouse lines of credit that also operate through 

correspondent arrangements with larger wholesale loan purchasers (rather than simply table funding loans). See 

Section III.B.5.d of this chapter for additional analysis related to Wholesale Access’ estimates of the broker share of 

the market. 

 5-13 
II.B.2.a. 2004 Broker Revenue 

The Census Bureau data also suggest that small brokers account for 67.2% of all revenue 

in the broker industry. Thus, it is interesting to compare various estimates of industry revenue 

for brokers. Above it was estimated that broker revenue totaled $19.920 billion during 2004, a 

year when mortgage originations totaled $2,589 billion (MBA estimate). Of course, this $19.920 

billion estimate applies only to 50,152 brokers; an adjustment is needed if one assumes there 

were 53,000 brokers, instead of 50,152. The following represent revenue estimates based on 

different treatment of the remaining 2,848 brokers and different per-firm revenue estimates: 

(1) $20.058 billion for 53,000 brokers, assuming the additional 2,848 firms were nonemployer firms and their average firm revenue was $48,285. The $48,285 figure is the estimated 

revenue per firm for non-employer firms. In this case, the 2,848 non-employer firms add just 

$138 million in revenue. Because the $48,285 appears to be such a small figure for the revenue 

of a broker (not net income, but total revenue), additional sensitivity analyses were conducted. 

(2) $20.394 billion for 53,000 brokers, assuming the additional 2,848 firms were nonemployer firms and their average firm revenue was $378,478. The $378,478 figure is the 

average per-employee revenue for small (<5 employees) broker firms. In this case, the 3,199 

non-employer firms add $1,077 million in revenue. Notice that the $378,478 is almost eight 

times the revenue estimate of $44,369 in (1) above. 

(3) $23.580 billion for 50,152 brokers, assuming the $166,273 (which is the average peremployee revenue for broker firms with less than 5 employees) could be applied to the estimate 

of 31,014 non-employer firms in the initial estimate of 50,152 brokers. 

(4) $24.053 billion for 53,000 brokers, assuming the additional 2,848 firms were nonemployer firms and that all 33,862 (31,014 of the initial 50,152 plus the additional 2,848) nonemployer firms had average firm revenue of $166,273 (instead of $48,285 as in (1) above). 

(5) $21.051 billion for 53,000 brokers, assuming the additional 2,848 firms were split 

between 1,087 employer and 1,761 non-employer firms and the average firm revenue was 

$962,634 for employer firms and $48,285 for non-employer firms (see Table 5-23 in the Data 

Appendix for the average revenue). 

(6) $21.259 billion for 53,000 brokers, assuming the additional 2,848 firms were split 

between 1,087 employer and 1,761 non-employer firms and the average firm revenue was 

$962,634 for employer firms and $166,273 for non-employer firms. 

Thus, there are a range of possible revenue estimates for 2004 based on the 

Census Bureau revenue data applied to either 50,152 broker firms or 53,000 broker firms. One 

can also make rough revenue estimates based solely on industry data. In 2004, the broker share 

of mortgage originations was 68%, or $1,761 billion (of total originations of $2,589 billion18). 

 

18 This estimate coincides with estimates released by the Mortgage Bankers Association (MBA). Alternatively, 

Freddie Mac estimates total single-family originations were $2,906 billion in 2004, and Fannie Mae estimates the 

total was $2,790 billion. 

 5-14 
Based on Wholesale Access (2005), brokers earn about 1.7 percent in origination fees, or 

$29.937 billion (multiplying 0.017 times $1,761 billion).19 As noted in Chapters 3 and 4, there 

have been anecdotal reports of lower origination fees. If fees were 1.50%, then broker revenues 

were $26.41 billion. This estimate, based on simple industry calculations, is slightly higher than 

the range reported in (1)-(6) above for the Census-Bureau-based estimates. While the various 

industry-based revenue estimates for 2004 vary somewhat depending on fee assumptions, the 

fact that they are in the same range as the Census-Bureau-based estimates offers some comfort, 

particularly since the industry-based estimates are used to estimate the revenue impact on small 

businesses. 

II.B.2.b. Consumer Savings and Revenue Transfers: Brokers 

As explained in Chapter 3, consumer savings and transfers associated with the new GFE 

assume $2.4 trillion in mortgage originations, with brokers accounting for 60% of this total.20 

While the base case assumed brokers earn a 1.75% fee, sensitivity analyses were conducted 

using 1.5% and 2.0% fees. In this case, broker revenues are projected to be: (a) $21.6 billion if 

fees are 1.5%, (b) $25.2 billion if fees are 1.75%, and (c) $28.80 billion if fees are 2.0%. As 

discussed above, revenue estimates generated in this manner for the year 2004 were similar to 

revenue estimates for brokers based on Census data. 

As noted above, 99.1% of broker firms are small businesses and this analysis assumes 

they account for 70% of all broker revenues.21 Thus, small broker revenues would be: (a) $15.1 

billion if fees are 1.5%, (b) $17.6 billion if fees are 1.75%, and (c) $20.2 billion if fees are 2.0%. 

GFE Consumer Savings and Transfer Estimates. Section VII.E of Chapter 3 

conducted several analyses with respect to projected transfers from brokers due to the new GFE. 

The estimates ranged from 11.0% to 14.0%. In the case of a 1.75% origination fee, the dollar 

range was from $2.77-$3.53 billion. Small businesses would account for 70% of these transfers, 

or $1.94-$2.47 billion. If there are 40,000 (44,000) (46,000) (50,000) brokers, then these 

transfers would come from 39,640 (43,604) (45,586) (49,550) small brokers.22 Because the 

industry-based revenue estimates are similar to the Census-Bureau-based revenue estimates (see 

above demonstration of this for the year 2004), then the percentage change in broker revenues is 

 

19 Origination fees include both direct origination fees and indirect origination fees (or yield spread premiums). 

20 According to Olson, the broker share was 65 percent during the heavy refinance years of 2001and 2002 and 68 

percent in 2004. While 60 percent is used here, Chapter 3includes sensitivity analyses of higher broker shares. The 

results for 65 percent are easily calculated by multiplying the projected revenues in the text by 1.083, or 65/60. 

Also see Section III.B.5.d of this chapter for a discussion of some issues related to the broker share of the market. 

21 The 2002 Census of Business estimates a revenue share of 67.2% for small brokers; however, as discussed above, 

that survey may not have included all brokers. Therefore, to ensure that the small broker revenue share is not 

underestimated, this analysis rounds it up slightly to 70%. 

22 However, it is recognized that in the latter cases (46,000 and 50,000 brokers), the mortgage origination volume 

could be higher than $2,400 billion, which is a projection for a more normal home purchase environment. 

 5-15 
given by the 11.0%-14.0% reported above. This percentage loss in revenues refers to both small 

and large brokers.23

If broker fees are 2.0% instead of 1.75%, then broker revenues and the above revenue 

transfers are increased by the ratio of 2.00/1.75, or 1.14. Revenue transfers for all brokers would 

be $3.17-$4.03 billion, and revenue transfers for small brokers would be $2.22-$2.82 billion – 

again, these revenue transfers for both groups would represent 11.0%-14.0% of their total 

revenues. If broker fees were 1.5% of the value of originated loans, then revenue transfers for all 

brokers would be $2.38-$3.02 billion, and revenue transfers for small brokers would be $1.67-

$2.12 billion. 

For estimates of the allocation of consumer savings of the GFE by size of firm, see Table 

A.1. In addition, Table A.1 shows estimates of the allocation of consumer savings per firm for 

the GFE. 

For a discussion of the competitive impacts of the RESPA reform on brokers, see Section 

VIII.A of Chapter 3. See Chapter 6 for a description of the compliance costs and regulatory 

burden of the rule. 

II.B.2.c. Number of Employees in Broker Industry 

This section examines the number of employees in the broker industry and the number of 

loans per worker – as explained below, these topics are relevant to the estimation of compliance 

and regulatory costs in Chapter 6. Again, the source of information is Wholesale Access. While 

Wholesale Access has provided numerous estimates over the past few years, the analysis below 

focuses on their two most recent surveys implemented in 2002 and 2004. 

2002 and 2004 Estimates. In 2002, Wholesale Access estimated that the 44,000 brokers 

that originated 65 percent of all mortgages employed 448,800 workers, or 10.2 employees per 

firm. In 2004, Wholesale Access estimated that the 53,000 brokers that originated 68 percent of 

all mortgages employed 418,700 workers, or 7.9 employees per firm. Wholesale Access also 

provides production numbers – the average number of loans per worker in 2002 was 22.7 while 

the average in 2004 was 20.0. The average number of loans per broker firm was 232 in 2002 

and 158.3 in 2004. 

Wholesale Access’ estimates of loan production per employee and the number of 

employees in the broker industry come from his survey of brokers. It should be noted that a 

higher figure for number of industry employees is obtained if one applies Wholesale Access’ 

estimate of 20 loans per employee to available estimates of the number of mortgages originated 

in 2004. For example, the Office of Federal Housing Enterprise Oversight (OFHEO) estimates 

 

23 One could also project the revenue transfers for 2004, rather than for the projection year, and compare the 

projected revenue transfers to the Census-Bureau-based estimates of actual revenues. This could be done by 

multiplying the range of loss rates (11.0 percent-14.0 percent) by the revenue estimates given in (1)-(6). For 

example, consider revenue estimate of $21.259 billion in step (6); in this case, revenue transfers could range from 

$2.338 billion to $2.976 billion. The revenue of small brokers would total $14.881 billion and the small broker 

revenue transfers could range from $1.637 billion to $2.083 billion. 

 5-16 
that there were $2,920 billion in mortgages originated during 2004, which translates into 

16,783,573 mortgages assuming an average loan amount of $173,980 (obtained from HMDA). 

Using Wholesale Access’ broker share of 68% means that brokers originated 11,412,830 

mortgages in 2004, which translates into 570,641 employees using Wholesale Access’ estimate 

of 20 loans per employee. If Wholesale Access’ 2002 estimate of 22.7 loans per employee were 

used, the number of broker employees would be 502,767. Using a lower estimate ($2.762 

billion) of mortgages originated during 2004 (obtained by averaging estimates from Freddie 

Mac, Fannie Mae, and the Mortgage Bankers Association) produces at estimate of 539,699 

broker employees assuming 20 loans per employee, and 475,506 broker employees assuming 

22.7 loans per employee. All these numbers are higher than Wholesale Access’ estimate of 

418,700 employees in 2004. 

In its 2004 study, Wholesale Access assumes $2,589 billion (from the Mortgage Bankers 

Association) in mortgage originations; using his estimate of 20 loans per employee combined 

with the other assumptions (68% broker share and $173,980 average loan amount) yields 

505,955 employees in the broker industry. If his 2002 estimate of 22.7 loans per employee were 

used, then the estimate of 2004 employees would drop to 445,775, which is close to his reported 

2004 figure of 418,700. 

Projection Year. Wholesale Access’ data can be used to estimate the number of workers 

in the broker industry during the projection year. First, assume their most recent 2004 estimate 

of 20 loans per worker. As discussed earlier, mortgage originations are projected to be $2.4 

trillion, which translates into 12,500,000 mortgages. If the broker share is 60% (65%), brokers 

would employ 375,000 (406,250) workers to produce 7,500,000 (8,125,000) loans. The 375,000 

is 43,700 less than the 418,700 employed in 2004, reflecting the lower volume of mortgages 

originated. If it is assumed each employee produces 23 loans (similar to Wholesale Access’ 

2002 estimate of 22.7 employees per loans), then the number of broker employees in the 

projection year would be 326,087 (352,261) assuming a 60% (65%) broker share of mortgage 

originations. 

 According to the Census data reported in Section II.B.1, small broker firms account for 

67.2% of the revenue of all broker firms (including employer and non-employer). Given that the 

Census data do not report quite as many broker firms as Wholesale Access and a desire to fully 

reflect the impact of RESPA reform on small firms, a slightly higher figure of 70% is used in 

Chapter 3 and in Section II.B.2.b of this chapter to calculate the small broker share of the 

revenue transfers under the new GFE. Section II.B.2 reported information that the small broker 

share of employees is higher than the small broker share of revenue. Considering only firms 

with employees, data from the 2002 Economic Census indicate that small employer firms earned 

64.2 of the industry’s revenue but employed 73.9 of its employees – a differential of 9.7 

percentage points. This suggests that the small broker share of all workers is probably closer to 

77.0 percent.24 Thus, in the case of the projection year, workers in small broker firms are 

 

24 A figure of 76.9% (which is rounded in the text to 77%) is obtained by simply adding the incremental revenue 

share (3.0%) for non-employer firms to the 73.9% employee share for small employer firms – or stated differently, 

by adding the differential 9.7 percentage points (see text) to the small business revenue estimate (67.2%) for both 

employer and non-employer firms. While crude, this probably serves as a good proxy for the share of broker 

workers accounted for by small businesses (assuming, of course, that the underlying Census Bureau data are 

correct). 

 5-17 
estimated to be 288,750 (312,813) if total workers are 375,000 (406,250). Workers in small 

broker firms during 2004 are estimated to have been 322,399 using Wholesale Access’ figure of 

418,700 for all broker employees and 342,246-439,394 depending on the various industry 

employee figures given above for all broker employees. 

III. Mortgage Lending 

Mortgage originators include brokers and lenders. Section II discussed brokers; this 

section examines the lender group, which consists of commercial banks, savings and loan 

institutions, and mortgage banks. Credit unions, which originate a small but growing percentage 

of mortgage loans, are also included with the lender group. Section A provides a broad overview 

of the lender group; readers are referred to Chapter 2 for a discussion of trends in mortgage 

lending over the past twenty years. Sections B.1 to B.4 report Census Bureau data for 2002 and 

2004 on the number and characteristics (payroll, revenue, etc.) of banks, thrifts, mortgage banks, 

and credit unions. The Census Bureau data are important because they report the proportion of 

each lender group that is small business, although alternative estimates will be developed in 

Section B.5. 

Section B.5 includes several technical analyses related to estimating the share of 

mortgage originations among the separate lender groups and the small business share of 

mortgage originations for each lender group. That section compares Census and industry data 

for lenders, derives the mortgage origination share for each small lender group, describes the 

revenue transfers under the new GFE for each lender group (including aggregate and per firm 

transfers from small lenders), expenses the bank and thrift transfers as a percentage of industry 

revenue, and estimates the number of lender employees engaged in mortgage origination activity. 

The latter is important for the analysis of compliance costs and regulatory burden in Chapter 6. 

III.A. Overview of Industry 

According to the Federal Deposit Insurance Corporation (FDIC), there were 7,402 

commercial banks and 1,279 savings institutions (thrifts) at the end of 2006, for a total of 8,681 

depositories. Banks had total assets of $10.1 trillion and outstanding loans (both mortgage and 

non-mortgage) of $6.0 trillion. The average return on equity for banks was 12.3 percent and 

approximately 88.6 percent were profitable, according to the FDIC. Thrifts had total assets of 

$1.8 trillion and outstanding loans (both mortgage and non-mortgage) of $1.3 trillion. The 

average return on equity for thrifts was 7.8 percent and approximately 85 percent were 

profitable. In terms of single-family mortgage debt, the Federal Reserve reports that banks held 

$2,053 billion at the end of 2006, representing 20.1 percent of outstanding mortgage debt, while 

thrifts held $869.6 billion or 8.5 percent of outstanding mortgage debt. Together, depositories 

held 28.6 percent of all outstanding mortgages. 

 

 5-18 
The annual volume of mortgages originated by depositories can be estimated from Home 

Mortgage Disclosure Act (HMDA) data.25 For 2005, the most recent year for which HMDA 

data are available, mortgage originations were distributed as follows: 

 2005 Originations (bill. $) % Number of Loans %

Comm. Banks 1,201.5 44.2% 6,501,145 44.9% 

Thrifts 494.0 18.2 2,302,568 15.9 

Mortgage Banks26 965.4 35.6 5,268,746 36.4 

Credit Unions 54.6 2.0 411,202 2.8 

Total 2,715,5 100.0 14,483,661 100.0 

III.A.1. Depositories: Commercial Banks and Thrifts 

In terms of dollars of originations, depositories originated 62.4% of all mortgages, with 

commercial banks originating 44.2% of all mortgages and thrifts, 18.2%. As shown in Table 5-

4, the above origination data for depositories (banks and thrifts) include both the data for the 

parent firms and the data for their mortgage banking subsidiaries. In 2005, there were 466 

mortgage-banking subsidiaries of banks that originated $495.0 billion, or 41.2% of the total 

originations of commercial banks. These subsidiaries include such mega lenders as Citicorp 

Mortgage, Chase Manhattan Mortgage Corporation, and Wells Fargo Home Mortgage. 

Similarly, there were 34mortgage-banking subsidiaries of savings institutions that originated 

$78.5 billion, or 15.9% of all thrift originations. The “Mortgage Bank” data reported above 

include only those mortgages originated by independent (non-subsidiary) mortgage banks. In 

2005, there were 1,287 independent mortgage banks that reported originations under HMDA; 

most of these are small, but giants such as Argent Mortgage Company, GMAC Mortgage, and 

American Home Mortgage are also in this group. 

Loans originated by brokers are typically reported in HMDA by the broker's wholesale 

lender (i.e., the bank, thrift, or mortgage banker that the broker is working with). Mega lenders 

such as those listed above purchase the bulk of loans originated by brokers. The reporting entity 

 

25 Observers estimate that HMDA covers approximately 85 percent of mortgage originations (see Scheessele, 1998). 

The data in the text represent all single-family home purchase and refinance mortgages reported by HMDA. 

26 Mortgage banks only include independent mortgage banks. Mortgage banking subsidiaries of commercial banks, 

savings institutions, and credit unions are included with their parents. 

 5-19 
under HMDA regulations is the entity responsible making the credit decision.27 Thus, brokers’ 

loans are typically reported under HMDA by the wholesale lender.28 

There were 4,831 depositories (4,228 banks and 603 thrifts, ignoring subsidiaries) 

reporting to HMDA in 2005, which is substantially fewer than the 8,833 depositories reported by 

the FDIC for the same year.29 

Table 5-4. HMDA Reported Mortgage Originations by Lender Type,2005 

Mortgage 

Number of Number of Originations 

Lenders Mortgages Percent ($1,000,000 Percent 

Commercial Banks 

 Banks 4,228 3,910,396 27.0% 706,463 26.0%

 Subsidiaries 466 2,590,749 17.9% 495,036 18.2%

 Total: Banks 4,694 6,501,145 45.9% 1,201,499 44.2%

Savings Institutions (Thrifts) 

 Thrifts 603 1,898,328 13.1% 415,431 15.3%

 Subsidiaries 34 404,240 2.8% 78,544 2.9%

 Total: Thrifts 637 2,302,568 15.9% 493,975 18.2%

Credit Unions 

 Credit Unions 1,977 392,249 2.7% 51,384 1.9%

 Subsidiaries 25 18,953 0.1% 3,213 0.1%

 Total: Credit Unions 2,002 411,202 2.8% 54,597 2.0%

Independent Mortgage Banks 1,287 5,268,746 36.4% 965,397 35.6%

Total Market 8,620 14,483,661 100.0% 2,715,468 100.0%

Note: See text for discussion of the mortgage company subsidiaries.

In 2005, banks and thrifts that operated in non-metropolitan areas, or had no more than $34 

million in assets,30 or made no mortgage loans in the preceding year were not required to report 

to HMDA. (Section III.B.5 below examines banks and thrifts that do not report to HMDA.) 

 

27 Specifically, “an institution that makes a credit decision on an application prior to closing reports that decision 

under HMDA regardless of whose name the loan closes in.” See A Guide to HMDA Reporting: Getting It Right! 

Federal Financial Institutions Examination Council. January 1, 1998. 

28 However, loan correspondents who fund loans through warehouse lines of credit are also required to report under 

HMDA those loans in which they make the credit decision. 

29 For the remainder of this section, we report 2005 data from the FDIC since it corresponds with 2005 HMDA data. 

As noted above, there were also 466 subsidiaries of commercial banks and 34 subsidiaries of savings institutions 

that reported to HMDA in 2005. 

30 Prior to 1997, the threshold was $10 million dollars. Since 1997, the threshold has been adjusted for inflation. 

 5-20 
 Chapter 2 discussed basic trends in the mortgage market over the past twenty years 

including the decline in the traditional portfolio lender, the rise of the secondary market, and the 

rise of the mortgage banking and broker methods of originating mortgages. The recent growth of 

"mega" lenders and their wholesale purchase activity were also discussed in Chapter 2. 

Depositories include those large banking and saving institutions (such as Bank of America and 

Wells Fargo) that purchase mortgages from brokers and mortgage bankers (the so-called broker 

and loan correspondent channels of mortgage origination) as well as originate mortgages through 

their own offices and branches (the so-called retail channel of mortgage origination). The 

consolidation of the mortgage origination market was also discussed in Chapter 2. Analysis of 

HMDA data show that the share of single-family originations accounted for by the top five (25) 

originators increased from 31.5 to 36.9 percent (from 60.8 to 68.5 percent) between 2001 and 

2005. An analysis of the Community Reinvestment Act by the Joint Center for Housing Studies 

(2002) noted the trend toward consolidation of banks and thrifts during the 1990s. In 2000, there 

were 10 large banks and thrifts (defined as originating over 50,000 loans) that originated 47 

percent (1.1 million of 2.5 million) of all conventional home purchase loans in metropolitan 

areas. Between 1993 and 2000, the largest depositories were responsible for 78 percent of the 

increase in home purchase originations by all depositories.31 At the other end of the spectrum, 

the Joint Center for Housing Studies notes that the number of depositories originating less than 

100 loans shrank by 10 percent between 1993 and 2000, and this group made fewer loans in 

2000 than they did in 1993.

III.A.2. Mortgage Banks 

 According to HMDA data, 1,287 independent mortgage banks originated $965.4 billion during 

2005, or 35.6 percent of all dollar originations that year. The share of originations due to all 

mortgage banks is higher, as these figures do not include loans originated by the mortgage 

banking affiliates of depositories (see Table 5.4). As noted above, most mortgage banks are 

small, but there are some large ones, such as Argent Mortgage Company, GMAC Mortgage, and 

American Home Mortgage. The 25 largest independent mortgage banks accounted for half of 

loans originated by independent mortgage banks during 2005.32 

III.A.3. Credit Unions 

The credit union industry comprises institutions primarily engaged in accepting members' 

deposits in cooperatives that are organized to offer consumer loans to their members. Credit 

 

31 One factor fueling these numbers was the acquisition or merger of large independent mortgage bankers with large 

banks. For example, North American Mortgage was acquired by Dime Savings Bank and Norwest Mortgage 

merged with Wells Fargo and Company 

32 At the other end of the spectrum, the Joint Center for Housing Studies (2002) reports that smaller independent 

mortgage bankers, as well as credit unions, were on the rise during the 1990’s. Between 1993 and 2000, the number 

of independent mortgage companies and credit unions making less than 100 conventional home purchase loans rose 

28 percent (from 1,163 to 1,483) and the number of home loans originated by these firms rose 42 percent. However, 

these small firms accounted for only 2.8 percent of the home loans originated by all independent mortgage banks 

and credit unions during 2000. 

 5-21 
unions are also member-owned institutions, with each member having an equal vote regardless 

of the amount within their accounts. Over recent years, credit unions have increased in capacity 

and services. More than half of credit unions accept loan requests via the Internet and 10 percent 

of credit unions provide mutual fund and stock brokerage services.33 According to the National 

Credit Union Administration (NCUA), there were 8,695 credit unions in 2005 – 5,393 Federal 

credit unions and 3,302 Federal-insured, state-chartered credit unions. According to HMDA data 

(see above), 1,977 credit unions (with 25 subsidiaries) originated 411,202 mortgages during 

2005, which represented 2.8 percent of single-family originations that year. A credit union, like 

a depository, was exempt from reporting under HMDA in 2005 if it had assets that did not 

exceed $34 million, or originated no mortgage loans in the preceding year, or if it operated only 

in a non-metropolitan area. The majority of credit unions have assets at or below the $34 million 

asset threshold for reporting. Also, as discussed in Section III.B.5 below, a substantial number 

of credit unions do not originate a significant number of mortgage loans. 

The next section reports Census Bureau data for 2002 and 2004 on the number and 

characteristics (payroll, revenue, etc.) of banks, thrifts, mortgage banks, and credit unions. The 

Census Bureau data are important because they report the proportion of each lender group that is 

small business. As will be seen, the Census Bureau data are generally consistent with the data 

reported above. For example, the above analysis shows there are many small lenders, but that 

large lenders account for most mortgage originations; similarly, the Census Bureau data will 

show there are many small lenders but they account for only a small portion of total industry 

revenue. Those instances where the Census Bureau data differs from data reported in this section 

will be noted throughout this analysis, it is important to keep in mind that mortgage originations 

provide only a portion of the total revenue earned by banks, thrifts and credit unions. 

III.B. Description of Economic Data 

Section B.1 reports Census Bureau data for 2002 and 2004 on the number and 

characteristics (payroll, revenue, etc.) of commercial banks. Following this, similar data are 

presented for thrift institutions (B.2), mortgage banks (B.3), and credit unions (B.4). Section 

III.B.5 will then derive estimates of the small business share of mortgage originations for banks, 

thrifts, mortgage banks and credit unions, and examine the small business impacts of the new 

GFE on these four lender groups. 

III.B.1. Commercial Banking - Data Description 

According to the Census Bureau, the Commercial Banking category comprises 

establishments primarily engaged in accepting demand and other deposits and making 

commercial, industrial, and consumer loans. Commercial banks and branches of foreign banks 

are included. Census Bureau data from the year 2004 indicate that Commercial Banking 

employed 1.6 million people at 6,978 firms. These firms had estimated annual revenue of $497 

 

33 For more details, see United States Department of Treasury, Comparing Credit Unions with Other Depository 

Institutions, January 2001. 

 5-22 
billion. Thus, in 2004 Commercial Banking averaged 234 employees per firm and had an 

estimated annual revenue of $71 million. A low proportion, 11.1%, of Commercial Banking 

employees worked at firms employing fewer than 100; 1.3% worked at firms employing fewer 

than 20. In addition to the 7,594 employer firms from Commercial Banking in 2004, there were 

an estimated 285 non-employer firms in Commercial Banking.34 While the data do not provide 

many details about these non-employer firms, Census methodology ensures that nonemployers 

meet a reasonable definition of small. The existence of nonemployer Commercial Banks may 

seem implausible. However, according to the Census, as many as 172 firms with less than five 

employees (1-4) classified themselves as Commercial Banks in 2004. A similarly small business 

that leased or contracted all of its employees would be considered a nonemployer because the 

payroll for the business would be zero. Thus, since very small banks appear to exist, then it is 

possible that nonemployer ones would as well. However, whether these small banks participate 

in the mortgage market is questionable. In addition, they do not account for much revenue; the 

Economic Census of 2002, the last year for which revenue data are available, reports that 

commercial banks with less than five employees accounted for three-hundredths of one percent 

of revenue. Thus, the inclusion or exclusion of these firms would not have a noticeable effect on 

estimates of the economic impact of the rule. 

Census Bureau data from 2002 provide somewhat more detailed information about 

Commercial Banking. In 2002 the sector employed approximately 1.7 million people at 7,285 

firms with 81,357 establishments compared to 6,978 firms with 83,030 establishments in 2004. 

These firms had aggregate annual revenue of $489 billion. In contrast with the revenue estimate 

for 2004, the 2002 revenue figure is taken directly from Census publications. The average 

number of employees per firm was 238, similar to 234 in 2004. Average revenue per firm was 

$67 million in 2002. 

III.B.1.a. Census Bureau Data for Small Businesses: Commercial Banking 

The size standard defined by the Small Business Administration (SBA) for Commercial 

Banking is in terms of assets ($150 million effective October 1, 2002), not revenue35. According 

to FDIC Statistics on Banking, 5,278 out of 7,883 (or 67.0%) of FDIC-insured banks had $150 

million in assets or less in 2002 and were considered small by SBA standards. In 2004, 4,765 

out of 7,629 (or 62.5%) of banks had less than $150 million in assets. Firms with less than $150 

million in assets owned 4.9% of all assets in 2002. In 2004, firms considered small by SBA 

standards owned 3.7% of all assets. The Economic Census does not provide data on assets but it 

does provide data on revenue. 

Since the size standard of many sectors is based on revenue, rather than assets, it is 

interesting to apply the common revenue-based size standard of $6 million to the Commercial 

 

34 See the Technical Appendix for a definition of nonemployer firms as well as a description of the methodology of 

estimating nonemployer firms for Commercial Banking. 

35 The current size standard for Commercial Banking, which became effective January 6, 2006, is $165 million in 

assets. However, to remain consistent with other industries for which more recent data is not available, 2002 data is 

used to calculate the percent of small businesses. 

 5-23 
Banking industry. According to Census Bureau data, it is estimated that 48.8% of employer firms 

had annual revenues less than $6 million. These small firms accounted for 2.0% of the revenue 

of all employer firms. Adding the estimated 237 firms with no employees to the calculations, 

50.4% meet this definition of small. These firms accounted for 2.0% of the industry’s total 2002 

revenue. 

“Very Small” Banks. An alternative method of characterizing a small business is by the 

number of employees. Although this is not the Small Business Administration’s method of 

defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.” In 2004, employer firms, employing less 

than twenty employees, accounted for 28.1% of all employer firms in the Commercial Banking 

industry, employed 1.3% of its employees, and received 1.2% of its (estimated) revenue. 

Including nonemployer firms would yield that “very small” firms constitute 31% of all 

Commercial Banks in 2004 and earn 1.2% of the industry’s (estimated) revenue.

III.B.2. Savings Institutions – Data Description 

According to the Census Bureau, Savings Institutions are defined as establishments 

primarily engaged in accepting time deposits, making mortgage and real estate loans, and 

investing in high-grade securities. Savings and loan associations and savings banks are included 

in this industry. Census Bureau data from the year 2004 indicate that Savings Institutions 

employed 248,962 people at 1,390 firms. These firms had estimated annual revenue of $92.5 

billion. Thus, in 2004 Savings Institutions averaged 179.1 employees per firm and had an 

estimated annual revenue of $67 million. A minority (13.3%) of Savings Institution employees 

worked at firms employing fewer than 100, and only 1.3% worked at firms employing fewer 

than 20. In addition to the 1,642 employer firms in the Savings Institutions sector, the Census 

Bureau reports there were 111 Savings Institutions nonemployer firms. While the data do not 

provide many details about these nonemployer firms, Census methodology ensures that 

nonemployers meet any reasonable definition of small. As with commercial banking, the 

existence of nonemployer savings institutions may seem implausible. However, according to the 

Census, 48 firms with less than five employees (1-4) classified themselves as Savings 

Institutions in 2004. A similarly small business that leased or contracted all of its employees 

would be considered a nonemployer because the payroll for the business would be zero. Thus, 

since very small savings institutions appear to exist, then it is possible that nonemployer ones 

would as well. However, whether these small savings institutions participate in the mortgage 

market is questionable. The overall results of this analysis are not materially changed whether or 

not these nonemployers are included. 

Census Bureau data from 2002 provide somewhat more detailed information about 

Savings Institutions. In 2002 the sector employed 246,426 people at 1,480 firms. These firms 

had annual revenue of $77.5 billion, which, after adjusting for inflation is $80.9 billion, 

considerably less than the 2004 estimate of $92.5 billion. In contrast with the revenue estimate 

for 2004, the 2002 revenue figure is taken directly from Census publications. Saving Institutions 

averaged slightly fewer employees in 2002 compared to 2004, 166.5 versus 179.1 yet had 

considerably lower average inflation adjusted revenues. In addition to the 1,480 Savings 

 5-24 
Institutions that had employees in 2002, there were an estimated 93 firms in the industry that 

were nonemployers. 

III.B.2.a. Census Bureau Data for Small Businesses: Savings Institutions 

Effective October 1, 2002, the size standard for savings institutions was $150 million in 

assets. The current size standard for Savings Institutions, which became effective January 6, 

2006, is $165 million in assets. According to Thrift Financial Reports provided by the FDIC, 

711 out of 1,481 savings institutions had assets of $150 million or less in 2002 and were 

considered small by SBA standards. These thrifts accounted for 3.7% of the total assets of all 

regulated thrifts. Since the size standard of many sectors is based on revenue, rather than assets, 

it is interesting to apply the common revenue-based size standard of $6 million to the savings 

institutions sector. According to the Census Bureau, approximately 39.0% of savings institutions 

had 2002 revenue of $6 million or less. It is estimated that these firms accounted for 1.9% of 

industry revenue. 

“Very Small” Thrifts. An alternative method of characterizing a small business is by 

the number of employees. Although this is not the Small Business Administration’s method of 

defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.” In 2004, employer firms, employing less than 

twenty employees, accounted for 23.5% of all employer firms in the Savings Institutions 

industry, employed 1.3% of its employees, and received 1.0% of its (estimated) revenue. 

Including nonemployer firms would yield that “very small” firms constitute 29.2% of all Savings 

Institutions in 2004 and earn 1.0% of the industry’s (estimated) revenue.

III.B.3. Real Estate Credit - Data Description 

Mortgage bankers are included in the Real Estate Credit category which, according to the 

Census Bureau, comprises establishments primarily engaged in lending funds with real estate as 

collateral. This includes: Construction lending, Farm mortgage lending, Federal Land Banks, 

Home equity credit lending, Loan correspondents (i.e., lending funds with real estate as 

collateral), Mortgage banking (i.e., nondepository mortgage lending), and Mortgage companies. 

Real Estate Credit does not include brokers, banks, thrifts and credit unions. Real Estate Credit 

also does not include firms primarily engaged in secondary market financing (the buying, 

pooling, and repackaging of loans for sale to others on the secondary market). 

As can be seen by the above definition, the Real Estate Credit industry includes firms in 

addition to mortgage banks. Census Bureau data from the year 2004 indicate that the Real Estate 

Credit industry employed 360,951 people at 9,502 firms, while the discussion in Section A above 

suggested there were approximately 1,300 mortgage banking firms. Firms in the Real Estate 

Credit category had estimated annual revenue of $105.7 billion. Thus, in 2004 Real Estate 

Credit averaged 38 employees per firm and had estimated annual revenue of $11.1 million. 

Although 94.0% of firms had less than one hundred employees, only 17.4% of employees 

worked for firms with less one hundred employees. Most Real Estate Credit firms (84.6%) had 

less than twenty employees; these smaller firms employed 7.5% of all employees and paid 5.9% 

of the payroll for the Real Estate Credit industry. 

 5-25 
Census Bureau data from 2002 provide somewhat more detailed information about Real 

Estate Credit. In 2002 the sector employed 274,356 people at 7,175 firms. These firms had 

aggregate annual revenue of $75.5 billion. In contrast with the $105.7 billion revenue estimate 

for 2004, the 2002 revenue figure is taken directly from Census publications. The average 

number of employees per firm was 38.2 and average revenue per firm was $10.5 million. After 

adjusting for inflation, the 2002 revenue per firm is $11.0 million, which is approximately equal 

to the 2004 estimate of $11.1 million. 

III.B.3.a. Census Bureau Data for Small Businesses: Real Estate Credit 

The greater financial detail provided in the 2002 data makes the 2002 data better suited 

for the task of determining how many firms meet the SBA’s definition of a small business. The 

2002 size standard for Real Estate Credit is $6 million in revenue. Census data, however, is 

reported for firms earning less than $5 million and $5 million to $10 million. Of the firms in the 

Real Estate Credit sector that had employees, it is estimated that 85.2% had annual revenues less 

than $6 million and are considered small by the SBA; these small employer firms accounted for 

6.1% of the revenue, 13.4% of the employees, and 9.9% of the payroll of all employer firms in 

the Real Estate Credit group. Including both employer and non-employer firms, it is estimated 

that small businesses accounted for 6.7% of total revenue in the Real Estate Credit sector. 

An insight into size standards can be gained by estimating the number of employees of a 

firm at the size standard limit. Dividing the most recent size standard ($6 million in revenue, 

effective October 1, 2002) by the estimated revenue per employee for 2004 yields an 

approximate size standard of 20. 

Data from the Economic Census indicate that although the Real Estate Credit industry 

shows some signs of concentration, it is by no means excessive. The four largest firms own 

11.2% of the establishments, earn 25.2% of revenue, pay 17.6% of the payroll, and employ 

15.1% of all employees. 

Since the size standard of many sectors is based on revenue, rather than assets, it is 

interesting to apply the common revenue-based size standard of $6 million to the Real Estate 

Credit industry. According to Census Bureau data, it is estimated that 83.9% of employer firms 

had annual revenues less than $6 million. These small firms accounted for 5.6% of the revenue 

of all employer firms. Adding the estimated 5,516 firms with no employees to the calculations, 

92.9% meet the SBA’s definition of small. These firms accounted for 6.7% of the industry’s 

total 2002 revenue. 

Table 5-5. Real Estate Credit: 2002 Concentration Ratios 

Firms 

Number of 

establishments 

Percent 

establishments Percent Revenue 

Percent Annual 

payroll ($1,000) Percent employees 

All Firms 19,234 100.0% 100.0% 100.0% 100.0%

4 largest firms 2,161 11.2% 25.2% 17.6% 15.1%

8 largest firms 4,044 21.0% 38.5% 30.4% 28.1%

20 largest firms 5,720 29.7% 54.1% 41.8% 37.7%

50 largest firms 8,171 42.5% 68.4% 56.1% 55.3%

 5-26 
“Very Small” Real Estate Credit Industry. A final method of characterizing a small 

business is by the number of employees. Although this is not the Small Business 

Administration’s method of defining a small business, Census data on firms with less than 

twenty employees reveals the characteristics of those firms that are “very small.” In 2004, 

employer firms, employing less than twenty employees, accounted for 84.6% of all employer 

firms in the Real Estate Credit industry, employed 7.5% of its employees, and received 5.4% of 

its (estimated) revenue. Including nonemployer firms would yield that “very small” firms 

constitute 91.1% of all Real Estate Credit firms in 2004 and earn 5.9% of the industry’s 

(estimated) revenue. 

III.B.4. Credit Unions – Data Description 

Credit unions are cooperative establishments primarily engaged in accepting member 

deposits and offering them consumer loans. Census Bureau data from the year 2004 indicate that 

the Credit Union Industry employed 229,213 people at 8,358 firms. These employer firms had 

estimated annual revenue of $44.6 billion. The large percent of employees, 46.1%, in the Credit 

Union Industry worked at firms employing fewer than 100; and 15.5% worked at firms 

employing fewer than 20. Also, in 2004, employer firms in the credit union industry averaged 

27.4 employees per firm and had estimated annual revenue per firm of $5,340,573. In addition 

to the 8,358 firms from the Credit Union Industry offices that had employees in 2004, the Census 

reports there were 7,226 Credit Union Industry offices with no employees.36 While the data do 

not provide many details about these non-employer firms, Census methodology ensures that 

nonemployers meet a reasonable definition of small. 

Census Bureau data from 2002 provide somewhat more detailed information about the 

Credit Union Industry. In 2002 the sector employed 208,038 people at 8,836 firms verses 

229,213 employees and 8,358 firms in 2004. These firms had annual revenue of over $37 

billion. In contrast with the $44.6 billion revenue estimate for 2004, the 2002 revenue figure is 

taken directly from Census publications. In 2002, the Credit Union Industry averaged 23.5 

employees versus 27.4 employees in 2004. Average revenue per firm was $4.2 million, which is 

$4.4 million in 2004 dollars after adjusting for inflation,37 and which is somewhat less than the 

2004 estimate of $5.3 million. 

 

36 The existence of a nonemployer financial institution may seem implausible. However, according to the Census, as 

many as 3,576 credit unions with less than five employees (1-4) classified themselves as credit unions in 2004. A 

similarly small business that leased or contracted all of its employees would be considered a nonemployer because 

the payroll for the business would be zero. Thus, since very small credit unions are numerous, then it is possible that 

there are nonemployer ones as well. However, these 7,226 nonemployer credit unions increase the total number of 

credit unions reported by the Census Bureau to 15,584 (combining the employer figure of 8,358 and the 

nonemployer figure of 7,226). As noted earlier, the National Credit Union Administration reported 9,687 credit 

unions in 2002, a figure that is close to the employer number (8,358) reported by the Census Bureau but 

significantly less than the overall total (15,584) reported by the Census Bureau. 

37 See the technical appendix for information on the price deflator used to convert 2002 to 2004 dollars. 

 5-27 
III.B.4.a. Census Bureau Data for Small Businesses: Credit Union Industry 

The small business size standard for the credit union industry is in terms of assets, not 

revenue. The current size standard for Credit Unions, which became effective January 6, 2006, 

is $165 million in assets. Effective October 1, 2002, the size standard for Credit Unions was 

$150 million in assets. According to National Credit Union Administration (NCUA) statistics, 

8,644 out of 9,687 credit unions had less than $150 million in assets. Thus, by SBA standards 

92.6% of all credit unions were small in 2002. Those firms with less than $150 million in assets 

owned 32% of all assets in 2002. Assuming that revenues are distributed similarly to assets, then 

small credit unions accounted for 32% of total industry revenues. Section III.B.5.a below uses 

information from Call Report data from the NCUA to estimate the number of small credit unions 

that are actually making mortgages (see Table 5-7 below). 

Since the size standard of many sectors is based on revenue, rather than assets, it is 

interesting to apply the common revenue-based size standard of $6 million to the credit union 

industry. According to Census Bureau data, it is estimated that 86.5% of employer firms had 

annual revenues less than $6 million. These small firms accounted for 21.4% of the revenue of 

all employer firms. Adding the Census reported 6,017 firms with no employees to the 

calculations, 92.1% meet this definition of small. These firms accounted for 21.8% of the 

industry’s total 2002 revenue.38

 “Very Small” Credit Unions. An alternative method of characterizing a small business 

is by the number of employees. Although this is not the Small Business Administration’s method 

of defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.” In 2004, employer firms, employing less 

than twenty employees, accounted for 74.4% of all employer firms in the Credit Union industry, 

employed 15.5% of its employees, and received 10.9% of its (estimated) revenue. Including 

nonemployer firms would yield that “very small” firms constitute 86.3% of all Credit Unions in 

2000 and earn 11.3% of the industry’s (estimated) revenue. 

The next section will continue this discussion of the characteristics of lenders, providing 

updated estimates of the number of small lenders, the small lender share of mortgage 

originations, and the revenue impacts of the new GFE on small lenders. The next section uses 

data from the mortgage market, rather than the general business data discussed in this section. 

Several technical and data issues necessary for estimating the small business share for each 

lender group are explored. 

For a discussion of the competitive impacts of the RESPA reform on lenders, see Section 

VIII.B of Chapter 3 and Section VII.B of Chapter 4. See Chapter 6 for a description of the 

compliance costs and regulatory burden of the rule. 

 

38 Adding the 6,017 nonemployer firms to the 8,836 employer firms gives a total of 14,853 credit unions, as reported 

by the Census Bureau. As noted in the earlier footnote, this combined number of the Census Bureau is substantially 

above the number reported by the NCUA; the NCUA number for 2002 is similar to the number of credit unions with 

employees reported by the Census Bureau. 

 5-28 
III.B.5. Lenders: Revenue Estimates, Small Business Transfers, and Additional Data 

Considerations 

This section examines numerous technical issues that are important for determining the 

small lender share of mortgage originations and reports the revenue impact of the RESPA rule on 

small lenders. Compared with the previous section, which provides general business data for 

each lender group, this section incorporates data on mortgage originations in order to derive the 

small business estimates used in Chapters 3 and 4 – as will be seen below, the small business 

estimates based on mortgage data are not the same as those reported above based on general 

revenue data for lenders. Unlike Chapters 3 and 4, which conducted the small business analysis 

for lenders as a group, this section also conducts the revenue transfer analysis on a disaggregated 

basis, that is, for each separate lender group. Specifically, this section: 

• provides updated estimates of the number of small lenders and small credit unions 

likely to be impacted by the RESPA rule (Subsection III.B.5.a); 

• estimates the dollar volumes of mortgage originations by small banks, small thrifts, 

small mortgage banks, and small credit unions, which are then combined to estimate 

an the overall small business share of total lender originations (23%, with a range 

from 20%-26%) (Subsection III.B.5.b); 

• reports revenue impacts of the new GFE on small lenders as a group (Subsection 

III.B.5.c); 

• estimates the share of mortgage originations accounted for by the separate lender 

groups (banks, thrifts, mortgage banks, and credit unions). (Subsection III.B.5.d for 

all lenders and III.B.5.e for small lenders); 

• reports the revenue transfers under the new GFE for each separate lender group and 

for small lenders within each group, and as a share of industry revenue for banks and 

thrifts (Subsection III.B.5.f); and 

• provides estimates of employees for all lenders and for small lenders (Subsection 

III.B.5.g). 

When estimating the various market shares for the different lender groups, this section pulls 

together mortgage activity data from several sources, which introduces some degree of 

uncertainty into the various estimates. In most cases, the discussion below shows the effects on 

key parameters (such as the small business percentage) of a number of alternative approaches. 

This provides the basis for sensitivity analyses when examining the revenue impacts of the new 

GFE on small lenders. 

III.B.5.a. Number of Small Lenders 

A first issue concerns the number of lenders (thrifts, banks, and mortgage banks) likely to 

be impacted by the RESPA rule. The following numbers of lenders are suggested as starting 

points: 

 5-29 
 HMDA-Reporters39 Industry Data40 

 2005 2006 2005 

Commercial Banks: 4,694 7,402 7,526 

Savings Institutions 637 1,279 1,307 

Depository Total 5,331 8,681 8,833 

Mortgage Banks 1,287 1,287 1,287 

All Lenders 6,618 9,968 10,120 

The “Industry” figures for depositories are taken from statistics published on FDIC’s web site, 

while the number of mortgage banks is based on HUD analysis of HMDA data. 

As shown in Table 5-6, there are many small banks and thrifts operating in nonmetropolitan areas that do not have to report their mortgage originations to HMDA. In 2005 

3,243 of the 3,249 depositories with their main office in a non-metropolitan area did not report 

any loans to HMDA.41 In all, 4,187 of the 9,518 banks and thrifts42 did not report any loans to 

HMDA. Thus, the 6,618 depositories and mortgage banks (see above) that report HMDA data is 

too small. Many of the non-HMDA reporters probably do little or no mortgage originations; so 

10,120 lenders (see above) may be too large. However, practically all the non-HMDA reporting 

banks and thrifts hold at least some mortgage loans as assets, which suggests that most of them 

may be originating mortgages. As shown in Table 5-6, 3,996 of the 4,187 non-HMDA-reporting 

depositories indicated on their call reports that they held mortgages on their balance sheets. 

Thus, it appears that most of these non-HMDA reporters may be originating mortgages, although 

it could be in very small amounts. Based on Olson (2004), there were 8,200 lenders in 2003, so 

it seems reasonable to conclude that there will be at least 8,200 lenders affected by the rule and 

possibly as many as the 2006 industry number of 9,968 (see above). 43

 

39 The bank and thrift (depository) data also include their mortgage banking subsidiaries. 

40 The “industry” estimates for banks and thrifts are from the FDIC while those for mortgage banks are from HMDA 

data. As discussed in Sections III.B.1 and III.B.2 above, the Census-Bureau-reported numbers for banks (6,978 with 

employees and 285 without employees) and thrifts (1,642 with employees and 182 without employees) are similar to 

the numbers reported by the FDIC for banks (7,836) and thrifts (1,467). As discussed in Section III.B.3, the Census 

category (Real Estate Credit) that includes mortgage banks reports 8,794 firms with employees (plus thousands of 

estimated non-employer firms), which means that it includes firms in addition to independent mortgage banks. 

41 The bank or thrift was designated as “non-metropolitan” or “metropolitan” based on the physical address of the 

headquarters of the parent bank. In Table 5-6, “small” is defined as having assets of less than $150 million 

42 The 9,518 banks and thrifts include mortgage company subsidiaries of depositories that report under HMDA. 

43Also see the brief summary of “The 1999 Lender Study” by Olson’s firm, Wholesale Access, at 

www.wholesaleaccess.com/lenders.shtrr. This study reports there are 1,500 independent mortgage originators (who 

 5-30 
 5-31 

 

According to the Census Bureau, the small business percentages for lenders are as 

follows: (a) 67.0% for banks; (b) 48.0% for thrifts; and (c) 92.9% for mortgage bankers. 

Applying these percentages to the “2006 Industry Data” yields (a) 4959 small banks, (b) 614 

small thrifts, and (c) 1,196 small mortgage banks. Thus, the total number of small lenders is 

6,769, or 67.9% of all 9,968 lenders. However, as explained in Section III.B.3, the 92.9% small 

business figure for mortgage bankers includes the effect of thousands of non-employer firms; 

focusing only on employer firms, the small business percentage reported by the Census Bureau 

falls to 85.2%. Using the 85.2% figure (instead of the 92.9%) in the above lender calculation, 

the number of small lenders would be 6,670 (instead of 6,769), or 66.9% of all lenders. The 

following sections further examine these small business estimates, by incorporating data on 

actual mortgage originations. In addition, small business estimates for credit unions are 

provided. 

Commercial Banks and Thrifts. The small business percentages from the Census 

Bureau for depositories (banks and thrifts) are based on 2002 data, with a definition of less than 

$150 million in assets. As explained above, applying the Census Bureau's percentages shows 

that 5,573 or 64.2%, of the 8,681 depositories operating at the end of 2006 qualified as small 

businesses. HUD examined asset data from the 2004 year-end call report for banks and thrifts 44

to determine the number of banks and thrifts having less than $150 million in assets, which 

remained the current definition of a small bank or thrift through 2005. That analysis found that 

58.9% of all depositories had assets less than $150 million, a figure slightly lower than the 

Census-Bureau-based small business percentage of 64.2%. As shown in Table 5-6, 5,137 (or 

59.8%) of the 8,586 commercial banks were small, as were 467 (or 50.1%) of the 932 savings 

institutions. On this basis, the total number of small depositories is 5,604, or 58.9% of all 9,518 

depositories in 2005.

close with a warehouse line of credit more than half the time, buy loans from others, or do servicing) as well as 

2,000 thrifts and 5,000 banks who routinely originate mortgages for sale. Olson also reports there are about 1,500 

credit unions who routinely originate mortgage loans for sale. 

44 Note that the assets reported in the 2004 year-end call report correspond to assets reported in the 2005 HMDA 

data reported by lenders in March. 
Table 5-6. Number of Commercial Banks and Savings Institutions with Mortgage Activity 

Commercial Banks Savings Institutions Depositori

All Small Percent All Small Percent All Small 

A. Metropolitan Areas 1. HMDA Reporters 4,689 2,030 43.3% 636 236 37.1% 5,325 2,266 

 2. Did Not Report Under HMDA 837 572 68.3% 107 79 73.8% 944 651 

 a. Number with 

 Outstanding Mortgages 711 503 70.8% 65 48 73.9% 776 551 

 3. Total Number of Lenders (1+2) 5,526 2,602 47.1% 743 315 42.4% 6,269 2,917 

 a. Total Number with 

 Mortgages (1+2a) 5,400 2,533 46.9% 701 284 40.5% 6,101 2,817 

B. Non-Metropolitan Areas

 4. HMDA Reporters 5 2 40% 1 1 100% 6 3 

 5. Did Not Report Under HMDA 3,055 2,533 82.9% 188 151 80.3% 3,243 2,684  a. Number with 

 Outstanding Mortgages 3,033 2,512 82.8% 187 150 80.2% 3,220 2,662 

 6. Total Number of Lenders (4+5) 3,060 2,535 82.8% 189 152 80.4% 3,249 2.,687 

 a. Total Number with 

 Mortgages (4+5a) 3,038 2,514 82.8% 188 151 80.3% 3,226 2,665 

C. Total (A+B)

 7. HMDA Reporters 4,694 2,032 43.3% 637 237 37.2% 5,331 2,269 

 8. Did Not Report Under HMDA 3,892 3,105 79.8% 295 230 78.0% 4,187 3,335  a. Number with 

 Outstanding Mortgages 3,744 3,015 80.5% 252 198 78.6% 3,996 3,213 

 9. Total Number of Lenders 8,586 5,137 59.8% 932 467 50.1% 9,518 5,604  a. Total Number with 

 Mortgages 8,438 5,047 59.8% 889 435 48.9% 9,327 5,482 

Note: HMDA data are for 2005. Lenders that report HMDA data but no Call Report data were included with metropoli

 5-32 
Mortgage Banks. Two estimates of the small business percentage for mortgage banks 

were noted above -- a high estimate of 92.9%, which was driven by the inclusion of nonemployer firms in the analysis (see Section III.B.3), and a lower but similar estimate (85.2%), 

which was based on employer firms only. But as discussed in Section III.B.3, the Census data 

included over 9,502 employer firms -- or over seven times the actual number (about 1,300) of 

independent mortgage banking firms.45 Even this lower figure is somewhat suspect since the 

industry of interest accounts for only one seventh of the available data. 

The small business threshold for mortgage banks is $6 million in revenues per year. 

While HUD has asset data for depositories that it can link with the HMDA origination data, 

HUD does not have revenue data for mortgage banks. For this reason, HUD simulated a revenue 

estimate for mortgage bankers that could be used in combination with HMDA origination data to 

provide some insights into the share of mortgages originated by small mortgage banks 

(recognizing that this was only a starting point). For mortgage banks that report to HMDA, 

HUD simulated annual revenue as follows: [0.02 (i.e., an assumed 2% origination fee) times all 

originations (i.e., single family, multifamily, and home improvement loans)] plus [0.0025 (or 25 

basis points) times all purchased mortgages].46 While obviously rough, this may be a 

conservative revenue estimate since mortgage banks have other sources of revenue than the fees 

(mainly origination fees) captured in this equation; one example being servicing fees on an 

outstanding stock of previously-originated or purchased mortgages, although it is recognized that 

small mortgage banks do not service their own originations to the same extent as large mortgage 

banks such as Argent Mortgage Company. There were 1,287 independent mortgage-banking 

firms that reported single-family mortgage originations to HMDA during 2005. Of these 

1,287mortgage banks, 919 (or 71.4%) had estimated revenues below $6 million. These small 

mortgage banks originated $80.3 billion (or 8.3%) of the $965.4 billion reported as mortgage 

bank originations in HMDA. Thus, in this case, the estimated small business percentage is 

71.4%, which is smaller than the percentage (85.2%) estimated based on employer data from the 

Census Bureau.47 Other groups of mortgage banks were examined. Originations of the smallest 

78.2% (83.7%) of mortgage banks totaled $110.6 ($146.8) billion, or 11.5% (15.2%) of all 

 

45 In fact, it could be that many of the loan correspondents that reported under the "Mortgage Banking and 

Correspondents" and "Real Estate" categories were brokers (in terms of David Olson's broad definition that is used 

in this analysis). Recall that the Census-Bureau-reported estimate of brokers was lower than Olson's estimates of the 

number of brokers; see Section II.B.1. 

46 In other words, it is assumed that mortgage banks earn a two-percentage-point origination fee on new mortgage 

originations and 25 basis points on acquired loans; the two-percentage-point origination fee includes the revenue 

effects of any servicing release premium. As explained in the text, this estimate is rough but probably 

underestimates the annual revenues of mortgage banks. 

47 The 92.9% small business percentage estimate based on employer and non-employer data of the Census Bureau is 

most likely wrong for mortgage banks. The Census Bureau data suggest that these small businesses account for 

6.7% of industry revenue; however, a small business percentage of 92.9% would have represented 1,196 of the 

1,287 independent mortgage banks reporting to HMDA in 2005. In 2005, the 1,196 mortgage bankers with revenues 

below the remaining 91 accounted for 27.1% of all mortgage originations -- or four times the small business revenue 

share of 6.7% suggested by the Census Bureau data. Thus, the 92.9% figure is not a good estimate of the percentage 

of mortgage banks that are small. 

 5-33 
originations by mortgage banks during 2005. The smallest 85.2% of mortgage banks originated 

$160.3 billion in 2005, or 16.6% of all originations. Thus, HUD's analysis of 2005 HMDA data 

for mortgage banks suggests that the small business share of revenue (approximated by the share 

of origination volume) increases from 8.3% to 15.2% as the small business percentage of 

mortgage banks increases from 71.4% to 83.7%, and increases further to 16.6% if the bottom 

85.2% of mortgage banks are considered. Based on the 2002 Census Bureau data, the 85.2% of 

employer firms in the "Real Estate Credit" industry accounted for 6.1% of industry revenue.48 

Based on the above analysis of HMDA data, small businesses probably account for 

71.4%-85.2% (or more generally 71%-85%) of the number of mortgage banks and for 8.3%-

16.6% (or more generally 8%-17%) of industry revenue. Many of the analyses below will use 

this range for small mortgage banks. The bottom 83.7% of mortgage banks, which accounted for 

15.2 percent of originations by all mortgage banks during 2005, will be used as a baseline. 

 Small Lenders—Recomputed. Based on the above analysis, there are two basic ways to 

compute the share of lenders that are small businesses. First, the data from the Census Bureau 

suggest the following small business percentages for lenders: (a) 67.0% for banks; (b) 48.0% for 

thrifts; and (c) 85.2%49 for mortgage banks. Applying these percentages to the “2006 Industry 

Data” (see above) yields (a) 4959 small banks, (b) 614 small thrifts, and (c) 1,097 small 

mortgage banks. In this case, the number of small lenders based on Census-Bureau-reported 

small business percentages is 6,670, or 66.9% of all 9,968 lenders. Second, HUD's analysis 

suggests the following small business percentages for lenders: (a) 59.8% for banks; (b) 50.1% for 

thrifts; and (c) 83.7% for mortgage banks. Applying these percentages to the “2006 Industry 

Data” (see above) yields (a) 4,426 small banks, (b) 641 small thrifts, and (c) 1,077 small 

mortgage banks. In this case, the total number of small lenders is 6,144, or 61.6% of all 9,968 

lenders. If the wider range (71.4%--85.2%) of mortgage bank percentages is used in (c), then the 

total number of small lenders is 5,986-6,164, or 60.1%-61.8% of all lenders. This range of 

60.1%-61.8% is somewhat lower than the Census-Bureau-based percentage of 66.9% for small 

lenders in 2006. While the percentage range for small mortgage banks has little effect on the 

estimate of the number of small lenders, it will have a more significant impact on the estimate of 

the mortgage originations accounted for by small lenders (discussed later). 

As noted earlier, Olson (2004) estimated there were 8,200 lenders, which could be a 

reasonable estimate of the number of lenders that were active in the mortgage market. If one 

assumes that all 1,287 mortgage banks that reported to HMDA in 2005 are included in the 8,200, 

this leaves 6,913 to be split between banks and thrifts. The split between banks and thrifts is 

based on their share of the total number (9,327) of depositories with mortgages from row 9.a of 

Table 5-6. On this basis, there would be: (a) 6,254 banks, of which 3,740 are small; (b) 659 

 

48 The above comparisons suggest that HUD's analysis of mortgage bankers based on 2005 HMDA yields somewhat 

similar results to the employer data from the Census Bureau. However, under HUD's analysis, the fixed revenue ($6 

million) definition for small business means that there would be a larger number of mortgage banks labeled as 

"small" in years with smaller overall levels of originations -- a problem with the technique 

49 The 85.2% figure is used for "Mortgage Banking and Loan Correspondents" rather than the 92.9% figure for 

reasons discussed earlier. 

 5-34 
thrifts, of which 330 are small; 50 and (c) 1287 mortgage banks, of which 1,097 are small. If 

there are in fact 8,200 active lenders making mortgages, then 5,167, or 63.0%, are small. These 

calculations assume the 85.2% small business share for mortgage banks; if the 71.4% share is 

used, the number of small mortgage banks changes to 919 and the number of small lenders 

changes to 4,989 or 60.8% of the 8,200 lenders. 

The information in the above two paragraphs suggests that the number of small lenders 

likely to be impacted by the rule could range from 4,989 to 6,164; the high end of this range 

probably includes many small banks that originate only a few mortgages. 

Credit Unions. As explained earlier, HMDA reports that 2,002 credit unions (including 

their 25 subsidiaries) originated $54.6 billion in mortgages during 2005, representing 2.0% of the 

total dollar volume of single-family mortgages originated that year (see Table 5-4). According 

to industry estimates, there were 8,801 credit unions in 2005 (National Credit Union 

Administration Call Reports); the Census reported a similar number (8,358) of credit unions with 

employees in 2004.51 The Census Bureau estimated that 92.6% of credit unions were small, 

based on 2002 data and a definition of $150 million in assets. Using the industry (Census 

Bureau) estimate of 9,814 (8,358), this means there were 8,348 (7,740) small credit unions. 

 All of the approximately 8,000 to 9,000 credit unions reported above are unlikely to be 

affected by the RESPA rule, as only 2,002 of them reported mortgage loans to HMDA in 2005. 

To examine this issue, HUD obtained data on the total assets of credit unions and on their 

mortgage originations for the year 2005. This information was derived from Call Report data 

from the National Credit Union Administration (NCUA). The key results are reported in Table 

5-7. As shown there, 3,969 of the 8,801 credit unions reported mortgages of $60.4 billion during 

2005. The remaining 4,832 credit unions reported no mortgage originations during 2005. Notice 

that the 2,002 credit unions that reported to HMDA accounted for $54.6 billion, or 90.4% of the 

total originations reported by the 3,969 credit unions. The 1,967 credit unions that originated 

mortgages but did not report to HMDA originated $5.8 billion ($60.4 billion minus $54.6 billion) 

in mortgages, or $2.968 million on average. This translates into 30 (60) mortgages per year if 

the average loan amount is $100,000 ($50,000), not a very large number. 

Table 5-7 also reports information on the asset size of credit unions. Based on HUD's 

analysis, 89.8% (or 7,900) of the 8,801 credit unions are small (i.e., had assets less than $150 

million).52 This is practically the same small business percentage (92.6%) as reported by the 

 

50 When the analysis shifts to the smaller number of 8,200 lenders, the small business percentages are probably too 

high; however, there are no other estimates available. 

51 There were an estimated 7,226 credit unions without employees in 2004, which places the Census number at 

15,584 (8,358 plus 7,226). However, one would think the agency (NCUA) number (8,180) would be correct; the 

Census-reported number (8,358) of credit unions with employees is also similar to the agency number. So it is not 

clear that the 15,584 estimate based on the Census Bureau data is correct. The credit unions without employees had 

practically no revenue so they don’t affect the revenue estimates produced by the Census Bureau. 

52 The $150 million small business threshold became effective on October 1, 2002, and remained so through the end 

of 2005. HUD applied the $150 million threshold to 2005 call report data on assets to classify credit unions as 

small. 

 5-35 
Census Bureau (see Section III.B.4). The share for small credit unions drops to 78.0% when 

only the 3,969 credit unions that originated mortgages are considered. The share for small credit 

unions drops even further to 60.7% when only the 2,002 credit unions that reported mortgages to 

HMDA are considered. 

Table 5-7. Mortgage Originations by Credit Unions, 2005 

Small Total 

Credit Unions Credit Unions 

1. HMDA Data 

 Number of Credit Unions 1,215 2,002 

 Number of Loans 63,416 411,202 

 Originations ($1,000) 6,637,000 54,598,000 

2. Call Report Data1

 a. Mortgages Reported 

 Number of Credit Unions 3,097 3,969 

 Number of Loans 89,246 407,509 

 Originations ($1,000) 8,387,172 60,436,870 

 b. No Mortgages Reported 

 Number of Credit Unions 4,803 4,832 

 c. All Credit Unions 7,900 8,801 

 1 The number of credit unions includes mortgage company subsidiaries. 

Table 5-7 also reports the share of industry mortgage originations accounted for by small credit 

unions. In 2005, the 3,097 small credit unions originated $8.387 billion in mortgages, or 13.9% 

of the $60.437 billion originated by all 3,969 credit unions. Based on analysis of data from the 

Census Bureau, it was estimated that small credit unions account for 22%-32% of industry 

revenue (see Section III.B.4). Thus, small credit unions account for a smaller share of mortgage 

originations than they do of industry revenue. 

III.B.5.b. Small Lender Share of Industry Revenue and Mortgage Originations 

 To calculate the small business share of transfers from lenders (due to the new GFE), 

requires two pieces of information: (1) the share of total mortgage originations for each of the 

four lender groups (banks, thrifts, independent mortgage bankers, and credit unions)53; and (2) 

the small business share of mortgages for each group.54 With respect to (1), HMDA data for 

2005 indicates the following shares of total (home purchase and refinance) single-family 

mortgage originations, expressed in dollars: (a) commercial banks (44.2%); (b) thrifts (18.2%); 

(c) independent mortgage bankers (35.6%); and (d) credit unions (2.0%). (See Table 5-4 in 

Section III.A.) With respect to (2), the Census Bureau reports the following small business 

 

53 For completeness, credit unions are included in the lender group. 

54 The distribution of mortgages (expressed in dollars) is a proxy for the distribution of revenues from mortgage 

operations because origination fees are expressed as a percentage of the loan amount. 

 5-36 
shares of revenue for banks and thrifts (as explained in Sections III.B.1 and III.B.2) and the 

above sections discussed the following small business shares of mortgages for mortgage banks 

and credit unions: (e) 4.9% for commercial banks; (f) 3.7% for thrifts; (g) 15.2% for independent 

mortgage bankers; and (h) 13.9% for credit unions.55 Ideally, to obtain the share of lender 

transfers accounted for by small lenders, one would simply multiply (1) a-d by (2) e-h and sum 

the results; doing this produces 8.5% as one estimate of the small business share of lender 

transfers. Unfortunately, this estimate may not be accurate, for two reasons. First, HMDA data 

do not identify loans originated by brokers. In HMDA, broker loans, which account for about 

60% of all originations, are reported mainly as originations of large wholesale lenders. Second, 

the Census-Bureau-based small business shares for banks and thrifts in (2) pertain to each 

industry's total revenues, which may not be the appropriate percentages for estimating the small 

business share of mortgage revenues. The remainder of this section discusses these issues in 

more detail and provides a range of estimates for the small business share of lender transfers. 

Mortgage originations (in dollar terms) are the key variable for measuring industry 

revenues because origination fees are expressed as a percentage (1.5%-2.0% in this analysis) of 

the mortgage amount. HUD projects $2.4 trillion in originations, divided between brokers (60%) 

and lenders (40%). Thus, the lender share of the projected $2.4 trillion mortgage market is $960 

billion, not the entire $2.4 trillion (as was suggested by the HMDA analysis in the above 

sections). Deducting the projected credit union volume ($48 billion, which is 0.02056 times $2.4 

trillion) from the $960 billion yields $912 billion for projected originations of banks, thrifts, and 

mortgage banks. The question is how to determine the small business share of this $912 

billion.57 

One might start by using HMDA data to allocate the $912 billion as follows: (i) 

commercial banks (45.1%); (j) thrifts (18.6%); and (k) independent mortgage banks (36.3%).58 

But using HMDA data on total mortgage originations to allocate the non-broker share (i.e., $912 

billion) of mortgage originations is subject to some uncertainty. Banks (e.g., Bank of America), 

thrifts (e.g., Indymac Bank, F.S.B.), and mortgage banks (e.g. Argent Mortgage Company) are 

also the wholesale lenders that purchase the loans originated by brokers. In other words, these 

entities not only originate their own loans on a retail basis (the $912 billion) but they also 

purchase the brokered loans (the $1,440 billion). But in their reports to HMDA, banks, thrifts, 

 

55 It is recognized that mixing small business shares of "revenues" with small business shares of "mortgage 

originations" may not be appropriate; however, there are no data on the small business shares of "mortgage 

originations" for banks and thrifts, which is the basic problem addressed in this section. The discussion in the text 

is simply illustrating the two-step method for calculating an overall small business share so little harm is done by 

mixing these concepts at this stage. Also, as discussed earlier, the small business share of industry revenue for 

mortgage banks could range from 8.3% to 16.6%. 

56 This 2.0% is based on the credit union share of mortgages reported to HMDA (see Table 5.4 in Section III.A). 

Credit unions are separated from banks, thrifts, and mortgage banks because their HMDA data probably do not 

include brokered loans to nearly the same extent as the HMDA data for the other lenders. 

57 The small business share of the $1,020 billion was determined in Section III.B.1 of this chapter; it was estimated 

that small brokers account for 70% of broker revenues. See Section VII.E.4 of Chapter 3 and Section VI.E.4 of 

Chapter 4 for sensitivity analysis of the 70% figure. 

58 See Table 5.4 and compute the lender shares as a percentage of originations without credit unions. 

 5-37 
and mortgage banks report as originations their wholesale loans as well as the loans they 

originate on their own through their retail channel -- there is no indicator in HMDA 

distinguishing loans originated through the retail channel. Therefore, using HMDA-based lender 

percentages (i, j, and k above) for the distribution of total originations to allocate the $912 billion 

in non-broker (or lender retail) originations among banks, thrifts, and mortgage banks assumes 

that the wholesale purchases of banks, thrifts, and mortgage banks, are similarly distributed (as i, 

j, and k). This may not be the case. 

This problem of HMDA not separately identifying originations purchased on a wholesale 

basis also affects the small business percentage for each of the three lender groups. Consider 

the top portion of Table 5.8, which reports loans originated by small banks and which expresses 

them as a percentage of originations reported by all banks.59 According to HMDA data, 2,032 

small banks originated $46.5 billion60 during 2005, representing 3.9% of the $1,201 billion in 

mortgages reported by all banks (and their subsidiaries). This 3.9% figure is not a good measure 

of the small bank share of bank originations. According to HMDA data, large banks originated 

the remaining 96.1%, or $1,155 billion. The problem is that the $1,155 billion figure includes not 

only loans that large lenders originated on a retail basis but also loans they purchased on a 

wholesale basis. If bank retail loans could be separately identified, the small bank volume of 

$46.5 billion61 would represent a much higher share of bank originations. For the same reason, 

the small business share (2.1% in Table 5-8) of HMDA-reported loans originated by savings 

institutions is an underestimate. 

 

59 HUD merged lender asset data from the FDIC with HMDA data. See http://www3.fdic.gov/sdi/ for further 

information. Small lenders in Table 5.8 are those with less than $150 million in assets. 

60 Because about half CHECK? of small banks are not required to report their originations to HMDA, the $46.5 

billion underestimates originations of small banks. This issue is discussed below. 

61 This assumes that the $46.5 billion for small banks consists of mortgages originated on a retail basis, which is a 

reasonable assumption. 

 5-38 
Table 5-8. Distribution of HMDA Mortgages for Small Lenders and Small Credit Unions, 2005 

Small Lenders All Lenders Percent Small 

Number of Number of Loans Number of Number of Loans Number of Loans

Lenders Loans ($million) Lenders Loans ($million) Loans ($) 

Commercial Banks 2,031 265,701 46,521 4,694 6,501,145 1,201,499 4.1% 3.9%

Savings Institutions 237 71,533 10,616 637 2,302,568 493,975 3.1% 2.1%

Depositories 2,269 337,234 57,139 5,331 8,803,713 1,695,474 3.8% 3.4%

Credit Unions 1,215 63,416 6,637 2,002 411,202 54,598 15.4% 12.2%

Source: 2005 HMDA Data 

Note: Includes data for mortgage company subsidiaries.

The number of commercial banks and savings institutions includes 22 lenders with missing mortgage assets. 

To summarize, loans originated by brokers are reported in HMDA data as originations of 

wholesale lenders, rather than being separately identified as brokered loans.62 This means that 

the non-brokered loans of wholesale lenders cannot be identified with HMDA data. Thus, 

HMDA data are of limited use for allocating the non-broker portion of originations (i.e. the $912 

billion) and for estimating the small business share of each lender group's non-brokered 

originations.63 Still, as explained in the remainder of this section, HUD uses HMDA as one 

source in estimating the small business share of lender originations. 

Estimation Approach. The basic approach for estimating the small business share of 

lender originations consisted of estimating the dollar volume of originations by small banks, 

small thrifts, and small mortgage bankers, summing these three figures, and then expressing that 

sum as a percentage of total lender (i.e., non-broker) originations. The main steps are outlined 

below. 

(1) According to HMDA, 2,031 small banks and 237 small savings institutions originated 

$57.139 billion in 2005. In addition to these 2,269 small depositories, there are an additional 

3,212 small depositories (3,015 small banks and 198 small thrifts) that had mortgages on their 

balance sheets but were not required to report their mortgage originations to HMDA, either 

because they had less than $34 million in assets or because they were physically located in a 

non-metropolitan area. Mortgage origination data are not available for these 3,015 small banks 

and 198 small thrifts. Step (2) describes the three methods used to estimate mortgage 

originations for the small banks, while Step (3) does the same for small thrifts. 

(2) Small Commercial Banks. Using FDIC data from call bank reports, the additional 

3,015 small banks were divided into three asset classes: up to $50 million, $50-$100 million, and 

 

62 As explained in Section II, brokers under Olson's broad definition also originate loans with warehouse lines of 

credit. It is possible that some of these loans are reported directly to HMDA as originations. 

63 For large lenders, industry sources report originations by the so-called three channels of production -- brokerage, 

correspondent, and retail. These data are used later to approximate retail originations by large lenders. But first, 

direct estimates of mortgage originations by small banks and small thrifts are provided. 

 5-39 
$100-$150 million. The banks were also divided by metropolitan and non-metropolitan location. 

Three approaches were then used to estimate mortgage originations for these small banks 

without origination data: (a) average originations per firm approach; (b) share of stock approach; 

and (c) origination-to-stock ratio approach. These are described below for banks. 

 5-40 
Table 5-9. Mortgage Originations and Outstanding Mortgages for Banks by Asset Size, 2005 

Asset Size 

Not More than 

$50 Million 

($50-$100] 

Million 

($100-$150] 

Million 

Less than $150 

Million 

Total (All 

Banks) 

Banks- Metropolitan Areas 

Banks Reporting Originations under HMDA 

 Loans Originated 83,233 110,543 71,892 265,668 6,500,657

 $ Originated ($1,000) 19,565,449 18,433,577 8,519,032 46,521,058 1,201,451,683

 Number of Banks 442 908 679 2,029 4,686

 Outstanding Loans ($1,000 ) 2,381,011 12,623,902 16,183,079 31,187,992 1,384,060,267

Banks Not Reporting Originations under HMDA 

 Outstanding Loans ($1,000 ) 1,528,761 666,695 8,94,146 3,089,602 155,971,031

 Number of Banks 362 76 65 710 711

Banks- Non-Metropolitan Areas 

Banks Reporting Originations under HMDA 

 Loans Originated 22 0 0 22 398

 $ Originated ($1,000) 2,898 0 0 2,898 31,407

 Number of Banks 2 0 0 2 5

 Outstanding Loans ($1,000 ) 0 0 0 0 95,143

Banks Not Reporting Originations 

 Outstanding Loans ($1,000 ) 4,655,864 11,785,768 9,834,892 26,278,524 54,977,561

 Number of Banks 1,133 949 430 2,512 3,033

All Commercial Banks 

Banks Reporting Originations under HMDA 

 Loans Originated 83,255 110,543 71,892 265,690 6,501,055

 $ Originated ($1,000) 19,568,347 18,433,577 8,519,032 46,523,956 1,201,483,090

 Number of Banks 444 908 679 2,031 4,691

 Outstanding Loans ($1,000 ) 2,381,011 12,623,902 16,183,079 31,187,992 1,384,155,410

Banks Not Reporting Originations under HMDA 

 Outstanding Loans ($1,000 ) 6,184,625 12,454,463 10,729,038 29,368,126 210,948,592

 Number of Banks 1,495 1,025 495 3,015 3,744

Note: Includes all commercial banks that reported loans under HMDA whether or not they report outstanding loans on their Call Report. 

 5-41 
(a) Average Originations Per Firm Approach: This approach simply multiplies the 

mean level of originations for those small firms with origination data (i.e., those that report 

HMDA data) by the number of small banks without origination data (i.e., those that do not report 

to HMDA). More specifically, for each of the three asset classes, the average mortgage 

origination amount per firm was first calculated for the small banks that reported mortgages to 

HMDA during 2005. This was done for both metropolitan and non-metropolitan areas, thus 

producing six averages of per firm originations. These six per firm averages were multiplied by 

the number of non-HMDA-reporting banks in each of the six categories and the six results were 

then summed (see Table 5-9). Doing this produces an estimate of $20.024 billion for the 3,015 

small banks without origination data. Adding this figure to the $46.521 billion for the 2,031 

small banks that reported to HMDA yields total estimated originations of $66.545 billion for all 

small banks.64 

(b) Share of Stock Approach: This “share of stock” approach estimates a bank's 

originations based on the bank's share of outstanding mortgages. For the 3,015 small banks 

without origination data, HUD obtained data from call reports on the dollar volume of 

outstanding mortgages held as assets. This approach was first implemented in an aggregated 

manner and then in a disaggregated manner. The outstanding assets ($29.368 billion) of the 

3,015 small banks without origination data represented 2.1% of the total outstanding assets 

($1,384.155 billion) of all 4,691 banks (both large and small) that reported originations to 

HMDA. This 2.1% was multiplied by the total originations ($1,201.483 billion) of the 4,691 

HMDA reporters to obtain an estimate of $25.492 billion for the originations of the 3,015 small 

banks. When added to the $46.521 for the 2,031 small banks that report originations to HMDA, 

this yields an overall estimate of $72.013 billion in originations for small banks. The 

disaggregated approach followed the same procedure for each of the six separate categories 

(three asset classes by metro and non-metropolitan status) and then summed the results. This 

produced an estimate of $11.357 billion for the 3,015 small banks, which, when added to the 

$46.521 for the 2,031 small banks that report originations to HMDA, yields an overall estimate 

of $57.878 billion in originations for small banks. 

(c) Origination-to-Stock Ratio Approach. The share of originations for the 2,031 small 

banks that reported HMDA data was higher than their share of the outstanding stock of 

mortgages. If this pattern is also true for the 3,015 small banks that do not report HMDA data, 

then the "Share of Stock Approach” described above will underestimate the originations of the 

3,015 small banks. Approach (c) addresses this by computing the ratio of "mortgage 

originations" to "outstanding mortgage stock" for the 2,031 HMDA reporters, and then 

multiplying that ratio by the "outstanding mortgage stock" of the 3,015 non-HMDA-reporters, to 

obtain an estimate of the "mortgage originations" for the 3,015 small banks. Implementing this 

 

64 Of course, it is not clear if the non-HMDA-reporting small banks will have the same average level of originations 

as the HMDA-reporting small banks in their asset category. Because of the large number of non-HMDA-reporting, 

non-metropolitan banks 1,133 in the lowest asset category ($0.0-$50.0 million), the results depend importantly on 

the average origination level assigned to that category. If this approach was implemented using the overall average 

origination level across all three asset categories (but separate averages for metropolitan and non-metropolitan 

areas), the additional estimated originations for the 3,015 small banks would have been $15.172 billion, which, 

combined with the $46.521 billion for HMDA-reporting small banks, yields an overall estimate for small banks of 

$61.693 billion – approximately $4.9 billion less than the $66.545 billion reported in the text. 

 5-42 
approach in the aggregated manner produced an estimate of $43.806 billion for the 3,015 small 

banks, which, when added to the $46.521 for the 2,031 small banks that report originations to 

HMDA, yields an overall estimate of $90.327 billion in originations for small banks.65 

(3) Small Thrifts or Small Savings Institutions. The same procedures were followed 

for savings institutions. In the case of thrifts, there were 237 small thrifts that reported 

origination data to HMDA and 198 thrifts that had outstanding mortgages on their balance sheets 

but did not report any mortgages to HMDA. The estimates for these 198 thrifts are given below 

for each of the three approaches. 

(a) The Average Originations Per Firm Approach produced an estimate of $5.724 

billion for the 198 small thrifts without origination data. Adding this figure to the 

$10.616 billion of the 198 small thrifts that reported to HMDA66 yields total 

estimated originations of $16.340 billion for all small thrifts. 

(b) The Share of Stock Approach, when implemented in an aggregated manner (see 

Step 2b for an explanation), produces an estimate of $3.913 billion, which, when 

added to the $10.616 billion of the 237 small thrifts that reported to HMDA, yields 

total estimated originations of $14.530 billion for all small thrifts. Implementing this 

approach in a disaggregated manner produced an estimate of $1.792 billion for the 

198 small thrifts without origination data, which, when added to the $10.616 billion 

of the 237 small thrifts that reported to HMDA, yields total estimated originations of 

$12.408 billion for all small thrifts. 

(c) The Origination-to-Stock Ratio Approach produced an estimate of $6.910 

billion for the 198 small thrifts without origination data, which, when added to the 

$10.616 billion of the 237 small thrifts that reported to HMDA,67 yields total 

estimated originations of $17.526 billion for all small thrifts. 

 

65 Implementing this approach in a disaggregated manner yields $74.7 billion as the estimated mortgage originations 

for the 3,015 small banks, which, when added to the $46.521 for the 2,031 small banks that reported originations to 

HMDA, yields an overall estimate of $121.2 billion in originations for small banks.

66 However, because thrifts in non-metropolitan areas are no longer required to report under HMDA, originations 

per firm for firms in the lower asset categories could not be calculated from HMDA data nor could disaggregated 

estimates of originations for non-reporting, non-metro firms be derived. If this approach were implemented using 

the overall average origination level across all three asset categories (but separate averages for metropolitan and 

non-metropolitan areas), the overall estimate for small thrifts would have been $15.442 billion. 

67 Implementing this approach in a disaggregated manner produced an origination estimate for small thrifts of $23.1 

billion. 

 5-43 
Table 5-10. Mortgage Originations and Outstanding Mortgages for Thrifts by Asset Size, 2005 

 Asset Size 

Not More 

than $50 

Million 

($50-$100] 

Million 

($100-$150] 

Million 

Less than $150 

Million 

Total (All 

Thrifts) 

Thrifts- Metropolitan Areas 

Thrifts Reporting Originations under HMDA 

 Loans Originated 37,322 18,331 15,734 71,387 2,302,422

 $ Originated ($1,000) 5,146,364 3,007,560 2,444,402 10,598,326 493,957,481

 Number of Thrifts 41 110 85 236 636

 Outstanding Loans ($1,000 ) 720,295 3,507,125 4,109,226 8,336,646 690,227,114

Thrifts Not Reporting Originations 

 Outstanding Loans ($1,000 ) 393,492 151,785 152,160 697,,437 29,041,150

 Number of Thrifts 38 7 3 48 65

Thrifts- Non-Metropolitan Areas 

Thrifts Reporting Originations under HMDA 

 Loans Originated 0 0 146 146 146

 $ Originated ($1,000) 0 0 17,803 17,803 17,803

 Number of Thrifts 0 0 1 1 1

 Outstanding Loans ($1,000 ) 0 0 65,692 65,692 65,692

Thrifts Not Reporting Originations 

 Outstanding Loans ($1,000 ) 941,395 1,622,938 2,207,042 4,771,375 8,940,819

 Number of Thrifts 65 47 38 150 187

All Thrifts 

Thrifts Reporting Originations under HMDA 

 Loans Originated 37,322 18,331 15,880 71,533 2,302,568

 $ Originated ($1,000) 5,146,364 3,007,560 2,462,205 10,616,129 493,975,284

 Number of Thrifts 41 110 86 237 637

 Outstanding Loans ($1,000 ) 720,295 3,507,125 4,174,918 8,402,338 690,292,806

Thrifts Not Reporting Originations under HMDA 

 Outstanding Loans ($1,000 ) 1,334,887 1,774,723 2,359,202 5,468,812 37,981,969

 Number of Thrifts 103 54 41 198 252

 (4) Small Depositories. The results from Steps (2) and (3) can now be combined to 

produce total mortgage origination estimates for all small depositories, which are presented in 

row 3 of Table 5-11. They are as follows: (a) Average Originations Per Firm Approach: $82.9 

 5-44 
 5-45 

billion; (b) Share of Stock Approach: $86.5 billion if the approach is implemented in an 

aggregated manner and $70.3 billion if the approach is implemented in a disaggregated manner; 

and (c) Origination-to-Stock Ratio Approach: $107.9 billion if the approach is implemented in an 

aggregated manner and $144.3 billion if the approach is implemented in a disaggregated manner. 

The estimates range from $70.3 billion to $144.3 billion. 

Of the three approaches, the "Average Originations Per Firm" approach seems to be the 

least reasonable in concept and the "Origination-to-Stock Ratio Approach" seems to be the most 

reasonable, for reasons discussed in Steps (2a) and (2c) above. However, implementation of the 

ratio approach during 2005 was confounded by a large number of zero values for nonmetropolitan firms. Therefore, the "Share of Stock approach" will be used in the analysis below 

for 2005. In addition, implementing the "Share of Stock Approach" in a disaggregated manner 

seems more reasonable, from a conceptual point of view. 
Table 5-11. Estimates of Small Lender Originations, 2005 ($ Billions) 

Estimation Approaches 

(a) (b) (c) 

Average Originations Share of Stock Origination-to-Stock R

Per Firm Approach Approach Approach 

Disaggregated Aggregated Disaggregated Aggregated Disag

1. Small Banks $66.5 28.0% $72.0 29.8% 57.9 25.7% $90.3 34.3% $121.2. Small Thrifts $16.3 6.9% $14.5 6.0% $12.4 5.5% $17.5 6.7% $23.

3. Subtotal: Small Depositories (1+2) $82.9 $86.5 $70.3 $107.9 $144.

4. Small Mortgage Banks (a) $146.8 61.7% $146.8 65.7% $146.8 65.1% $146.8 55.8% $146.

 (b) $80.3 $80.3 $80.3 $80.3 $80.

 (c) $160.3 $160.3 $160.3 $160.3 $160.

5. Subtotal: Small Lenders (a) $229.7 $233.3 $217.1 $254.7 $291.

 (3+4) (b) $163.2 $166.8 $150.6 $188.2 $224.

 (c) $243.2 $246.8 $230.6 $268.2 $304.

6. Small Credit Unions $8.4 3.5% $8.4 3.5% $8.4 3.7% $8.4 3.2% $8.

7. Total: (5+6) (a) $238.1 100.0% $241.7 100.0% $225.56 100.0% $263.0 100.0% $299.

 (b) $171.6 $175.2 $159.0 $196.5 $232.

 (c) $251.6 $255.2 $239.0 $276.5 $312.

8. % of All Lender 

Originations ($988.2) (a) 24.1% 24.5% 22.8% 26.6% 30.3%

 (b) 17.4% 17.7% 16.1% 19.9% 23.6%

 (c) 25.5% 25.8% 24.2% 28.0% 31.7%

Note: In number 8, "All Lender" includes credit unions. See text for definition of "Estimation Approaches" and for an explanation of the three small 

mortgage bank amounts in number 4. The percentage distribution of originations for small lenders assumes (a) $146.8 billion for small mortgage 

banks. 

 5-46 
 (5) Small Mortgage Banks. As discussed earlier, the small business threshold for 

mortgage banks is $6 million in annual revenues but revenue data for mortgage banks are not 

available. HUD's estimation approach for determining small mortgage banks was described 

earlier. In that analysis, 919 (or 71.4%) of the 1287 mortgage banks that reported to HMDA 

were considered small; these small mortgage banks originated $80.3 billion (or 8.3%) of the 

$965.4 billion reported as mortgage bank originations in HMDA. But as discussed earlier, 

HUD's estimation method for determining small mortgage banks could be imprecise. It was 

noted that originations of the smallest 83.7% (85.2%) of mortgage banks totaled $146.8 billion 

($186.0 billion), or 15.2% (16.6%) of all originations reported by mortgage banks to HMDA in 

2005. Row 4 of Table 5-11 includes the $146.8 billion estimate as well as the $80.3 billion and 

$160.3 billion estimates. 

 (6) Small Lenders. The estimates of mortgages originated by small lenders (small 

banks, small thrifts, and small mortgage banks) during 2005 can now be totaled. Consider row 5 

in Table 5-11. The estimates range from $217.1 billion to $291.1if small mortgage banks 

originate $146.8 billion. If the disaggregated "share of stock" and "ratio" approaches are used, 

the range is from $217.1 billion to $291.1 billion if small mortgage banks originate $146.8 

billion. Of course, the estimates depend importantly on the origination amount for small 

mortgage banks. As shown in Table 5-11, if that amount is $80.3 ($160.3), the estimates of 

small lender originations varies from $150.6 billion to $224.6 billion ($230.6 billion to $304.6 

billion). 

 (7) Small Credit Unions. Table 5-7 reports the share of credit union originations 

accounted for by small businesses. In 2005, the 3,097 small credit unions originated $8.387 

billion in mortgages, or 13.9% of the $60.437 billion originated by the 3,969 credit unions that 

reported mortgages during in 2005. Row 6 in Table 5-11 adds this amount ($8.387 billion) for 

small credit unions to each of the various figures for small lenders (banks, thrifts, and mortgage 

banks) in row 5 to arrive at a range of overall estimates of originations by small lenders 

(including credit unions) in row 7. If small mortgage banks originate $146.8 billion, the total for 

small lenders (including credit unions) is $299.4 billion, under the disaggregated "ratio 

approach". 

(8) Small Lender Share of Mortgage Originations. It is estimated that mortgage 

originations totaled $3,088 billion in 2005. Olson (2004) reports that brokers accounted for 68% 

of these originations, leaving 32%, or $988.2 billion, for banks, thrifts, mortgage banks, and 

credit unions. Under the disaggregated "share of stock approach", Steps 5-7 suggest that small 

lenders (including credit unions) accounted for $225.5 billion ($217.1 billion for small 

depositories and small mortgage banks and $8.4 billion for small credit unions), or 22.8%, of the 

$988.2 billion. In other words, small lenders (including credit unions) account for 22.8% of all 

lender (non-broker) originations. Other estimates are possible, as indicated in the various rows 

of Table 5-11. In addition, there is some uncertainty with the share of mortgages accounted for 

by brokers. If the estimate for the broker share in 2005 were 63%, instead of 68%, then $1,142.6 

billion (instead of $988.2 billion) would be the estimate of lender (non-broker) originations. In 

this case, the $225.4 billion originated by small lenders (including credit unions) would represent 

19.7% (instead of 22.8%) of lender originations. 

 5-47 
The baseline analysis in Chapter 3 assumes that small businesses account for 22.8% of 

lender revenue, which is consistent with the disaggregated "share of stock approach" for small 

depositories and the $146.8 billion estimate for small mortgage banks. Sensitivity analyses are 

conducted to show the effects of higher and lower revenue percentages for small lenders 

(specifically, 20% and 26%). If the baseline percentage of 22.8% or the top end of the range of 

26.0% overestimate the revenue share of small lenders, that is preferable to underestimating the 

small lender share. 

III.B.5.c. Lender Revenue in Projection Model: Aggregated Analysis 

This section uses the above estimates of the small lender share of mortgage originations, 

in combination with the estimates of consumer savings and transfers in Chapter 3, to examine 

revenue impacts on small lenders. As explained in Chapter 3, consumer savings and transfers 

associated with the new GFE assume $2.4 trillion in mortgage originations, with 40% ($960 

billion) of this total originated by lenders and 60% ($1,440 billion) by brokers.68 While the base 

case assumed lenders earn a 1.75% fee, sensitivity analysis was conduced using 1.50% and 2.0% 

fees. In this case, lender revenues are projected to be: (a) $19.2 billion if fees are 2%, (b) $16.8 

billion if fees are 1.75%, and (c) $14.4 billion if fees are 1.50%. 

As noted above, small lenders are estimated to account for 23% of all lender revenues (or 

specifically 22.8%). Thus, small lender revenues would be: (a) $4.38 billion if fees are 2%, (b) 

$3.83 billion if fees are 1.75%, and (c) $3.28 billion if fees are 1.50%. As noted above, 

sensitivity analyses were conducted in Chapter 3 for small business revenue shares of 20% and 

26%. With this range, small lender revenues would be: (a) $3.84 billion - $4.99 billion if fees 

are 2%, (b) $3.36 billion - $4.37 billion if fees are 1.75%, and (c) $2.88 billion - $3.74 billion if 

fees are 1.50%. 

GFE Transfer Estimates for Lenders. Section VII.E.4 of Chapter 3 conducted several 

analyses with respect to projected consumer savings and transfers from lenders associated with 

the new GFE. The estimates ranged from 11.0% to 14.0%. In the case of a 1.75% origination 

fee, the dollar range for consumer savings from lenders was from $1.85-$2.35 billion. Small 

businesses would account for 22.8% of these transfers, or $422-$537 million.69 If there are 8,200 

active lenders that originate mortgages, the consumer savings and transfers would come from 

5,167 small lenders (3,740 small banks, 330 small thrifts, and 1,097 small mortgage banks). If 

there are 9,968 active lenders (see earlier discussion), then the consumer savings and transfers 

would come from 6,670 small lenders (4959 small banks, 614 small thrifts, and 1,097 small 

mortgage banks). In both cases, 3,097 small credit unions would also experience revenue 

reductions. For each group, the percentage change in lender revenues from originating 

mortgages is given by the 11.0%-14.0% reported above. This percentage loss in revenues refers 

to both small and large lenders and small and large credit unions. 

 

68 The 40% share for lenders includes originations by credit unions. 

69 If the revenue share for small lenders is 20% (26%), the dollar range for GFE transfers is $370-$470 million 

($481-$611 million). 

 5-48 
If lender fees are 2.0% instead of 1.75%, then lender revenues and the above figures for 

consumer savings and revenue transfers are increased by the ratio of 2.00/1.75, or 1.143. 

Revenue transfers for all lenders (including credit unions) would be $2.11-$2.69 billion, 

assuming 11%-14% savings, and revenue transfers for small lenders (including credit unions) 

would be $482-$612 million, assuming a small business share of 22.8%, and $422-$698 million 

assuming the 20%-26% range in small lender estimates. Again, these revenue transfers for both 

groups (all lenders and small lenders) would represent 11.0%-14.0% of their revenues from 

originating single-family mortgages. 

III.B.5.d. Share of Mortgage Originations Accounted for by Lenders: Disaggregated 

Analysis 

Section III.B.5.b explained that data are not available that allocate lender retail (or nonbroker) originations among banks, thrifts, and mortgage banks. For this reason, the analysis of 

the revenue impacts on lenders in the above section considered lenders as a group, rather than as 

separate industries (banks, thrifts, and mortgage banks). This section relies on an earlier HUD 

analysis to project the market shares for the separate lender groups. The section uses 2001 

HMDA data and other information to derive a range of estimates for retail originations for the 

major lender groups (banks, thrifts, and mortgage banks, as well as credit unions). Results from 

this section’s analysis are then applied to 2005 data to obtain an updated distribution of retail 

mortgages across the various lender groups. As will become clear, there is some uncertainty 

around these estimates. 

The Mortgage Bankers Association of America (MBA) estimated that mortgage 

originations totaled $2,030 billion in 2001, and Olson (2002) estimated that brokers originated 

65% of 2001 mortgages and lenders, the remaining 35%. Thus, the lender (retail or non-broker) 

share of the 2001 mortgage market was $710.5 billion. The question is how to distribute this 

$710.5 billion among the three lender groups and credit unions. 

One might start by using HMDA data, which reports $1,793.7 billion in mortgage 

originations during 2001. Although HMDA does not cover all originations, its high coverage 

rate (88.4% of the MBA-reported $2,030 billion in origination volume for 2001) lends it some 

credibility. Row 1 of Table 5-12 shows that banks, thrifts, and mortgage banks reported 

$1,752.2 billion in originations (97.7%) under HMDA, while credit unions reported the 

remaining $41.3 billion (2.3%). Row 2 expands the HMDA data in row 1 to make it consistent 

with total mortgage originations of $2,030 billion reported by the MBA.70 Row 3 deducts the 

65% share for brokers from the origination figures in row 2, leaving a total of $710.5 billion (or 

35%) for lender originations (including credit unions). Notice that the credit union figure 

($46.767 billion) in row 3 is the same as in row 2, which assumes that credit unions purchase no 

loans on a wholesale basis.71 The entire broker amount ($1,319.5 billion) is taken from the 

 

70 Essentially, this involves multiplying the figures in row 1 by 1.1317 (reflecting the 88.36% coverage rate for 

HMDA). Thus, this assumes that HMDA's undercoverage rate is the same across the different industries; the results 

of an alternative assumption will be noted below. 

71 While this may be unrealistic, it provides a reasonable approximation given the lack of data on this question. 

 5-49 
origination total ($1,983.2 billion) without credit unions, and distributed across banks, thrifts, 

and mortgage banks, based on the HMDA-reported distribution given in row 1(b). Thus, this 

2001 HMDA-based distribution of the $710.5 billion in lender retail (non-broker) originations 

given in row 3 (a) is as follows: (1) 43.3% for banks; (2) 23.7% for thrifts; (3) 26.4% for 

independent mortgage banks; and (4) 6.6% for credit unions. 

Table 5-12. Distribution of Mortgages Originated by Lenders, 2001 

Commercial Bank Thrift Mortgage Bank Credit Union Total 

1. 2001 HMDA Data $812,553,264 $443,928,847 $495,894,752 $41,323,206 $1,793,700,069 

 (a) % Distribution 45.3% 24.7% 27.6% 2.3% 100.0%

 (b) % Distribution W/O 

 Credit Unions 46.4% 25.3% 28.3% 100.0%

2. Adjust HMDA Data to be 

 Consistent With 2001 Originations $919,598,072 $502,411,510 $561,223,342 $46,767,076 $2,030,000,000

3. Estimated Lender (Non-broker) $307,763,909 $168,143,165 $187,825,850 46,767,076 $710,500,000

 Originations 

 (a) % Distribution 43.3% 23.7% 26.4% 6.6% 100.0%

4. NMN Wholesale Mortgages $554,645,000 $300,468,000 $248,421,000 $0 $1,103,534,000

 (a) % Distribution 50.3% 27.2% 22.5% 0.0% 100.0%

5. Estimaterd Non-Wholesale Mortgages 

 (W/O Credit Unions) (#2-#4) $364,953,072 $201,943,510 $312,802,342 $0 $879,698,924

 (a) % Distribution 41.5% 23.0% 35.6% 0.0% 100.0%

6. Retail Distribution Based on 

 NMN Data $275,357,128 $152,366,398 $236,009,398 46,767,076 $710,500,000

 (a) % Distribution 38.8% 21.4% 33.2% 6.6% 100.0%

7. Retail Dsitribution Based on 

 HMDA Data (From #3) $307,763,909 $168,143,165 $187,825,850 46,767,076 $710,500,000

 (a) % Distribution 43.3% 23.7% 26.4% 6.6% 100.0%

Notes: Row 2 increases the amounts in row 1 by the ratio of total mortgage originations ($2,030,000,000) to 

 HMDA-reported originations ($1,793,700,069). This adjustment for HMDA under coverage assumes that the 

 four lender groups have the same HMDA coverage rate. 

The above calculations assume that purchases of brokered loans by warehouse lenders are 

distributed across the three lender groups in the same manner as their HMDA-reported mortgage 

originations.72 This may or may not be a good assumption. It could be that large wholesale 

 

72 Recall that large banks (e.g., Bank of America), thrifts (e.g., Washington Mutual), and independent mortgage 

banks (e.g. Countrywide in 2001) report under HMDA not only loans that they originate on a retail basis, but also 

loans that they table fund and loans where they make the credit decision -- but HMDA does not separately identify 

these different types of loans. 

 5-50 
lenders are more heavily concentrated among banks than they are among (say) independent 

mortgage banks. If this were the case, using the HMDA-based distribution of lender-reported 

originations as a proxy for the distribution of retail loans among lenders would overstate 

(understate) the retail share of originations by banks (independent mortgage banks). The 

remainder of this section attempts to shed some light on this issue. 

HUD obtained data on wholesale lending from the National Mortgage News (NMN). The 

NMN data is based on a survey of large prime and subprime lenders -- it covered the top 55 (42) 

prime (subprime) lenders that fund mortgages of brokers and the top 44 (20) prime (subprime) 

lenders that purchase mortgages from correspondents. Thus, the NMN survey probably covered 

the bulk of all wholesale lending. HUD disagregated the NMN data for 2001 into the three lender 

groups (banks, thrifts, and independent mortgage banks); the wholesale lending for each of these 

three groups is reported in row 4 of Table 5-12. As shown in row 4 (a), NMN's data for 

wholesale lending are distributed as follows: (1) 50.3% for banks; (2) 27.2% for thrifts; (3) 

22.5% for independent mortgage banks. As can be seen by comparing these shares with those 

from row 1(c) in Table 5-12, the purchases of brokered and correspondent loans by warehouse 

lenders are not distributed across the three lender groups in the same manner as HMDA-reported 

mortgage originations. Wholesale purchases are more (less) concentrated among banks and 

thrifts (mortgage banks) than are mortgage originations reported under HMDA. Based on these 

comparisons, the HMDA-based distribution of retail originations given in row 3(a) may overstate 

(understate) the retail share for banks and thrifts (mortgage banks) in 2001. 

 Row 5 of Table 5-12 reports an estimate of non-wholesale originations, obtained by 

subtracting wholesale lending in row 4 from total mortgage originations in row 2. This serves as 

one estimate of retail originations by lenders. As shown in row 5(a), the distribution of nonwholesale (or retail) originations suggested by the NMN data differs from that suggested by 

HMDA reported in row 3(a). The following are the two sets of estimates for the percentage 

shares of retail originations: 

 NMN-Based Distribution HMDA-Based Distribution

Banks 38.8% 43.3% 

Thrifts 21.4% 23.7% 

Mortgage Banks 33.2% 26.4% 

Credit Unions 6.6% 6.6%

Total 100.0% 100.0% 

Mortgage banks are credited with a larger share (33.2% versus 26.4%) of retail originations 

based on analysis using the NMN data for wholesale lenders. 

The above percentages can be used to allocate among banks, thrifts, mortgage banks, and 

credit unions, the revenue transfers associated with new GFE that were reported earlier for all 

lenders as a group in Section III.B.5.c. This will be done in Section III.B.5.f below, entitled 

"Transfers as a Share of Total Revenue." In addition, Section III.B.5.e below will combine the 

 5-51 
above analysis on lender shares with the earlier analysis of mortgages originated by small 

lenders, to provide disaggregated small business shares (i.e., small bank, small thrift, small 

mortgage bank, and small credit union) for each lender group. But before doing that, some 

additional technical issues are discussed with respect to the lender data. 

Additional Estimate Based on the NMN Data. Steps 1-7 in Table 5-12 provided one 

method for estimating the distribution of non-broker loans across the various lender groups. 

HUD also used the information on retail lending provided by NMN to estimate lender shares of 

non-broker loans. Briefly, this approach used the following information from NMN and HMDA: 

(a) NMN reports that the113 large lenders included in their sample originated $716.4 

billion in mortgages on a retail basis during 2001. 

(b) HUD disaggregated NMN’s retail originations for large lenders as follows: $385.3 

billion for commercial banks (53.8%); $119.8 billion for thrifts (16.7%); $206.4 billion 

for mortgage banks (28.8%); and $4.9 billion for credit unions (0.7%). 

(c) HUD deducted the originations of NMN’s large lenders from 2001 HMDA data. In 

HMDA, NMN’s 113 large lenders were represented by 276 HMDA reporters (parents 

and subsidiaries). These 276 lenders accounted for $1,258.4 billion of the $1,793.7 

billion in mortgage originations reported to HMDA in 2001. 

(d) The remaining $535.3 billion ($1,793.7 minus $1,258.4) of HMDA-reported 

originations were distributed as follows: $173.0 billion for commercial banks (32.3%); 

$135.0 billion for thrifts (25.2%); $191.7 billion for mortgage banks (35.8%); and $35.6 

billion for credit unions (6.7%). These lenders will be referred to as the “smaller lenders” 

(recognizing that they are not defined as small businesses but are not included in NMN’s 

sample of “large lenders”). 

(e) Finally, it was assumed that the HMDA undercount of $236.3 billion (i.e., MBA’s 

origination projection of $2,030 billion for 2001 minus HMDA’s total of $1,793.7 

billion) was distributed across the lenders, in the same pattern as noted above.73 This 

resulted $249.4 billion for commercial banks (32.3%); $194.6 billion for thrifts (25.2%); 

$276.3 billion for mortgage banks (35.8%); and $51.4 billion for credit unions (6.7%).74 

According to (b), commercial banks account for the largest share (53.5%) of retail loans 

originated by NMN’s sample of large retail lenders. According to (d), mortgage banks account 

 

73 This assumes that the large lenders in NMN’s sample accurately reported their originations to HMDA, which is 

probably a reasonable assumption. The undercounted HMDA loans could be due both to “smaller lenders” not 

reporting under HMDA and to underreporting on the part of those that do report under HMDA. Also, it may have 

been more realistic to assume that the undercount of $236.3 billion did not include loans for credit unions; however, 

including credit unions in the analysis does not affect the overall results. 

74 Thus, the MBA’s estimate of $2,030 billion in total originations for 2001 is divided between (a) $1,258.4 billion 

reported by NMN sample of larger lenders and (b) $771.7 billion allocated to “smaller lenders” not included in 

NMN’s sample. As the text explains, HMDA data are use to allocate the $771.7 billion among banks, thrifts, 

mortgage banks, and credit unions. 

 5-52 
for the largest share (35.8%) of the originations of the smaller lenders not included in NMN’s 

sample. These patterns are consistent with the earlier discussion in this section. But the purpose 

of the above data manipulations is to develop an alternative estimate of the distribution of lender 

retail (or non-broker) originations among banks, thrifts, mortgage banks, and credit unions. The 

NMN data in (b) provide the distribution of retail loan originations across the various lender 

types for larger lenders. The distribution in (d) can be used as one estimate of the retail 

distribution for smaller lenders, although it is recognized that the loans in (d) include some 

wholesale as well as retail loans. Combining the various weights in (b) and (d) and assuming 

that total lender retail (non broker) originations for 2001 were $710.5 billion (see earlier 

discussion) produces the following estimate of the percentage distribution for these retail loans: 

41.4% for commercial banks; 20.5% for thrifts; 31.5% for mortgage banks; and 6.6% credit 

unions.75 This distribution, using an alternative estimation approach, is very similar to the 

“NMN-based Distribution” derived earlier and reported in row 6 of Table 5-12.76 The main 

point from all these analyses that use the NMN data is that the HMDA-based distribution places 

too much weight on commercial banks relative to mortgage banks. 

Questions About Broker and Lender Shares of Mortgage Originations. The NMN 

data raise some issues concerning the broker and lender shares of the mortgage market. This 

Regulatory Impact Analysis relies on the extensive survey work conducted by David Olson, who 

places the broker share of the mortgage market at 65% in 2001 (or $1,319.5 billion, assuming 

that total originations are the MBA-reported $2,030 billion). This leaves 35%, or $710.5 billion, 

for lenders. At first glance, this 35% figure appears small – that is, one would think the retail 

operations of major banks such as Bank of America, Washington Mutual, and Countrywide, 

combined with the originations of community banks and thrifts and small mortgage bankers 

would amount to more than 35% of the mortgage originations. The NMN data for retail 

originations lend some support to this intuition. As noted in (a) above, NMN reports that the113 

large lenders included in its sample originated $716.4 billion in mortgages on a retail basis 

during 2001 – a figure slightly larger than the $710.5 billion derived above by applying Olson’s 

35% lender share to MBA’s total origination figure. Adding some (undetermined) amount from 

(d) to reflect retail originations by smaller lenders not included in NMN’s sample would place 

the total retail (non broker) figure substantially higher than that ($710.5 billion) based on Olson’s 

analysis. The source of this discrepancy does not appear to be with the overall originations, as 

MBA’s estimate ($2,030 billion) is consistent with estimates by Fannie Mae and others. The 

discrepancy may result from different definitions used by NMN and Olson, or there may be some 

other reason for the rather large differences in the two estimates of lender retail originations. 

The method for estimating non-wholesale loans (a proxy for retail loans) described in 

Table 5-12 can also be compared with Olson’s figures. Essentially, that method subtracted 

NMN’s data for wholesale loans ($1,103.5 billion in row 4 of Table 5-12) from the MBA’s total 

origination estimate ($2,030 billion), yielding $879.7 billion as one estimate of the nonwholesale portion of the market (see row 5 in Table 5-12). This $879.7 billion is higher than the 

 

75 This calculation fixes the credit union share at 6.58%, as explained earlier in discussing the “HMDA-based 

distribution” and “NMN-based distribution”. 

76 Although it is recognized that if the weights from (d) were reduced to reflect the (unknown) presence of wholesale 

loans, the distribution would shift back toward commercial banks. 

 5-53 
$710.5 billion figure based on Olson's estimate that the non-broker share of the mortgage market 

was 35% in 2001 (although it is not even clear from the available information if these two 

measures are even the same concepts).77 There could be several reasons for this discrepancy. 

For instance, NMN and Olson are probably using different definitions (e.g., Olson's broker 

definition does not include independent mortgage banks while NMN's correspondent definition 

probably does). In addition, the $879.7 billion estimate of non-wholesale lending based on 

NMN's analysis might be slightly lower if all wholesale lending were included in NMN's data 

(rather than just the wholesale lending of large lenders). 

It would be difficult to reconcile these different estimates of the broker, non-wholesale, 

retail, and lender shares of the mortgage market without more information about underlying 

definitions and the consistency across the various data sets. As noted above, this Regulatory 

Impact Analysis uses Olson’s estimates as a starting point because his data are based on large 

surveys of the broker industry. If the estimates of the broker market used in this Regulatory 

Impact Analysis are too high, that will result in an overestimate of the small business share of 

revenue transfers, which seems preferable to underestimating those shares. To reflect any 

uncertainty with the broker estimates, Chapter 3 conducts sensitivity analyses for lower and 

higher shares of the broker market. 

Concerning NMN’s data, the important insight is that the percentage distribution of nonwholesale lending among lenders differs from the percentage distribution of HMDA-reported 

loans. Therefore, this Regulatory Impact Analysis relies heavily on the “NMN-based 

Distribution” (see above) for disaggregating the lender results among banks, thrifts, and 

mortgage banks. 

Below, the results of this section based on 2001 data will be combined with updated data 

for 2005. 

III.B.5.e. Share of Mortgage Originations Accounted for by Small Lenders: Disaggregated 

Analysis 

Section III.B.5.b reported a range of estimates for mortgages originated by small banks, 

small thrifts, small mortgage banks, and small credit unions -- the differences among the various 

estimation techniques were summarized in Table 5-11. As explained earlier, the estimate that 

small lenders account for 23% (with a 20%-26% range) of all lender originations was not 

disaggregated for the separate lender groups. For example, there was no separate estimate of the 

percentage of commercial bank originations accounted for by small commercial banks -- the 

numerator (originations by small banks) is available (because it was estimated in Section 

III.B.5.b above) but there is no estimate of the denominator (retail originations by all banks). 

But Section III.B.5.d derived a range of estimates for lender retail originations, which means that 

estimates for the small business share of the separate industries (banks, thrifts, and mortgage 

banks) can now be presented. 

 

77 If the broker share of the market had been 60% in 2001, then the lender figure would have been $812 billion, 

which is not too far from the NMN-based estimate of $879.7 billion in Table 5.12. 

 5-54 
First, Table 5-13 repeats the analysis of Table 5-12 using updated HMDA and mortgage 

origination data. Although the NMN data are not included for 2005 (rows 4 and 5 of Table 5.12 

are dropped), the 2001 NMN retail distribution has been adjusted using 2005 HMDA data and is 

reported in row 6 of Table 5.13. The adjustment was made as follows: 

Step 1: the 2001 HMDA distribution without credit unions was obtained from row 1(b) of Table 

5.12: (a) banks, 46.4%; (b) thrifts, 25.3%; (c) mortgage banks, 28.3%. 

Step 2: the NMN retail distribution without credit unions was derived from row 6 of Table 5.12: 

(d) banks, 41.5%; (e) thrifts, 23.0%; (f) mortgage banks, 35.6%. 

Step 3: in order to determine the relationship between the two distributions, the NMN 

distribution was divided by the HMDA distribution to obtain: (g) banks, 0.894; (h) thrifts, 0.909; 

(i) mortgage banks, 1.257.78 

Step 4: the 2005 HMDA distribution without credit unions was obtained from row 1(b) of Table 

5.13: (j) banks, 45.2%; (k) thrifts, 18.6%; (l) mortgage banks, 36.3%. As can be seen by 

comparing the 2001 and 2005 HMDA distributions from Steps 1 and 4, there has been a shift in 

HMDA-reported loans toward mortgage banks and away from thrifts. 

Step 5: in order to obtain an estimate of the NMN distribution that reflects this shift in HMDAreported loans toward mortgage banks, the ratios from Step 3 are applied to the 2005 HMDA 

distribution from Step 4 producing an updated estimate of the retail distribution of mortgage 

originations based on NMN data:79 (m) banks, 39.2%; (n) thrifts, 16.4%, and (o) mortgage 

banks, 44.4%. 

Step 6: credit unions, which accounted for 6.3% of retail originations (see row 3 of Table 6.13), 

are included in the analysis to produce the following 2005 estimated NMN distribution of retail 

loans: (p) banks, 36.8%; (q) thrifts, 15.4%, (r) mortgage banks, 41.6%; and (s) credit unions, 

6.3%. 

 

78 As explained earlier, the fact that this mortgage banker figure is greater than 1 indicates that HMDA 

underestimates the retail origination share of mortgage banks (relative to banks and thrifts). 

79 Applying the Step 4 ratios produces a retail distribution that sums to greater than one (1.029), so the resulting 

figures for banks, thrifts, and mortgage banks had to be divided by 1.029 to obtain the figures reported in Step 5. 

 5-55 
Table 5-13. Distribution of Mortgages Originated by Lenders, 2005 

Commercial Bank Thrift Mortgage Bank Credit Union Total 

1. 2005 HMDA Data $1,201,500,000 $494,000,000 $965,400,000 $54,600,000 $2,715,500,000 

 (a) % Distribution 44.2% 18.2% 35.6% 2.0% 100.0%

 (b) % Distribution W/O 

 Credit Unions 45.2% 18.6% 36.3% 100.0%

2. Adjust HMDA Data to be 

 Consistent With 2005 Originations $1,366,316,332 $561,764,684 $1,097,829,203 $62,089,781 $3,088,000,000

3. Estimated Lender (Non-broker) $418,156,777 $171,926,299 $335,987,143 $62,089,781 $988,160,000

 Originations 

 (a) % Distribution 42.3% 17.4% 34.0% 6.3% 100.0%

4. NMN Wholesale Mortgages -- -- -- -- 

 (a) % Distribution 

5. Estimaterd Non-Wholesale Mortgages -- -- -- -- 

 (W/O Credit Unions) (#2-#4) 

 (a) % Distribution 

6. Retail Distribution Based on 

 Adjusted NMN Data (see above) $364,091,496 150,998,301 $410,980,423 62,089,781 $988,160,000

 (a) % Distribution 36.8% 15.3% 41.6% 6.3% 100.0%

7. Retail Dsitribution Based on 

 HMDA Data (From #3) $418,156,777 $171,926,299 $335,987,143 62,089,781 $988,160,000

 (a) % Distribution 42.3% 17.4% 34.0% 6.3% 100.0%

Notes: Row 2 increases the amounts in row 1 by the ratio of total mortgage originations ($3,088,000,000) to 

 HMDA-reported originations ($2,715,500,000). This adjustment for HMDA under coverage assumes that the 

 four lender groups have the same HMDA coverage rate. 

As can be seen from rows 6 and 7 of Table 5.13, the two estimated retail (non-broker) 

distributions of loans among the four lender groups for 2005 are as follows: 

 NMN-Based Distribution HMDA-Based Distribution

Banks 36.8% 42.3% 

Thrifts 15.4% 17.4% 

Mortgage Banks 41.6% 34.0% 

Credit Unions 6.3% 6.3%

Total 100.1% (rounding) 100.0% 

These two retail distributions will be used below, with the NMN-based distribution being the 

base case. 

 5-56 
Table 5-14 reports the data for the baseline case of a 22.8% share of mortgage 

originations for small lenders. This baseline case uses the "share of stock approach" and 

assumes that small mortgage banks originated $146.8 billion during 2005, or 65.1% of all 

originations by small lenders (including credit unions). The estimates for retail originations by 

each lender group are also included in the table -- first based on the 2005 HMDA Distribution 

and second based on the Adjusted NMN Distribution (which is derived above in Steps 1-6). 

These additions allow the computation of the "Small Lender Share" of originations for each 

separate industry. The estimated origination shares for small businesses range from 13.8% 

(HMDA-Based Distribution) to 15.9% (Adjusted NMN Distribution) for banks, from 7.2% to 

8.2% for thrifts, and from 43.7% to 35.7% for mortgage banks. The rather wide range for 

mortgage banks is due to the estimated origination share for mortgage banks being significantly 

higher under the Adjusted NMN Distribution (41.6%) than under the "HMDA-Based 

Distribution" (34.0%). Given that the estimated amount for small mortgage banks is fixed in this 

table (at the base case of $146.8 billion), the share for small mortgage banks is necessarily lower 

when retail originations by all mortgage banks are estimated using the Adjusted NMN 

Distribution (35.7%) than when using the HMDA distribution (43.7%). The small business 

shares for banks and thrifts are much lower than the small business share for mortgage banks, 

and they also exhibit much less variation between the HMDA-Based and Adjusted NMN 

Distributions. 

 5-57 
Table 5-14. Lender Originations Under Different Distributions, 2005 

I. Share of Stock Approach- Disaggregated 

Projected Originations 

Small Lenders All Lenders: HMDA Distribution All Lenders: Adjusted Distribution 

$ % $ % Small Lender $ % Small Lender 

Billions of Total Billions of Total Share Billions of Total Share 

1. Banks 57.9 25.7% 418.157 42.3% 13.8% 364.091 36.8% 15.9%

2. Thrifts 12.4 5..5% 171.926 17.4% 7.2% 150.998 15.3% 8.2%

3. Mortgage Banks 146.8 65.1% 335.987 34.0% 43.7% 410.980 41.6% 35.7%

4. Credit Unions 8.4 3.7% 62.090 6.3% 13.5% 62.090 6.3% 13.5%

5. All 225.5 100.0% 988.160 100.0% 22.8% 988.160 100.0% 22.8%

 

II. Share of Stock Approach- Aggregated

Projected Originations 

Small Lenders All Lenders: HMDA Distribution All Lenders: Adjusted Distribution 

$ % $ % Small Lender $ % Small Lender 

Billions of Total Billions of Total Share Billions of Total Share 

1. Banks 72 29.8% 418.157 42.3% 17.2% 364.091 36.8% 19.8%

2. Thrifts 14.5 6.0% 171.926 17.4% 8.4% 150.998 15.3% 9.6%

3. Mortgage Banks 146.8 60.7% 335.987 34.0% 43.7% 410.980 41.6% 35.7%

4. Credit Unions 8.4 3.5% 62.090 6.3% 13.5% 62.090 6.3% 13.5%

5. All 241.7 100.0% 988.160 100.0% 24.5% 988.160 100.0% 24.5%

 

Note: See text for explanation of "HMDA Distribution" and "Adjusted Distribution". 

 The above small business estimates, based on mortgage origination activity, are higher 

than the Census-Bureau-based estimates reported earlier based on revenue data. According to 

the Census of Business, small banks account for 4.9% of bank revenues, compared with 15.9% 

of mortgage originations based on the disaggregated share of stock approach combined with the 

adjusted NMN distribution. Under the same assumptions, the estimate of the small business 

share for thrifts was 8.2%, also higher than the Census-Bureau-based estimate that small thrifts 

account for 3.7% of thrift revenues. 

The estimates of the small business share for mortgage banks exhibit much greater 

variation, due to the wide variation in projected originations for small mortgage banks (from 

$80.3 billion to $160.3 billion). However, the range from 35.7% (Adjusted NMN Distribution) 

to 43.7% (HMDA Distribution) for the base case of $146.8 billion probably represents a 

 5-58 
reasonable range for the small business share of retail originations by mortgage banks; of course, 

it is recognized there is some uncertainty here. These small business estimates for mortgage 

banks are considerably higher than the Census-Bureau-based estimate that small businesses 

account for 6.7% of the revenue of the Real Estate Credit Industry (which includes mortgage 

banks). Finally, the estimate of the small business share for credit unions is 13.5%, which is less 

than the 32.2% figure from the Census Bureau -- obviously, those credit unions engaged in 

mortgage activity are larger than the average credit union. 

Chapter 3 includes a small lender share of 22.8% as the base case, with a 20%-26% 

range. If the Census-Bureau-based small business revenue estimates had been used for the 

separate industries, the overall small lender share would have been 7.0% using industry weights 

from the "HMDA-based Distribution", and 7.2% using industry weights from the "Adjusted 

NMN Distribution." Thus, the small lender share used in the baseline projections in Chapter 3 is 

three times any estimate based on revenue data from the Census Bureau. 

Number of Mortgages. The revenue analysis in Chapter 3 is based on dollar volumes, 

so mortgage originations (expressed in dollars) is the appropriate concept for that analysis, as 

explained above. However, certain analyses of regulatory burden and compliance costs are 

based on number of loans (see Chapter 6). Therefore, it is useful to have loan-based percentage 

distributions for the lender groups and their respective small business sectors. Therefore, the 

above 2001 NMN80 and HMDA analysis was repeated but on a loan-number basis rather than a 

mortgage-dollar basis. The following are the two sets of estimates for the percentage shares of 

the number of lender retail (non-broker) mortgages obtained for 2001: 

 

80 In addition to the caveats mentioned in the above analysis based on mortgage dollars, there are additional ones 

when the analysis switches to the number of mortgages. The “share of stock” and “originations-to-stock ratio” 

approaches for estimating the small business share of the dollar-based originations by banks and thrifts relied on the 

outstanding stock of mortgages for those banks and thrifts that did not report any mortgage originations under 

HMDA. The data on the outstanding mortgage stock were only available on a dollar basis (i.e., not available on a 

number-of-loans basis). Thus, the estimation techniques for the small bank and thrift percentages of the number of 

loans expressed loans as a share of outstanding mortgage dollars, rather than as a share of outstanding mortgage 

loans. In addition, the NMN data for wholesale mortgages were also only available on a dollar basis. However, 

NMN data on both dollar volume and number of loans were available for combined wholesale and retail 

originations. In addition, HMDA data (both dollar volume and number of loans) were available for NMN’s lenders. 

Thus, average loan amounts for banks, thrifts, and mortgage banks were estimated using those NMN and HMDA 

data, producing the following results (with HMDA data in parentheses): $144,038 ($140,751) for commercial 

banks; $178,578 ($169,427) for thrifts; and $135,123 ($138,817) for mortgage banks. As can be seen the NMN and 

HMDA data provide somewhat similar results. The average loan amounts from the NMN data are used here, as they 

place a greater weight on wholesale lending than the HMDA data. 

 5-59 
 NMN-Based Distribution HMDA-Based Distribution

Banks 41.1% 44.8% 

Thrifts 19.5% 20.3% 

Mortgage Banks 31.0% 26.5% 

Credit Unions 8.4% 8.4%

Total 100.0% 100.0% 

In the base case,81 the small business share of the number of lender (non-broker) loans was 

25.6%, which was almost six percentage points greater than the 2001-derived small business 

share (20%) of the dollar amount of mortgages originated by lenders. This meant that during 

2001 small lenders originated loans of lower average amounts than large lenders. In the base 

case, and assuming the Adjusted NMN Distribution (rather than the HMDA Distribution), the 

small business share of loans for each of the lender groups in 2001 were as follows: (1) 19.0% 

for commercial banks; (2) 12.3% for thrifts; (3) 41.6% for mortgage banks; and (4) 29.1% for 

credit unions. 

The above 2001 data, combined with 2005 data from HMDA and some of the 2005 

dollar-based results reported above, were used to estimate the 2005 retail distribution of loans 

among lenders and the corresponding 2005 small business percentages. This was done as 

follows: Step 1: the above 2001 small lender percentages based on numbers of loans were 

divided by the 2001 small lender percentages based on dollars of originations, yielding the 

following ratios: (a) banks, 1.62; (b) thrifts, 1.36; (c) mortgage banks, 1.14; and (d) credit unions, 

1.33. Step 2: the ratios in Step 1 were multiplied by the 2005 small lender percentages based on 

dollars to obtain the following 2005 small lender percentages based on numbers of loans: (a) 

banks, 25.8%; (b) thrifts, 8.2%; (c) mortgage banks, 40.8%; and (d) credit unions, 21.9%. Step 3:

the 2005 HMDA-based retail distribution of the number of loans was obtained (similar to the 

approach in row 3(a) of Table 5.12), yielding: (a) banks, 42.1%; (b) thrifts, 14.9%; (c) mortgage 

banks, 34.1%; and (d) credit unions, 8.9% Step 4: to obtain an NMN-based retail distribution of 

the number of loans in 2005, lender-specific ratios of the 2001 NMN-to-HMDA-based retail loan 

distributions were applied to 2005 HMDA-retail loan distribution from Step 3 to obtain the 

following 2005 estimate of the NMN-based retail distribution of the number of loans: (a) banks, 

37.9%; (b) thrifts, 14.1%; (c) mortgage banks, 39.2%; and (d) credit unions, 8.9%. Step 5: the 

overall small lender share of the number of loans was obtained by multiplying the four small 

lenders shares from Step 2 by the four retail market shares from Step 4, to obtain 29.3% for the 

overall NMN-based small lender share of loans originated. Thus, the small lender share based 

 

81 The 2001 analysis was based on a disaggregated, origination-to-stock ratio approach with small mortgage bank 

originations of $85.783 billion. 

 5-60 
on numbers of loans (29.3%) is 6.5 percentage points greater than the small lender share based 

on dollars of loans (22.8%) 

To conclude, the following are the two sets of estimates for the percentage shares of the 

number of lender retail (non-broker) mortgages obtained for 2005: 

 NMN-Based Distribution HMDA-Based Distribution

Banks 37.9% 42.1% 

Thrifts 14.1% 14.9% 

Mortgage Banks 39.2% 34.1% 

Credit Unions 8.9% 8.9%

Total 100.0% 100.0% 

III.B.5.f. Transfers as a Share of Total Revenue: Lenders 

Section II.B of this chapter included an analysis relating Census-Bureau-based historical 

information on broker revenue to broker revenue projected by applying a percentage origination 

fee (e.g., 1.75%) to the broker share of mortgage originations. Because practically all broker 

revenue derives from the origination fee, the two revenue figures (historical and fee-based) 

matched reasonably well. Such would not be the case for lenders because lenders, such as banks, 

earn a substantial portion of their revenues from non-mortgage-origination-related activities. 

Even mortgage banks -- the lender group that most focuses on single-family mortgages -- earn 

substantial revenue from servicing mortgages and from their secondary market activities, as well 

as from their multifamily and other businesses. Still, it would be interesting to relate the revenue 

transfers from the RESPA rule to available information about industry revenues. 

III.B.5.f.(1) Commercial Banks 

As discussed in Section B.1 above, it is estimated that commercial banks earned $496.9 

billion in 2004, with small businesses earning $24.35 billion (4.9%) of that revenue. These 

revenue estimates can be compared with the expected revenue transfers from banks under the 

RESPA rule. As discussed in Section III.B.5.c above, projected transfers for lenders as a group 

are $1.85 billion (11% savings rate) to $2.35 billion (a 14% savings rate), assuming a 1.75% 

origination fee. As shown in Table 5-14, commercial banks are estimated to account for 36.8%-

42.3% of lender retail originations. Assuming the low end ($1.85 billion) of the transfer range 

for lenders, the commercial bank share of transfers would be $0.680-$0.782 billion; assuming the 

high end ($2.35 billion) of the transfer range, the commercial bank share of transfers would be 

$0.865-$0.995 billion. Using the high-end transfer figure for all lenders ($2.35 billion), the 

estimated revenue transfers for banks due to the GFE are 0.17%-0.20% of the $496.9 billion of 

 5-61 
bank revenues in 2004. These GFE transfers are based on $2.4 trillion in mortgage originations; 

the transfers can be placed in the context of year 2004 by multiplying them by 1.15, which is 

equal to mortgage originations in 2004 ($2.762 trillion) divided by projected mortgage 

originations ($2.4 trillion). Thus, if the GFE had been in existence in 2004, transfers would have 

been 0.20%-0.23% of bank revenues. These revenue impacts would vary under different 

circumstances; for example, if the average origination fee were 2.0% (1.50%) instead of 1.75%, 

the revenue impacts would be changed by a factor of 1.14 (0.86). Thus, assuming the high-end 

transfer estimate, the revenue impacts for the new GFE on commercial banks would be $0.777-

$0.894 billion with a 2.0% origination fee and $0.583-$0.670 billion with a 1.50% origination 

fee. 

Under the GFE, projected transfers for small lenders are $422-$537 million (see Section 

III.B.5.c). In the base case, small banks account for 25.6% of these transfers from small lenders, 

or $108-$138 million. The estimated revenue transfers are 0.44%-0.57% of the $24.35 billion in 

small bank revenues in 2004. Again, multiplying by 1.15 places the small bank transfers in the 

context of year 2004 (0.51%-0.66%). These revenue impacts on small banks would vary under 

different circumstances; for example, if the average origination fee were 2.0% (1.50%) instead of 

1.75%, the revenue impacts would be changed by a factor of 1.14 (0.86). For estimates of the 

allocation of consumer savings of the GFE by size of firm, see Table A.2. In addition, Table A.2 

shows estimates of the allocation of consumer savings per firm for the GFE. 

III.B.5.f.(2) Savings Institutions or Thrifts 

As discussed in Section B.2 above, it is estimated that thrifts earned $92.5 billion in 

2004, with small businesses earning $3.42 billion (3.7%) of that revenue. As noted above, 

projected transfers for lenders as a group are $1.85-$2.35 billion, assuming a 1.75% origination 

fee. As shown in Table 5-14, thrifts are estimated to account for 15.4%-17.4% of lender retail 

originations. Assuming the low end ($1.85 billion) of the transfer range for lenders, the thrift 

share of transfers would be $0.28-$0.32 billion; assuming the high end ($2.35 billion) of the 

transfer range, the thrift share of transfers would be $0.36-$0.41 billion. Using the high-end 

transfer figure for all lenders ($2.35 billion), the estimated revenue transfers for thrifts due to the 

GFE are 0.39%-0.44% of the $92.5 billion of thrift revenues in 2000. These GFE transfers are 

based on $2.4 trillion in mortgage originations; the transfers can be placed in the context of year 

2004 by multiplying them by 1.15.82 Thus, if the GFE had been in existence in 2004, transfers 

would have been 0.45%-0.51% of thrift revenues. These revenue impacts would vary under 

different circumstances; for example, if the average origination fee were 2.0% (1.50%) instead of 

1.75%, the revenue impacts would be changed by a factor of 1.14 (0.86). Thus, assuming the 

high-end transfer estimate, the revenue impacts for the new GFE on thrifts would be $0.41-$0.47 

billion with a 2.0% origination fee and $0.31-$0.35 billion with a 1.50% origination fee. 

Under the GFE, projected transfers for small lenders are $422-$537 million. In the base 

case, small thrifts account for 5.5% of these transfers from small lenders, or $23-$30 million. 

 

82 The factor, 1.15, is equal to mortgage originations in 2004 ($2.762 trillion) divided by projected mortgage 

originations ($2.4 trillion). 

 5-62 
The estimated revenue transfers are 0.67%-0.88% of the $3.42 billion in small bank revenues in 

2000. Again, multiplying by 1.15 places the small thrift transfers in the context of year 2004 

(0.77%-01.01%). These are rather small effects; readers can gauge the effects of a larger share 

for small thrifts by adjusting the results reported for 5.5% share. Of course, the revenue impacts 

on small thrifts could vary for other reasons. For example, if the average origination fee were 

2.0% (1.50%) instead of 1.75%, the revenue impacts would be changed by a factor of 1.14 

(0.86). For estimates of the allocation of consumer savings of the GFE by size of firm, see Table 

A.2. In addition, Table A.2 shows estimates of the allocation of consumer savings per firm for 

the GFE. 

III.B.5.f.(3) Independent Mortgage Banks 

Under the GFE, the projected transfers for lenders as a group are $1.85-$2.35 billion, 

assuming a 1.75% origination fee. As shown in Table 5-14, mortgage banks are estimated to 

account for 34.0%-41.6% of lender retail (non-broker) originations. Assuming the low end 

($1.85 billion) of the transfer range for lenders, the mortgage bank share of transfers would be 

$0.628-$0.768 billion; assuming the high end ($2.35 billion) of the transfer range, the mortgage 

bank share of transfers would be $0.800-$0.978 billion. These revenue impacts would vary under 

different circumstances; for example, if the average origination fee were 2.0% (1.50%) instead of 

1.75%, the revenue impacts would be changed by a factor of 1.14 (0.86). As discussed in 

Section B.3, the Census category (Real Estate Credit) that includes mortgage banks reports 9,502 

firms with employees, which means that it includes firms in addition to the approximately 1,300 

mortgage banks. Thus, it would be inappropriate to compare the revenue transfers under the new 

GFE with the revenue of the Real Estate Credit category. If revenue data were available for 

mortgage banks, the transfers associated with the new GFE would represent a much higher 

percentage of mortgage bank revenues than they did of commercial bank and thrift revenues. 

This is because mortgage bank revenue is more closely tied to mortgage origination activity than 

is either commercial bank or thrift revenue. 

Under the GFE, projected transfers for small lenders are $422-$537 million. In the base 

case, small mortgage banks account for 65.1% of these transfers from small lenders, or $275-

$349 million. As emphasized earlier, the mortgage bank share of projected small lender transfers 

is subject to some uncertainty. The base case just presented assumes that small mortgage banks 

originated $146.8 billion in mortgages during 2005. While this base case of $146.8 billion is 

probably reasonable, sensitivity analysis can be used to show the range of impacts for mortgage 

banks. If small mortgage banks had originated $160.3 billion in 2005, and given the other 

assumptions of the base case (mainly the disaggregated share of stock approach in Table 5-11), 

small lenders would have accounted for 24.2% (instead of 22.8%) of mortgage originations by 

all lenders, and small mortgage banks would have accounted for 67.1% of originations by small 

lenders. In this case, projected transfers are $447-$569 million for small lenders and $300-$382 

for small mortgage banks. These revenue impacts on small mortgage banks could vary for other 

reasons as well. For example, if the average origination fee were 2.0% (1.50%) instead of 1.75%, 

the revenue impacts would be changed by a factor of 1.14 (0.86). The revenue impacts on small 

mortgage banks would be $314-$398 (instead of $275-$349) million if origination fees are 2.0% 

and $203-$300 million if origination fees are 1.50%. For estimates of the allocation of consumer 

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savings of the GFE by size of firm, see Table A.3. In addition, Table A.3 shows estimates of the 

allocation of consumer savings per firm for the GFE. 

III.B.5.f.(4) Credit Unions 

As discussed earlier, there were 8,801 credit unions in 2005 and the Census estimates that 

7,900 (90%) of them qualify as a small business. Small credit unions account for 22%-32% of 

industry revenue, according to the Census Bureau. But as shown in Table 5-7, only 3,969 credit 

unions reported mortgage originations during 2005. These are the credit unions that are likely to 

be affected by the RESPA rule. HUD estimates that 78% (or 3,097) of these are small credit 

unions and that they account for 13.9% of industry mortgage originations. 

Under the GFE, the projected transfers for lenders as a group are $1.85-$2.35 billion, 

assuming a 1.75% origination fee. As shown in Table 5-14, credit unions are estimated to 

account for 6.3% of lender retail originations (including credit unions). The credit union share of 

transfers would be $0.116-$0.148 billion.83 While most credit unions are not engaged in 

mortgage activity, one can still compare the transfer estimates with industry revenue. Based on 

Census Bureau data, it is estimated that industry revenue was $44.8 billion during 2004. The 

estimated revenue transfers ($0.116-$0.148 billion) for credit unions due to the GFE are 0.26%-

0.33% of the $44.8 billion of credit union revenues in 2004. These GFE transfers are based on 

$2.4 trillion in mortgage originations; the transfers can be placed in the context of year 2004 by 

multiplying them by 1.15 (see above). Thus, if the GFE had been in existence in 2004, transfers 

would have been 0.30%-0.38% of credit union revenues. 

Under the GFE, projected transfers for small lenders are $422-$537 million. As shown in 

Table 5-14, small credit unions account for 3.7% of the transfers from small lenders, or $16-$20 

million. The estimated revenue transfers are 2.92%-3.72% of the $14.430 billion in small credit 

unions revenues in 2004. Again, multiplying by 1.15 places the small credit union transfers in 

the context of year 2004 (3.36%-4.28%). These revenue impacts on small credit unions would 

vary under different circumstances; if the average origination fee were 2.0% (1.50%) instead of 

1.75%, the revenue impacts would be changed by a factor of 1.14 (0.86). For estimates of the 

allocation of consumer savings of the GFE by size of firm, see Table A.3. In addition, Table A.3 

shows estimates of the allocation of consumer savings per firm for the GFE. 

For a discussion of the competitive impacts of the RESPA reform on lenders, see Section 

VIII.B of Chapter 3. See Chapter 6 for a description of the compliance costs and regulatory 

burden of the rule. 

 

83 These revenue impacts on small mortgage banks could vary for several reasons. For example, if the average 

origination fee were 2.0% (1.50%) instead of 1.75%, the revenue impacts would be changed by a factor of 1.14 

(0.86). 

 5-64 
III.B.5.g. Workers Engaged in Mortgage Origination Activity at Lender Firms 

Chapter 6 examines compliance costs and regulatory burden associated with the RESPA 

rule. The number of employees engaged in mortgage origination activity is needed for that 

analysis, for example, to estimate the number of employees that would need to be trained in the 

new RESPA rule. Employment data for banks, thrifts, and credit unions were reported earlier in 

Sections III.B.1, III.B.2, and III.B.4, respectively. The problem with those data is that a 

substantial portion of bank, thrift, and credit union employees are not engaged in mortgage 

origination activities – thus, using those data would substantially overstate the number of 

employees affected. As explained in Section III.B.3, data for mortgage banks are included in the 

much larger “Real Estate Credit” industry, which means that estimates of workers employed by 

mortgage banks are not available from that source. Thus, some method is needed to estimate the 

number of lender employees that are engaged in mortgage origination activities. 

Section II.B.3 discussed estimates of the “the average number of loans originated per 

employee in the broker industry” – one being 20 loans per employees based on Olson’s 2004 

survey and approximately 23 (22.7) loans per employee based on Olson’s 2002 survey. This 

section applies these and other estimates to the projected originations of commercial banks, 

thrifts, and mortgage banks, and credit unions in order to estimate the number of employees 

working on origination activities in these industries. While the method is subject to a number of 

caveats, it provides a starting point for examining the compliance and regulatory impacts that are 

related to the number of employees. The following steps are involved in developing the 

estimates. 

(1) Section II.B.3 projects that brokers originate 20 loans for each worker they employ, 

based on Olson’s 2004 survey. As a starting point, the analysis below will assume that lenders 

also originate at 20 loans per worker but will also consider lower (18) as well as higher estimates 

(23). The lower lender estimate (18) is consistent with the widely held belief that brokers are 

more efficient than lenders and also errs on the side of including more employees, which seems 

preferable to estimating too few employees being affected by the RESPA rule. The higher lender 

estimate (23) reflects Olson’s 2002 estimate for brokers. Sensitivity analyses can show the 

effects of alternative assumptions. 

(2) Lenders are expected to originate $960 billion of the projected $2,400 billion in 

mortgage originations; in terms of the number of loans, lenders are expected to originate 

5,000,000 of the 12,500,000 mortgages originated. As explained in Section III.B.5.d, these loans 

can be distributed based on the Adjusted Distribution or the HMDA Distribution (in parenthesis) 

as follows: (a) 7,402 commercial banks, 1,895,141 (2,104,947) mortgages; (b) 1,279 thrifts, 

702,811 (745,528) mortgages; (c) 1,287 mortgage banks, 1,958,443 (1,705,920) mortgages; and 

(d) 3,969 credit unions, 443,605 (443,605) mortgages. 

(3) As estimate of “20 loans per employee” would yield 250,000 lender (non-broker) 

employees originating mortgages. Applying the 20 average to (a)-(d) yields the following 

estimates of employees engaged in mortgage origination activity (i.e., at the retail level) for the 

four lender groups: (e) commercial banks, 94,757 (105,247); (f) thrifts, 35,141 (37,276); (g) 

mortgage banks, 97,222 (85,296); and (h) credit unions, 22,180 (22,180) – for a total of 250,000 

employees. The 94,757 (105,247) employees for banks represent 5.8% (6.4%) of total bank 

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employment (1,631,328) during 2004. The 35,141 (37,276) employees for thrifts represent 

14.1% (15.0%) of total thrift employment (248,962) during 2004. Employment data are not 

available for mortgage banks, as well as for credit unions that originate mortgages. 

(4) As discussed in Section III.B.5.a, there are 4,426 small banks, 641 small thrifts, 1,077 

small mortgage banks (in base case), 3,097 credit unions, or 9,241 small lenders. As explained 

in Section III.B.5.d, it is estimated that these small lenders, as a group, account (in the base case) 

for 29.3% of all mortgage loans originated by lenders. Section III.B.5.d also reported the small 

business shares of mortgages for each of the four industries. The following small business shares 

are based on the Adjusted Distribution of mortgages: (i) 25.8% for commercial banks; (j) 11.2% 

for thrifts; (k) 40.8% for mortgage banks; and (l) 21.9% for credit unions. As explained in 

Section II.B.3, these “shares of originations” can be used as a proxy for “shares of employees.” 

Applying these percentages to the Adjusted Distribution figures in (e)-(h) suggests that the 

following numbers of employees in small firms: (m) 24,446 for commercial banks; (n) 3,921 

for thrifts; (o) 39,974 for mortgage banks; and (p) 4,858 for credit unions. Thus, it is estimated 

that 73,198 workers84 are employed in mortgage origination activity by the small banks, small 

thrifts, small mortgage banks, and small credit unions. 

(5) There is a degree of uncertainty with the above estimates – in addition to the issues 

discussed above in Section III.B.5.d concerning the overall size of the non-broker share and the 

difficulty of allocating non-broker originations among different lender groups, there is the issue 

of whether the “20 employees per worker” is appropriate for lenders. As discussed in Section 

II.B.3, the average number of loans per worker in the broker industry was approximately 23 in 

2002. It also may be appropriate to use a smaller number for lenders such as “18 employees per 

loan”. In addition to the uncertainty due to the variation of this figure within the broker 

industry, there is also the uncertainty associated with applying a relationship from the broker 

industry to the lender industry. Sensitivity analysis can be used to show the effects of alternative 

assumptions. If the broker average (23 loans per worker) were used instead of 20, the estimated 

number of employees engaged in origination activity in the lending (non-broker) industry would 

be 217,391 employees. If a smaller average (say 18) were used, the estimated number of 

employees engaged in origination activity in the lending (non-broker) industry would be 277,778 

employees. In these two cases, employees in small lender firms would total 63,651 and 81,331, 

respectively (assuming that the small lender share is 29.3%). 

There is also the issue of the overall volume of mortgage activity. Projecting a higher 

origination volume of 15,500,000 (instead of 12,500,000) and assuming 20 loans per worker 

would increase the number of lender (non-broker) loans to 620,000 and the number of employees 

to 310,000, assuming the lender market share remained at 40 percent. If the lender share dropped 

to 35 percent (more consistent with recent high volume origination years), then the number of 

lender (non-broker) loans would rise moderately from 5,000,000 to 5,425,000 and the number of 

employees from 250,000 to 271,250. In this case, employees in small lender firms would total 

 

84 73,198 non-broker employees in small firms divided by 250,000 total non-broker employees gives the overall 

small business percentage of 29.2793%( which is the 29.3% reported in the text). 

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79,420 (assuming that the small lender share is 29.3%). If 23 loans per worker were used,85 the 

number of employees engaged in mortgage origination activity would be 269,569 assuming a 40-

percent lender origination share and 235,870 assuming a 35-percent-lender origination share. In 

these two cases, employees in small lender firms would total 78,983 and 69,110, respectively 

(assuming that the small lender share is 29.3%). 

IV. Settlement and Title Services 

Section IV.A provides an overview of the title insurance industry, including a review of 

the literature on market issues related to the title industry. Section IV.B then presents Census 

Bureau data on the economic characteristics of each of the four industry sectors: title and 

settlement agents (B.1), lawyers (B.2), escrow firms (B.3), and large title insurers (B.4). The 

Census Bureau data are important because they report the proportion of each title and settlement 

group that is small business. Section IV.B.5 includes several technical analyses related to 

estimating (a) the share of industry revenue among the separate title and closing-related sectors 

and (b) the small business share of revenue for the title industry as a whole. That section 

compares Census and industry data, derives the revenue share for each of the four title and 

settlement groups, and describes the consumer savings and revenue transfers under the new GFE 

for each group (including transfers from small firms). 

The American Land Title Association (ALTA) claims there are no significant potential 

savings in title-related fees. This Regulatory Impact Analysis disagrees with ALTA. Readers 

are referred to Section V.B of Chapter 2 for anecdotal and statistical evidence that title fees can 

be reduced. That more detailed discussion in Chapter 2 is summarized in Step (8) of Section 

VII.E.1 in Chapter 34. As discussed in Chapter 2, there is substantial evidence that title, 

closing, and other settlement fees can be reduced. 

IV.A. Overview of Industry 

Residential real estate transactions are consummated at settlement. Settlement is where 

sellers actually convey their property to buyers and where loan documents are executed. In the 

absence of rescission, transactions are final at the end of the settlement process. Settlement 

agents orchestrate the settlement process. In some parts of the country settlement agents are 

usually attorneys; in other parts they are not. In California and other Western states, settlement 

agents are commonly referred to as escrow agents. Clients are frequently referred to settlement 

agents by loan originators and real estate agents, but this is not always the case. 

The range of specific services provided by settlement agents varies widely. At a 

minimum, settlement agents facilitate the consummation of transactions by performing a variety 

of clerical functions. One such clerical function is the assembly of documents provided by 

various other parties for review and signature. For example, in routine sales transactions, 

 

85 Based on Olson’s survey data, the number of loans per worker in the broker industry increases during higher 

volume years such as those characterized by high levels of refinance activity. Thus, it may be appropriate to 

consider even higher “loan per worker” figures. 

 5-67 
settlement agents may amend a generic deed to reflect the details of the conveyed property and 

conveyor. As a further example, after receiving loan documents from lenders, settlement agents 

explain the documents to borrowers and show borrowers where to sign. A second clerical 

function performed by settlement agents is arranging the collection and disbursement of monies 

from various parties including lenders, real estate agents, purchasers and sellers. In addition to 

these clerical functions that settlement agents almost always perform, there are many other 

functions settlement agents frequently perform as part of the settlement process.86 Most of these 

additional functions relate to establishing title and can be categorized as title services. The 

extent to which settlement agents perform various title services varies widely across the states 

and even within states. Title services often performed by settlement agents include title research 

and examination, arranging the purchase of title insurance, and title insurance sales. Title 

services often performed by settlement agents also include underwriting title insurance and 

occasionally participating in the maintenance of private of repositories of title records known as 

title plants. Since title services constitute an important component of the bundle of services 

provided by many settlement agents, it is useful to more fully describe what title services entail. 

In order to convey real estate, one must have title to it. In simpler language, in order sell 

real estate, one must own it. Purchasers of real estate should make sure that the seller actually 

owns what is being sold. Furthermore, purchasers should verify that the property they are 

buying is not encumbered by undeclared liens or problematic easements. Moreover, real estate 

lenders usually require these verifications. 

The first step in making these verifications is to perform a title search. The American 

Land Title Association (ALTA) describes a title search as follows: “A title search includes 

examining records in the offices of recorders or registers of deeds, clerk of courts and other 

municipal and county officials, or similar records housed in a title company’s ‘title plant’.”87 In 

general, for every real estate transaction requiring settlement, settlement agents either perform a 

title search themselves, or cause a title search to be performed by another party. In cases where 

the title search is performed by another party, it is commonly performed by a party called an 

abstracter. The abstracter produces a report, routinely called an abstract, which summarizes the 

history of the property “including all conveyances, interest, liens, and encumbrances that affect 

title to the property.”88

The results of the title search are used to assess the title’s marketability. This assessment 

is not an ultimate, unequivocal determination of marketability because there are a variety of 

problems that can affect marketability that are not shown in public records.89 These problems 

may include forged deeds, claims against a property by a previously undisclosed heir, recording 

 

86 Because many settlement agents are experts in real estate issues, there are many functions that they may perform 

that are related to real estate, but are not directly part of the settlement process. For example, a settlement agent who 

is a real estate attorney may be involved with zoning petitions. Such activity is not part of the ordinary settlement 

process. 

87 ALTA, “Facts About Title Insurance,” http://www.alta.org/govt/issues/02/respapack_1108e.htm. 

88 Blacks Law Dictionary, Seventh Edition, 1999, page 9. 

89 The determination can be ultimate and unequivocal under the Torrens System; however, the Torrens System is 

only very rarely used in the United States. 

 5-68 
errors, and mechanics liens which were not recorded at the time the title search was performed. 

Because marketability cannot be unequivocally known, real estate lenders generally require title 

insurance.90 ALTA describes title insurance as insurance that “provides protection against 

problems affecting real estate titles.”91 There are two types of title insurance: lender’s insurance 

and owner’s insurance. Lender’s insurance protects the lender in the event that a title problem 

surfaces; lender’s insurance remains in force until the insured lender’s lien is removed, either 

because the property is sold or because it was refinanced. Owner’s insurance protects the 

owner’s equity in the event that a title problem surfaces. Title insurance is typically required by 

lenders in both purchase and refinancing transactions; premiums can be substantially lower in the 

case of refinancing. A key reason why premiums are lower in the case of refinancing is that the 

title search process is frequently less exhaustive than it is with purchases. As discussed below, 

some private firms are begining to experiment with less expensive alternatives to title insurance. 

Title insurance is issued by regulated insurance carriers. Title insurance carriers are 

generally large, “monoline” companies that specialize in issuing title insurance policies. As 

insurance carriers, title insurers are generally exempt from federal prohibitions against collusive 

activity by the McCarran-Ferguson Act. In exchange for receiving this exemption, the carriers 

are subject to regulation by state insurance commissions. The state insurance commissions 

generally seek to ensure that rates are not unfairly discriminatory, excessive, or inadequate. 

Premiums most be sufficiently large, or adequate, to ensure that the insurer will be able to satisfy 

future claims without being bankrupted. Various states impose assorted regulatory requirements 

on title insurance carriers. The carriers are heavily regulated in some states, lightly regulated in 

others. Title insurance rates are promulgated by some state insurance commissions, but it is 

more common for carriers to propose rates. In some states proposed rates can be used only after 

explicit approval from the insurance commission; in other states rates can used without explicit 

approval. In these some states, title insurance carriers must allow the insurance commission a 

certain amount of time to review the proposed rates before the proposed rates can actually be 

charged. 

Data from the 2002 Economic Census indicate that the eight largest Direct Title 

Insurance Carriers account for 87.8% of the sector’s revenue. Large title insurance carriers 

include LandAmerica (which owns the Commonwealth Land Title Insurance Company, the 

Lawyers Title Insurance Company, and the Transnation Title Insurance Company), Fidelity 

National Financial (which owns Fidelity National Title and Chicago Title), Stewart Title, First 

American Title Insurance, and Old Republic Title. Title insurance carriers sell their insurance 

through both retail outlets that they directly own in part or in whole, and independent sales 

agents widely known as “title agents.” In 2006, 61% of title insurance sales were channeled 

through non-afflilated title insurance agents.92 

 

90 Home equity lenders generally do not require title insurance and some lenders are willing to accept title insurance 

alternatives as discussed below. 

91 ALTA, “Facts About Title Insurance” http://www.alta.org/govt/issues/02/respapack_1108e.htm. 

92 ALTA, “2006 Market Share by Family and States” http://www.alta.org/industry/06_ALL/2006_market_famstatedis.xls. 

 5-69 
Settlement agents arrange to have title insurance purchased on behalf of lenders and 

owners. In addition to arranging the purchase of title insurance, settlement agents frequently 

arrange its sale. Settlement agents who double as title agents can sell directly. Alternatively, 

settlement agents can sell title insurance indirectly through affiliated business arrangements. 

For example, a settlement agent may purchase title insurance from a spouse or other close family 

member. Some settlement agents do not sell title insurance, either directly or indirectly. These 

settlement agents purchase title insurance from title agents with whom they have no affiliation 

other than that of being a customer. 

ALTA reports that title insurance premiums “go towards searching, examining and 

maintaining title records [i.e. title plants], resolving or clearing title defects, attorney fees and 

other costs associated with defending a lender or homeowner against title-related issues, and the 

payment of actual claims.”93 Many of these costs relate to underwriting; the costs of searching, 

examining, and maintaining records are underwriting costs. Title insurance carriers bear these 

underwriting costs when they sell their policies to lenders and homebuyers directly, without the 

use of an independent title agent, and when they sell their policies through “limited-service 

agents” whose primarily role is that of marketing title insurance products.94 In general, when 

title insurance carriers do not sell directly and do not use limited-service agents, they do not bear 

the costs of underwriting. Rather, the carrier’s agent does the underwriting and is compensated 

for doing so by means of a sales commission. Sales commissions constitute about half of the 

total expenses incurred by title insurers.95 

As with most insurance, title insurance is frequently sold by agents who are compensated 

through sales commissions that are based on the premiums the agent generates. Typical 

commission rates for property and casualty insurance are approximately 20% of gross premiums. 

Commission rates for title insurance are much higher, approximately 80% gross premiums.96 

Most states do not regulate title insurance commission rates.97 There are two explanations for 

this difference in commission rates. First, title insurance agents do perform costly underwriting 

tasks for which they must be compensated. Second, title insurance carriers do not market their 

products directly to their customers; rather, they market them to their sales agents, otherwise 

known as title agents. This practice is akin to the “reverse competition” that pervades the credit 

insurance industry and is blamed for causing excessive rates.98 Competition for title agents leads 

title insurance carriers to increase the commissions they pay to title agents. Lipshutz describes 

this practice as follows: 

 

93 ALTA, “Facts About Title Insurance,” http://www.alta.org/govt/issues/02/respapack_1108e.htm. 

94 Lipshutz describes limited-services agents as follows: “ The idea here was that an insurer could retain an agent 

whose sole function was to market (quaintly dubbed ‘solicit’ in [Pennsylvania’s] enabling statute) title insurance, 

pay that agent a reduced commission, and conduct the insurance functions itself or through one of its full-service 

agents. Various objections to this form of commission as a thinly disguised kickback have been raised over the 

years, and its popularity has waned.” Lipshutz, The Regulatory Economics of Title Insurance, p. 41. 

95 Lipshutz, The Regulatory Economics of Title Insurance, p. 35. 

96 Lipshutz, The Regulatory Economics of Title Insurance, p. 37. 

97 The exceptions are Connecticut, Florida, New Mexico, South Carolina, and Texas. 

98 Consumers Union, Credit Insurance: The $2 Billion a Year Rip-Off, 1999. 

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[T]he relationship between local real estate professionals and the remote title insurer 

head office remains tenuous at best. Accordingly, customer loyalty runs primarily to 

the producer [i.e. title agent], not the insuring company as such, and so competition 

among insurers for established producers is intense...and in the competition to attract 

these agents, the primary competitive tool is the commission rate. As institutional 

loyalties throughout the country have eroded, switching among insurers by agents has 

become more common and has led to the perception that the prevailing commission 

rates have crept upward. 

Title insurance commissions add substantially to the cost of real estate settlement (also 

see discussion in Chapter 2). According to a survey of title insurance rates in a California, 

insurance companies are quoting rates averaging approximately $750 for a $250,000 

refinancing.99 Assuming a commission rate of 80%, as suggested by Lipshutz, the sales 

commission received by title agent on this policy is $600.100 The title agent is frequently also 

the settlement agent. Unless the settlement agent purchases the insurance through an unaffiliated 

title agent, this $600 commission provides the settlement agent, or his business affiliate, with 

additional income that is not itemized at settlement on the HUD-1 and is seldom otherwise 

disclosed to the borrower. 

In addition to potentially receiving income from title insurance sales commissions, 

settlement agents can receive income through assessing a variety of different charges on 

purchasers, sellers, and refinancers. In many cases the largest fee levied by settlement agents is 

billed as either an “attorney fee ” or “settlement fee” or, in the case of California, an “escrow 

fee.” These fees are frequently supplemented with fees such as “document preparation fees,” 

“notary fees,” “endorsement fees,” and other miscellaneous fees. If the settlement agent hired an 

abstracter, the settlement agent will likely charge an “abstract fee.” Many of these fees 

compensate the settlement agent for specific expenses incurred. Such is the case when a 

settlement agent passes through the cost of obtaining an abstract. 

While title insurance commissions are higher than those associated with most other types 

of insurance, loss payments are relatively small. In 2001 the industry paid claims totaling 4.7% 

of revenue; between 1992 and 2001 claims averaged 5.2% of revenue. In contrast, the 

corresponding figures for property and casualty insurers paid claims of 87.3% and 79.6%.101 

The American Land Title Association (ALTA) explains the low pay-out rates as follows: 

Title companies make substantial efforts to correct and eliminate all problems before 

insuring. That’s why most homeowners don’t have to experience title problems. To 

use an analogy, saying that low claims means we don’t need title insurance is like 

 

99 Consumers Union, California Title Insurance Rates Remain High, 2003. 

100 As explained in a recent article, Ken Harney quotes James R. Maher of the American Land Title Association 

(ALTA) as saying the average national “split” of the premium charged at closings is 70-72 percent to the title or 

settlement agency, and the balance to the title insurance company. The splits go as high as 92.5 percent to the agent 

or attorney and just 7.5 percent for insurance, according to Maher. See Kenneth R. Harney, “How to Save 50 to 60 

Percent on Title Insurance When Refinancing,” Realty Times, June 17, 2002. 

101 A.M. Best, A.M. Best Special Report: Title Insurance and Industry Statistics – 2001, 2002. 

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saying that you don’t need to sterilize the equipment in a hospital operating room 

because of the low incidence of infections.102

An ALTA press release quotes ALTA President James R. Maher stating “the title industry 

spends more than 10 times the amount it pays in claims to perform title searches and cure these 

title problems to avoid claims.”103 The same press release suggests title problems arise in one 

out of every four real estate transactions, but does not describe what the most common problems 

are or how much effort or expense is needed to resolve them. 

Individual settlement and title service providers tend to work within relatively small 

geographic territories. These territories may frequently encompass no more than several 

counties. According to the 2002 ALTA survey 67% of Abstracters and Title Agents operate in 

just one county. Only 16% of them operate in three or more counties. A key reason for this is 

that service providers need to have a detailed understanding of local settlement practices and 

how they vary across individual counties, cities, and towns. Furthermore, individual settlement 

and title service providers frequently need to physically travel to various local government 

offices and title plants to perform title research and record deed and liens. 

Direct title insurance carriers are increasingly investing in computerized title plants and 

many government recording offices are also moving towards digitized title records. 

Technological advances have caused the need for physical travel to decline over recent years. As 

technology continues its advance, it is expected that the need for physical travel will decline even 

further. In a report on direct title insurance carriers, the insurance rating agency A.M. Best 

stated, 

The acquisition and maintenance of title plants is gradually becoming more cost 

effective as the business becomes more computerized. Modern title insurance 

companies feature the computerization of order taking, title search and 

examination, and policy issuance. These advances have permitted companies to 

dramatically increase premium volume capacity with only a modest increase in 

personnel. This capability not only enhances the profitability of the title 

company, but also makes it easier to manage expenses during slow real estate 

markets.104

Providers of settlement and title services are represented by a variety of state and national 

industry organizations. The most prominent national organization is ALTA. ALTA’s 

membership is composed of 2,400 title insurance companies, their agents, independent 

abstracters and attorneys who search, examine, and insure land titles. Many of these companies 

also provide additional real estate information services, such as tax search, flood certification, tax 

filing, and credit reporting services. A second major national organization is the American Bar 

Association Section of Real Property, Probate, and Trust Law. A small sample of the state 

 

102 www.alta.org. 

103 www.alta.org. 

104 A.M. Best, A.M. Best Special Report: Title Insurance and Industry Statistics , 2000, p. 11. 

 5-72 
organizations includes the Escrow Institute of California, the New York Land Title Association, 

and the Massachusetts Conveyancers Association. 

IV.A.1. Reports on the Title Industry 

There are several reports examining various aspects of the title industry. Key findings of 

these reports are summarized below. 

ALTA Abstracter and Title Agent Operations Survey: 2002. This survey was 

conducted by Fetzer-Kraus on behalf of ALTA and queried select ALTA members regarding key 

aspects of their firm. Specifically ALTA members that were either abstracters or title agents 

were queried. There were 286 respondents. The respondents were not geographically 

representative of the distribution of the nation’s population or mortgage market. A relatively 

large number of responses were obtained from the West North Central region; relatively few 

responses were obtained from New England and the Pacific region. Key finding from the survey 

include: 

• Gross revenue and number of orders received are highly correlated. 71% of 

companies that received fewer than 500 orders in 2001 reported revenue of less 

than $250,000. 

• 82% of respondents reported revenue from title insurance. Among these 

companies, sales of title insurance policies accounted for an average of 63% of 

2001 total revenue. 

• 74% of respondents reported revenue from escrow and closing functions. 

Among these companies, escrow and closing function revenue averaged 22% of 

2001 total revenue. 

• 56% of respondents reported revenue from abstracts. Among these companies, 

abstracts accounted for an average of 43% of 2001 total revenue. 

• 6% of respondents reported revenue from practicing law. Among these 

companies, revenues from practicing law accounted for an average of 27% of 

total 2001 revenue. 

• One-fourth of respondents reported having three or fewer full-time employees. 

One-fourth of respondents reported fifteen or more fulltime employees. 

• One-third of respondents wrote business for only one title insurance carrier in 

2001. Another 23% of companies wrote business for two insurers. 

A.M. Best Special Reports on the Direct Title Insurance Carriers.

105 These annual 

reports provide an industry overview and current and historical financial details about the title 

 

105 A.M. Best, A.M. Best Special Report: Title Insurance and Industry Statistics – 2001, 2002. 

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insurance industry. Unlike the ALTA report discussed above, which focused on title agents and 

abstracters, these reports focus on direct title carriers. Highlights from the most recent report 

include 

• Largely because of low mortgage rates and the high level of refinancing, the title 

industry experienced its sixth consecutive year of profitability in 2001. 

• The title industry has unique characteristics compared with property/casualty 

insurers. Title insurance revenue is more volatile and reflects regional and 

national economic conditions. The industry’s revenues are largely tied to 

mortgage rate trends, but the industry’s cost structure is relatively fixed. 

• The industry is evolving rapidly because of consolidation through mergers and 

acquisitions, entry into new lines business and international expansion. 

• Both property / casualty insurers and title insurers must physically produce 

policies, but the processes and requirements have significant differences. A 

typical property/casualty policy might involve filling out a few blanks on a 

form, while the title policy might require the transcription of a complex legal 

description unique to the insured property. 

• In property and liability insurance lines, agents’ commissions are generally in 

the range of 10% to 25% of premium on policies that agents write. In title 

insurance, the agent retains a much larger proportion of the amount charged. 

Arguably, because of the high level of effort title agents put into underwriting, 

commissions for title agents should be more properly described as agent’s 

retention or agent’s labor or work charges. 

• The title insurance activity of search and examination generally is carried out 

locally, because the public records to be searched are usually only available 

locally. This activity might be done by directly owned branch operations or title 

agents. 

• The typical property/casualty insurance company operates with a loss and lossadjustment expense ratio between 60 and 80 percent depending on its lines of 

business. This compares with a typical title insurance company’s loss and lossadjustment expense ratio of 5 to 10 percent. 

Industry Report Card: US Mortgage and Title Insurers. 106 This Standard and Poor’s 

report examines not only the title industry in general, but also investigates specific firms. 

• In contrast with the mortgage insurance market, the title insurance market excels 

when mortgage rates decline. While refinancing frequently results in the 

 

106 Standard and Poor’s, Industry Report Card: U.S. Mortgage and Title Insurers, 2003. 

 5-74 
cancellation of mortgage insurance, it results in issuance of additional title 

insurance. 

• Title insurers have been expanding into other product-lines, many of which are 

related to real estate. Regardless of the level of revenue generated from nontitle 

segments, however, much of it is real estate related and therefore sensitive to 

interest rates. 

• Title companies have sought to rationalize expenses through investments in 

infrastructure and information technology. 

• Some title insurers have increased their direct sales operations by increasing 

investments in personnel and infrastructure to meet the increasing title order 

volume associated with the currently low interest rates. 

• S&P concludes that HUD’s proposed RESPA rule “could place downward 

pressure on title rates.” (page 2) 

Government Reports. The GAO107 examined in more detail issues which had been 

previously raised (in an earlier GAO report) as worthy of further study, concerning the nature of 

competition in the title insurance industry and the impact on consumers. Section V.B.2 of 

Chapter 2 contains a full review of this report. 

IV.A.2. Radian Lien Protection 

Although it ultimately was disapproved and not allowed to go forward, the recent attempt 

by Radian to offer a less expensive title insurance product is an interesting case study about the 

title industry. Therefore, it is summarized below. 

Some private sector financial institutions believe title insurance premiums are too high. 

Against considerable opposition from existing title insurers, Radian Guaranty introduced a title 

insurance alternative called Radian Lien Protection (RLP). RLP was designed to take the place 

of traditional lenders’ title insurance. Radian claimed its lien protection product was comparable 

to traditional title insurance, but cost several hundred dollars less. Specifically, Radian stated: 

Radian Lien Protection was developed as an innovative, cost-saving product that 

can reduce closing costs by more than 50 percent on refinances, second mortgages 

and home equity loans. A mortgage insurance pool policy, Radian Lien 

Protection is designed to provide coverage for a range of losses arising from 

defaults, including losses due to undisclosed liens.108, 109 

 

107 U.S. General Accountability Office, Title Insurance: Actions Needed to Improve Oversight of the Title Industry 

and Better Protect Consumers (Report to the Ranking Member, Committee on Financial Services, House of 

Representatives), April 2007. 

108 http://www.radiangroupinc.com/RadianGroup/MortgageInsurance/RadianGuaranty/products/ 

mi_products_radianlien.asp 

109 Unlike traditional title insurers, Radian would not have attempted to correct any title problems that it discovered. 

 5-75 
Radian believed its lien protection product could save consumers an estimated $3 billion 

per year.110 After selling its product for a brief period prior to receiving explicit regulatory 

approval from any state insurance commissioner, Radian suspended sales pending explicit 

regulatory approval.111 Prior to its suspension, about half a dozen lenders have used RLP and 

the investment banking firm Lehman Brothers accepted RLP as an alternative to title insurance 

on asset-backed and mortgage-backed securities. Fannie Mae was also reportedly “looking a

alternatives to traditional title insurance.

t” 

 

112 Both the Community Financial Resource Center and 

the National Community Reinvestment Coalition supported Radian’s efforts to reduce the cost of 

title insurance. 

The mechanics of the RLP have been described as follows: 

RLP is a form of mortgage guaranty pool insurance pool insurance with additional 

coverage for mortgage defaults involving undisclosed liens. Coverage for loans 

insured with RLP is intended to provide 100% of the lender’s loss upon a borrower 

default up to a per loan limit of $650,000. Additionally, the total aggregate amount of 

coverage for mortgage guaranty losses for a lender’s pool of loans is equal to 0.01% 

of the total aggregate sum of loan balances delivered under the policy. The total 

aggregate amount of coverage for losses from undisclosed liens on a lender’s pool of 

loans is equal to 0.5% of the total aggregate sum of loan balances delivered under the 

policy....Radian would offer RLP as an alternative to lenders title insurance in only 

certain situations: 1) for home refinancings, 2) for second liens, and 3) for home 

equity loans. In the purchasing of properties, the primary option for lenders would 

continue to be traditional lenders title insurance.113

RLP proved to be quite controversial and the subject of two expert technical analyses. 

One of these analyses was very much in favor of RPL; the other was very much against it. 

Liu finds that RPL could save refinancing borrowers in California an average of $272 

dollars. He estimates that for mortgages under $650,000, the average refinancing title insurance 

was $548 in 2001, and the average RLP fee would have been $276. Applying the average saving 

of $272 to certain assumption regarding future mortgage activity in California, Liu estimates that 

RPL could increase consumer surplus in the state by at least $1.38 billion. Liu finds nothing 

negative associated with RLP. 114

110 The Legal Description, April 1, 2002. 

111 The Radian Group Inc. failed to get regulatory approval to sell Lien Protection in California. In July, 2003, the 

head of California’s Department of Insurance, John Garamendi, upheld a ruling barring Radian from offering the 

product in California. See Jody Shenn and Erick Bergquist, “Clearer Signs of Shakeout in the Mortgage Business,” 

American Banker, January 5, 2004, pp. 1, 18. 

112 The Legal Description, May 16, 2002. 

113 Paul Liu, “The Increase in Consumer Surplus From Radian Lien Protection: The California Market,” 2003. 

114 Paul Liu, “The Increase in Consumer Surplus From Radian Lien Protection: The California Market,” 2003. 

 5-76 
In sharp contrast, Lipshutz argues that consumers would actually pay more for RPL than 

they would for traditional title insurance. He states that Liu’s calculations were not based on the 

discounted rates that many California title insurers offer to many refinancing borrowers under 

certain circumstances. For example, Lipshutz states that California title insurers offer lower 

rates in conjunction with electronic order submissions. He argues that if Liu considered 

currently existing discounts such as the electronic order submission discount, then he would have 

found that traditional title insurance costs between $25 and $50 less than RLP, depending on the 

insured amount. Lipshutz also argues that the adoption of RLP would slowly damage the quality 

of title records because these records would be searched, and corrected, less often. Lipshutz 

further argues that the adoption of RLP would hinder efforts to collect child support payments 

from delinquent parents because homes encumbered by child support could be refinanced even if 

the lien is not removed.115

Interestingly, Fidelity National Financial, the nation’s largest title insurance carrier, was 

planning to offer a new insurance product that essentially mimiced RLP and cost as little as $275 

per transaction.116 This suggested that when confronted with the possibility of competition, title 

insurers can reduce the cost of their products. Fidelity’s action was also interesting given the 

vigorous resistance the title industry exhibited towards Radian’s product. While Ernest Smith of 

Fidelity believed the firm’s new product was not suitable in every situation, according to Jody 

Shenn of American Banker, Smith believed that the new product made sense for certain lenders, 

particularly those planning to self-insure against title risk or refinancing existing loans.117

IV.A.3. Literature Review of Market Issues in the Title Industry 

Chapter 2 provides a thorough literature review of market issues in the title industry. 

Rather than repeating that review here, readers are referred to section V.A of Chapter 2. 

IV.A.4. Can Title Fees Be Reduced? 

Chapter 2 discusses the issue of whether there is any “fat” or excess in title fees; that is, is 

there any potential for the new GFE to reduce title fees? While all third-party fees are the 

subject of that discussion, the focus is on title and settlement fees, which make up the bulk of 

third party fees.118 ALTA claims there are no significant potential savings in title-related fees. 

 

115 Nelson Lipshutz, “Consumer Impacts of Substituting Radian Lien Protection Coverage For Refinance Lender’s 

Title Insurance,” 2003 

116 According to Inside Mortgage Finance, unlike RLP, the Fidelity National Financial product would not have 

required the borrower to certify that no liens had been placed on the financed property and would not have required 

the borrower to be sufficiently creditworthy. Inside Mortgage Finance, June 6, 2003, page 9. 

117 Jody Shenn, “Title Insurer Transforms Debate Over Lien Policies”, American Banker, June 18, 2003, page 1. 

118 As explained in Chapter 3, this analysis uses $1,435 as the cost of closing and title services, based on industry 

data; this $4,435 represents 72.5% of all third party fees. A Progressive Policy Institute report (see Ham and 

Atkinson, 2003) estimated typical closing and title costs on a $150,000 home purchase to be $1,650 (consisting of 

$350 for title search, $800 for title insurance, and $500 for settlement fees); no source was provided for this 

estimate. Title and closing fees averaged $1,336 in 2001 based on FHA data. The 2006 Bankrate survey reported 

$1,256 in title and closing fees. 

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This Regulatory Impact Analysis disagrees with ALTA. Readers are referred to Chapter 2 for 

both anecdotal, industry, and statistical evidence on this issue. As discussed in Chapter 2, there 

is substantial evidence that the title industry is non-competitive and that title, closing, and other 

settlement fees can be reduced. This Regulatory Impact Analysis reviews studies showing the 

existence of relatively high fees and a wide variability of prices in this industry. 

 Rather than repeating that discussion here, readers are referred to Section V.B of Chapter 

2 for evidence that title fees are excessive and can be reduced. That more detailed discussion in 

Chapter 2 is summarized in Step (8) of Section VII.E.1 in Chapter 3. 

IV.B. Description of Economic Data 

The National Technical Information Service of the Bureau of Commerce classifies most 

settlement and title service providers in one of four possible categories: Title Abstract & 

Settlement Offices (NAIC 541191), Offices of Lawyers (NAIC 541110), Direct Title Insurance 

Carriers (NAIC 524127), or Other Activities Related to Real Estate (NAIC 531320). In some 

states Offices of Lawyers are the sole provider of settlement services. In many states Offices of 

Lawyers play a limited role in providing settlement services; in these states the work is done 

primarily by Title Abstract & Settlement Offices or by the escrow agents that are classified in the 

Other Activities Related to Real Estate category. Due to data limitations, it is not known what 

percentage of residential real estate settlement and title services are provided by the various types 

of firms. 

Along the same lines as Section III for lenders, this section uses data from the Census 

Bureau to describe the characteristics of the four title and closing-related industries. The Census 

Bureau data cover industry characteristics such as the number of firms, payroll, revenue, and 

small business shares. Data relating to Title Abstract & Settlement Offices are presented first, 

beginning with the Census Bureau data and proceeding to data collected by ALTA (Subsection 

IV.B.1). Then data relating to Offices of Lawyers are presented (IV.B.2), followed by data 

relating to Other Activities Relating to Real Estate (IV.B.3) and Direct Title Insurance Carriers 

(IV.B.4). 

After the basic characteristics of each industry are discussed, Subsection IV.B.5 provides 

several technical analyses that incorporate industry data to estimate an overall small business 

share for the title and closing industry. The revenue transfers for each title and closing industry 

are then examined for that industry as a whole and for small businesses within that industry. 

Where possible, the transfers are expressed on a per firm basis and as a percentage of industry 

revenue. Numerous sensitivity analyses are presented in Subsection IV.B.5 to reflect the 

uncertainty around the various estimates. 

IV.B.1. Title Abstract and Settlement Offices 

The National Technical Information Service defines Title Abstract and Settlement 

Offices as “establishments (except offices of lawyers and attorneys) primarily engaged in one or 

more of the following activities: (1) researching public land records to gather information 

relating to real estate titles; (2) preparing documents necessary for the transfer of title, financing 

 5-78 
and settlement; (3) conducting final real estate settlements and closings; and (4) filing legal and 

other documents relating to the sale of real estate. Real estate settlement offices, title abstract 

companies, and title search companies are included in this industry.” Census Bureau data from 

the year 2004 indicate Title Abstract and Settlement Offices employed 79,819 people at 8,008 

firms. These firms had an estimated annual revenue of $8.9 billion. Thus, in 2004 Title Abstract 

and Settlement Offices averaged 10.0 employees per firm and had estimated annual revenue of 

$1,113,369. The majority, 66.4%, of Title Abstract and Settlement office employees worked at 

firms employing fewer than 100; 39.2% worked at firms employing fewer than 20. In addition to 

the 8,008 Title Abstract and Settlement Office employer firms, according to the Census Bureau 

there were 6,203 Title Abstract and Settlement Office nonemployer firms. While the data do not 

provide many details about these non-employer firms, Census methodology ensures that 

nonemployers meet a reasonable definition of small.119

Census Bureau data from 2002 provide somewhat more detailed information about Title 

Abstract and Settlement Offices. In 2002 the sector employed 65,833 people at 6,252 firms. 

These firms had annual revenue of $7.6 billion. In contrast with the revenue estimate for 2004, 

the 2002 revenue figure is taken directly from Census publications. As is the case in 2004, Title 

Abstract Offices averaged approximately 10.5 employees per firm. Average revenue per firm 

was $1,215,678, which, after adjusting for inflation, 120 is $1,270,038, approximately equal to the 

2004 estimate of $1,113,369. In addition to the 6,252 Title Abstract and Settlement Offices that 

had employees in 2002, there were an estimated 5,778 Title Abstract and Settlement Offices 

nonemployer firms.121

IV.B.1.a. Census Bureau Data for Small Businesses: Title Abstract and Settlement Offices 

The greater financial detail provided in the 2002 data makes the 2002 data better suited 

for the task of determining how many firms meet the SBA’s definition of small. The 2002 size 

standard for Title Abstract and Settlement Offices is $6 million. The Census Bureau, however, 

reports data for firms earning less than $5 million and firms earning $5 million to $10 million. 

Of the firms in this sector that had employees, it is estimated that 96.9% had annual revenues 

less than $6 million and are considered small by the SBA. Of all firms in this sector (employer 

and nonemployer), 98.5% had annual revenues less than $6 million and are considered small by 

the SBA.122 These small businesses account for 49.8% of the revenue earned by the Title 

Abstract and Settlement Offices sector.123

 

119 See technical appendix for details of this methodology. 

120 See technical appendix for details on inflation adjustment. 

121 See technical appendix for estimation details. 

122 The percentage of all firms that are small according to the SBA’s definition is derived by adding the estimated 

5,778 nonemployer firms to the 5,094 employer firms operating the entire year that meet SBA size standards and 

dividing by the sum of all 5,258 employer firms operating the entire year and the number of nonemployer firms. 

123 The revenue share of small firms is calculated by adding the revenue earned by employer firms operating the 

entire year considered small by SBA standards, $3,552,142,000, to the estimated revenue earned by nonemployer 

firms, $297,785,000, and dividing by the total revenue across all firms, which is equal to the estimated revenue of 

 5-79 
“Very Small” Title and Settlement Firms. An alternative method of characterizing a 

small business is by the number of employees. Although this is not the Small Business 

Administration’s method of defining a small business, Census data on firms with less than 

twenty employees reveals the characteristics of those firms that are “very small.” In 2004, 

employer firms, employing less than twenty employees, accounted for 90.5% of all employer 

firms in the Title Abstract and Settlement industry and received 35.1% of its (estimated) revenue. 

Including nonemployer firms would yield that “very small” firms constitute 94.7% of all Title 

Abstract and Settlement firms in 2004 and earn 37.4% of the industry’s (estimated) revenue. 

Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. For the year 2004, 

adding the 79,819 employees in employer firms to 6,203 (which assumes one worker for each 

non-employer firm) yields 86,022 as one estimate of the number of workers in the industry. The 

2002 data on the percentage of employees in small employer firms (60.0%) can be applied to the 

2004 data to arrive at an estimate for the number of workers in small firms. Multiplying the 

number of employees (79,819) by 0.600 yields an estimated 47,913 employees in small employer 

firms in 2004 which, when added to 6,203 (which assumes one worker for each non-employer 

firm), yields 54,116 workers in small firms in 2004. Small firms represent 99.2% of all industry 

firms in 2004. 

IV.B.1.b. Comparisons of Census Bureau Data with ALTA Data 

It is interesting to compare the Census Bureau data with data collected by ALTA through 

a voluntary survey of its title agent and abstracter members. There is at least one major 

difference between the universe covered by the ALTA survey and the universe categorized by 

the Census Bureau as Title Abstract and Settlement Offices. Not all Title Abstract and 

Settlement Offices are represented by ALTA. For example, lawyers who provide settlement 

services may chose to be represented by the American Bar Association Section of Real Property, 

Probate, and Trust Law instead of ALTA.124 A relatively small number of title agents and 

abstracters, 286, participated in the 2002 survey conducted by Fetzer and Kraus. The Census 

Bureau reports there were 6,252 title abstract and settlement agents in 2002, so the response rate 

for the ALTA survey seems relatively low. That being said, ALTA believes the survey results 

provide “a credible and reliable snapshot of abstracter and title agent company characteristics.” 

Like the Census data, the survey data indicates a preponderance of small firms: 86% of the 

respondents had twenty-five or fewer employees; and 91% of the respondents had revenues of $3 

million or less. (The survey did not include a greater than $5 million category.) The 

respondents derived their revenue from four main sources: selling title insurance, performing 

abstracts, performing escrow and closing functions, and practicing law. The largest source of 

revenue for most firms came from selling title insurance. Among the 286 survey participants, 

title insurance revenue accounted for 63% of 2001 revenue. 

 

nonemployer firms plus $7,433,115,000 earned by all employer firms operating the entire year. Note that the 

nonemployer firms account for only five percent of the sector’s total revenue. 

124 Alternatively, they may be represented by both groups or neither group. 

 5-80 
IV.B.2. Office of Lawyers 

The National Technical Information Service defines Other Activities Related to Real 

Estate as “offices of legal practitioners known as lawyers or attorneys (i.e., counselors-at-law) 

primarily engaged in the practice of law.” Many, if not most, of these offices do not earn a 

significant portion of their revenues from providing residential real estate settlement services. 

Unfortunately, due to data limitations, it is not possible to know how many Offices of Lawyers 

are extensively involved in residential real estate settlement. 

Census Bureau data from the year 2004 indicate Offices of Lawyers employed 1,122,723 

at 166,704 firms. The majority, 68.9%, of those employed by Offices of Lawyers worked at 

firms employing fewer than 100; 46.0%, worked at firms employing fewer than 20. In addition 

to the 166,704 Offices of Lawyers employer firms, the Census Bureau reports that there were 

234,849 Offices of Lawyers nonemployer firms. While the data do not provide many details 

about these nonemployer firms, Census Bureau methodology ensures that nonemployers meet a 

reasonable definition of small.125 

Census Bureau data from 2002 provide somewhat more detailed information about 

Offices of Lawyers. In 2002 the sector employed 1,080,428 people at 162,593 firms.126 In 

addition to the employer firms, there were an estimated 218,777 Offices of Lawyers 

nonemployer firms.127

IV.B.2.a. Census Bureau Data for Small Businesses: Offices of Lawyers 

The greater financial detail provided in the 2002 data, makes the 2002 data better suited 

for the task of determining how many firms meet the SBA’s definition of small. The size 

standard effective October 1, 2002 for Offices of Lawyers is $6 million in revenue. Of the firms 

in this sector that had employees, it is estimated that 97.5% had annual revenues less than $6 

million and are considered small by the SBA. Of all firms in this sector (employer and 

nonemployer), 99.1% had annual revenues less than $6 million and are considered small by the 

SBA.128 129These small businesses account for 47.8% of the revenue earned by Offices of 

Lawyers.130 

 

125 See technical appendix for details of this Census Bureau methodology. 

126 All of the Office of Lawyer data are for establishments that are taxable. 

127 See technical appendix for estimation details. 

128 Firms that are small according to the SBA’s definition is derived by adding the estimated 218,777 nonemployer 

firms to the estimated 133,570 employer firms operating the entire year that meet SBA size standards and dividing 

by the sum of all 136,934 employer firms operating the entire year and the number of nonemployer firms. 

129 The 2002 data on the percentage (97.5%) of employer firms that are small can be applied to the 2004 data 

reported in the text to arrive at an updated estimate for the number of small firms. Multiplying the number of 

 5-81 
“Very Small” Lawyer Firms. An alternative method of characterizing a small business 

is by the number of employees. Although this is not the Small Business Administration’s method 

of defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.” In 2004, employer firms, employing less 

than twenty employees, accounted for 95.2% of all employer firms in the Office of Lawyers 

industry and received 38.6% of its (estimated) revenue. Including nonemployer firms would 

yield that “very small” firms constitute 98.0% of all Office of Lawyers firms in 2004 and earn 

42.8% of the industry’s (estimated) revenue. 

Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. For the year 2004, 

adding the 1,122,723 employees in employer firms (from Table 5-51) to 234,849 (which assumes 

one worker for each non-employer firm) yields 1,357,572 as one estimate of the number of 

workers in the industry. The 2002 data on the estimated percentage of employees in small 

employer firms (58.6%) can be applied to the 2004 data to arrive at an estimate for the number of 

workers in small firms. Multiplying the number of employees (1,122,723) by 0.586 yields an 

estimated 657,749 employees in small employer firms in 2004 which, when added to 234,849 

(which assumes one worker for each non-employer firm), yields 892,598 workers in small firms 

in 2004. Workers in small firms represent 65.7% of all industry workers (1,357,572) in 2004. 

As discussed in Chapter 6, not all these workers are engaged in single-family mortgage activity. 

IV.B.3. Other Activities Related to Real Estate 

The National Technical Information Service defines Other Activities Related to Real 

Estate as “establishments primarily engaged in performing real estate related services (except 

lessors of real estate, offices of real estate agents and brokers, real estate property managers, and 

offices of real estate appraisers). Examples of establishments in this industry are: real estate 

escrow agencies, real estate fiduciaries offices, and real estate listing services.” This 

classification of firms is included in this analysis of settlement and title service providers 

primarily because it includes real estate escrow agencies. Real estate escrow agencies are the 

primary provider of settlement and title services in California and other Western states. Many of 

these firms categorized as Other Activities Related to Real Estate do not earn a significant 

portion of their revenues from providing residential real estate settlement and title services. 

Unfortunately, due to data limitations, it is not possible to know how many firms categorized as 

Other Activities Related to Real Estate are extensively involved in residential real estate 

settlement. 

 

employer firms in 2004 (166,704) by 0.975 yields an estimated 162,536 small employer firms which, when added to 

the number of non-employer firms (234,849) in 2004, yields 397,385 small firms in 2004. These small firms 

represent 98.9% of all firms (401,553) in 2004. 

130 The revenue share of small firms is calculated by adding the estimated revenue earned by employer firms 

operating the entire year considered small by SBA standards, $73,799,026,000, to the estimated revenue earned by 

nonemployer firms, $12,477,720,000, and dividing by the total revenue across all firms, which is equal to the 

estimated revenue of nonemployer firms plus $168,013,231,000 earned by all employer firms operating the entire 

year. 

 5-82 
Census Bureau data from the year 2004 indicate that the Other Activities Related to Real 

Estate industry employed 67,274 people at 15,136 firms. These firms had an estimated annual 

revenue of $10.5 billion. Thus, in 2004 Other Activities Related to Real Estate averaged 4.4 

employees per firm and had estimated annual revenue per firm of $691,097. Within the Other 

Activities Related to Real Estate Industry 45.6% of employees worked at firms employing fewer 

than 20. In addition to the 15,136 employer firms from the Other Activities Related to Real 

Estate Industry offices in 2004, the Census reports there were 448,409 nonemployer firms. 

While the data do not provide many details about these nonemployer firms, Census Bureau 

methodology ensures that nonemployers meet a reasonable definition of small.131,132 The 

average annual revenue of nonemployer firms in 2004 was $66,144 (the total revenue was $29.7 

billion). 

Census Bureau data from 2002 provide more detailed information about Other Activities 

Related to Real Estate Industry. In 2002, the sector employed 57,123 people at 13,908 firms. 

These firms had annual revenue of $8.24 billion. In 2002, the Other Activities Related to Real 

Estate Industry averaged 4.1 employees per firm. Average revenue per employer firm was 

$592,371 ($622,006 in 2004 dollars). However, more relevant is the annual revenue per firm of 

firms operating the entire year, which is $831,981 ($873,603 in 2004 dollars). In addition to the 

13,908 employer firms from the Other Activities Related to Real Estate industry in 2002, there 

were 335,115 nonemployer firms. The average revenue of the nonemployer firm in 2002 was 

$65,789 ($69,080 at 2004 prices). The total revenue of nonemployer firms in 2002 was $22 

billion. 

IV.B.3.a. Census Bureau Data for Small Businesses: Other Activities Related to Real Estate 

The greater financial detail provided in the Economic Census of 2002 data make the 2002 

data better suited for the task of determining how many firms meet the SBA’s definition of 

small. The 2002 size standard for Other Activities Related to Real Estate Industry was $1.5 

million in revenue (it was increased to $2 million on July 31, 2006). Although the data are not 

broken down in such a manner as to allow the calculation of the percentage of employer firms 

earning less than $1.5 million, a generous estimation of the number of small businesses can be 

obtained by examining those firms earning less than $2.5 million. 

Firms earning less than $2.5 million represent 95.4% of the firms operating in Other 

Activities Related to Real Estate, account for 46.4% of the payroll, and earn 46.5% of the 

revenue. An insight into size standards can be gained by examining the characteristics of 

employer firms earning less than $2.5 million in 2002: the average number of employees was 3.8 

and the average revenue was $405,107 ($425,374 at 2004 prices). 

 

131 See technical appendix for details of this Census Bureau methodology. 

132 A firm in the Other Activities Related to Real Estate was considered “small” by the SBA if its annual revenue 

was less than $1.5 million. The current size standard for Other Activities Related to Real Estate (as of July 31, 

2006) is $2 million. 

 5-83 
Continuing to use a cutoff of $2.5 million instead of $1.5 million, an upper-bound 

estimate of the proportion of all Other Real Estate firms that are small is calculated to be 99.9%. 

This percentage is derived by adding the 335,115 nonemployer firms to the 8,225 employer firms 

operating the entire year that meet SBA size standards and dividing by the sum of all 8,620 

employer firms operating the entire year and the number of nonemployer firms. These small 

businesses account for 86.9% of the revenue earned by the Other Real Estate Activities Industry. 

“Very Small” Firms. An alternative method of characterizing a small business is by the 

number of employees. Although this is not the Small Business Administration’s method of 

defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.”133 In 2004, employer firms, employing less 

than twenty employees, accounted for 95.6% of all employer firms in the Other Activities 

Related to Real Estate industry, employed 45.6% of its employees, and received 50.3% of its 

(estimated) revenue. Including nonemployer firms would yield that “very small” firms constitute 

99.8% of all firms in the Other Activities Related to Real Estate industry in 2004 and earn 87% 

of the industry’s (estimated) revenue. 

Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. For the year 2004, 

adding the 67,274 employees in employer firms (from Table 5-74) to 448,409 (which assumes 

one worker for each non-employer firm) yields 515,683 as one estimate of the number of 

workers in the industry. The 2002 data on the percentage of employees in small employer firms 

(59.6% from Table 5-76) can be applied to the 2004 data to arrive at an estimate for the number 

of workers in small firms. Multiplying the number of employees (67,274) by 0.596 yields an 

estimated 40,074 employees in small employer firms in 2004. Adding this estimate of 

employees working for small employer firms to the number of nonemployer firms (448,409) 

yields 488,483 workers in small firms in 2004. Workers in small firms represent 94.7% of all 

industry workers (515,683) in 2004. As discussed previously, not all these workers are engaged 

in single-family mortgage-related activity. 

IV.B.4. Direct Title Insurance Carriers 

There are relatively few Direct Title Insurance Carriers, and even fewer large carriers, but 

the large carriers dominate the market. Data from the 2002 Economic Census indicate that the 

four largest Direct Title Insurance Carriers account for 80.9% of the sector’s (estimated) revenue 

and 74.6% of its employees. According to the American Land Title Association’s 2001 

Company Summary, five national families of affiliated title insurance companies accounted for 

87% of the title insurance business written. Despite the dominance of a few large firms, Census 

Bureau data indicate there were 1,959 Direct Title Insurance Carriers in 2004. There are several 

possible explanations for the divergence between the relatively small number of large title 

 

133 Note that one could consider an office of twenty employees “large” compared to our estimate of the average 

number of employees (3.8) working for a firm that met the SBA size standard in 2002. However, the average 

number of employees working for an firm in the Other Activities Related to Real Estate Activities industry in 2004 

is 2.1. 

 5-84 
insurance carriers and the relatively large number of carriers reported by the Census Bureau. 

First, since the title insurance carriers frequently assign underwriting responsibilities to their 

agents, it is likely that some agents who are not really insurance carriers erroneously indicated 

they are title insurance carriers. Second, attorneys and other professionals may warrant the 

merchantability of titles. While such warranties are not title insurance per se, it is possible these 

warrantors erroneously indicated they are title insurance carriers. Third, some of those that 

indicated they are direct title insurance carriers may be relatively unknown, niche players that 

focus on commercial transactions or transactions outside the United States. In 2004, employer 

firms in the Direct Title Insurance Carrier industry employed 75,702 people, had a payroll of 

$4.8 billion, and an estimated annual revenue of $18 billion. Firms with one hundred or more 

employees accounted 2.9% of all employer firms’ but 86.1% of the employees and 92.5% of the 

estimates revenue of employer firms in 2004. 

IV.B.4.a. Census Bureau Data for Small Businesses: Direct Title Insurance Carrier 

Industry 

Census Bureau data from 2002 provide somewhat more detailed information about Direct 

Title Insurance Carriers. In 2002, the sector employed 63,278 people at 1,201 employer firms. 

In contrast with the revenue estimate for 2004, the 2002 revenue figure is not estimated but taken 

directly from the Economic Census. The greater financial detail provided in the Economic 

Census of 2002 makes the 2002 data better suited for the task of determining how many firms 

meet the SBA’s definition of small and what percentage of the industry’s revenue they earn. The 

2002 size standard for Direct Title Insurance Carriers was an annual revenue of $6 million (the 

size standard has since been increased to $6.5 million). It is estimated that employer firms that 

met the SBA’s definition of small accounted for 94.6% of employer firms and 4.8% of its 

revenue.134 Including our estimates of nonemployer firms (135) does not significantly change 

the proportion of the industry that would be considered small by the SBA. Firms earning less 

than $6 million account for 95.2% of all firms but only 4.8% of all revenue. 

“Very Small” Firms. An alternative method of characterizing a small business is by the 

number of employees. Although this is not the Small Business Administration’s method of 

defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.” In 2004, employer firms, employing less 

than twenty employees, accounted for 90.8% of all employer firms in the Direct Title Insurance 

Carrier industry, employed 8.4% of its employees, and received 4.4% of its (estimated) revenue. 

Including nonemployer firms would yield that “very small” firms constitute 91.8% of all Direct 

Title Insurance Carrier firms in 2004 and earn 4.4% of the industry’s (estimated) revenue. 

 

134 To estimate these proportions for employer firms in 2002, the number of firms earning less than $5 million (887 

firms earning a total of $577 million in revenue) to estimates for firms earning between $5 million and $6 million. 

The Economic Census tells us that there were 23 firms earning between $5 million and $10 million with an 

aggregate revenue of $160 million. Assuming that all firms are equally distributed over the range yields five firms 

earning between $5 million and $6 million. In addition, assuming that these firms earn the maximum revenue for 

this range ($6 million) yields an aggregate revenue for firms earning between $5 million and $6 million of $30 

million. Our estimate of the proportion of employer firms that are small is achieved by dividing by the total number 

of firms operating the entire year in 2002. 

 5-85 
Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. To do this, we 

estimate the proportion of employees working for small employer firms using the 2002 

Economic Census data and apply it to the 2004 data. There were 5,702 employees working for 

employer firms (9% of employer firms operating the entire year). We estimate the number of 

employees working for firms earning between $5 million and $6 million, using our estimates of 

the aggregate revenue of these firms ($30 million) and the revenue per employee for firms 

earning between $5 million and $10 million ($124,131). Assuming that this ratio applies to all 

firms within this range, a reasonable estimate is that there were 242 employees employed by 

firms earning between $5 million and $6 million in 2002. Thus, the proportion of employees 

working for small title insurance employer firms in 2002 was 9.4%. 

Multiplying the number of employees (75,702) by 0.094 yields an estimated 7,116 

employees in small employer firms in 2004 which, when added to 135 (which assumes one 

worker for each non-employer firm), yields 7,251 workers in small firms in 2004. Workers in 

small firms represent 9.6% of all industry workers (75,837) in 2004. As noted earlier, industry 

data suggest that Census Bureau data concerning small businesses in the Direct Title Insurance 

Industry are not likely to be accurate. 

IV.B.5. Title and Settlement Industry: Revenue Estimates, Small Business Transfers, and 

Additional Data Considerations 

This section examines numerous technical issues that are important for determining (a) 

the share of revenue among the various sectors of the title and settlement industry and (b) the 

overall small business estimate for this industry. In addition, the section reports the revenue 

impact of the RESPA rule on small title and settlement agents. Unlike Chapter 3, which 

conducted the small business analysis for title and settlement agents as a group, this section also 

conducts the revenue transfer analysis on a disaggregated basis, that is, for each separate sector 

of the industry. Specifically, this section: 

• Determines the overall small business share of the title and settlement industry by 

exploring various methods for weighting the relative importance of each of the 

separate sectors. Several sensitivity analyses are conducted to show the impact on the 

overall small business estimate of different weights for the different sectors. 

(Subsection III.B.5.a) 

• Reports the revenue transfers under the new GFE for separate industry groups and for 

small businesses within each group, and where possible, on a per firm basis and as a 

share of industry revenue. (Subsections III.B.5.b and III.B.5.c) 

When estimating the various industry revenue shares for the different title and settlement 

groups, this section pulls together data from several sources, which introduces some degree of 

uncertainty into the various estimates. In most cases, the discussion below shows the effects on 

key parameters (such as the small business percentage) of a number of alternative approaches. 

This provides the basis for sensitivity analyses when examining the revenue impacts of the new 

GFE on small title and settlement agents. 

 5-86 
IV.B.5.a. Determining the Overall Small Business Share of the Settlement and Title 

Industry 

Table 5-15 provides a summary of information from the Census Bureau for the four 

components of the title and closing industry -- Direct Title Insurance Carriers, Title Abstract and 

Settlement Offices, Offices of Lawyers, and Other Activities Related to Real Estate (such as 

escrow). These data were discussed above in Sections B.1-B.4. Ideally, it would be possible to 

precisely determine the overall proportion of revenue that accrues to small settlement and title 

service providers by combining the information for the four industries presented in Table 5-15. 

However, this is not possible for several reasons. First, it is not possible to know what 

proportion of Offices of Lawyers is primarily engaged in residential real estate settlement. Real 

estate probably accounts for a small portion of the billions in revenues of this industry. Second, 

it is not known what proportion of the firms classified as Other Activities Related to Real Estate 

are primarily engaged in real estate settlement (see Section B.3). Third, the large Direct Title 

Insurance Carriers are involved in many other businesses besides underwriting single-family 

residential title insurance in the United States. For example, they underwrite commercial title 

insurance and foreign title insurance. Some are also involved in businesses such as automobile 

title insurance, employment screening, homeowners insurance, and banking.135 Fourth, since 

approximately 80% of title insurance premiums are paid out as commission, there is a problem 

relating to double counting. In the Census Bureau data, some dollars are counted as revenue for 

both Direct Title Insurance Carriers and the title insurance sales agents that are classified under 

the headings Title Abstract & Settlement Offices, Offices of Lawyers, or Other Activities 

Related to Real Estate. Despite these problems, the analysis below provides a range of estimates 

that probably approximates the small business share of this industry. 

Industry Year

Employer

NonEmployer Total EmployerNonEmployer Total Firms Revenue

2004 1,959 135 2,094 18.09 0.003 18.09

2002 1,201 126 1,327 12.81 0.004 12.81 95.2% 4.8%

2002 8 largest 0 8 11.24 0.00 11.24

2002 20 largest 0 20 11.83 0.00 11.83

2004 8,008 6,203 14,211 8.92 0.33 9.25

2002 6,252 5,778 12,030 7.60 0.30 7.90 98.5% 49.8%

Offices of Lawyers 2004 166,704 234,849 401,553 189.58 13.99 203.57

2002 162,593 218,777 381,370 172.86 12.48 185.34 99.1% 47.8%

2004 15,136 448,409 463,545 10.46 29.66 40.12

2002 13,908 335,115 349,023 8.24 22.05 30.29 99.9% 86.9%

* The small business share is based on data from the 2002 Economic Census and SBA size standards in effective October 

1, 2002. For the first three industries, the small business cut-off was $6 million revenue, for which the Census provided 

data. For Other Activites, the size standard was $1.5 million in revenue, for which data were not available to determine the 

proportion of small buisinesses. Instead, the small business share for Other Activities Related to Real Estate was estimated 

using data on firms earning less than $2.5 million.

Table 5-15. Summary Statistics of Industries in Title and Settlement Services

Number of Firms Revenue ($ billions) Small Business 

Direct Title 

Insurance Carriers

Title Abstract and 

Settlement Offices

Other Activities 

Related to Real 

 

135 Information about these non-title insurance operations is contained in the annual reports of the five major 

carriers. 

 5-87 
As noted above, the title and settlement industry has four components with varying small 

business shares: (a) Direct Title Insurance Carriers (4.8%); (b) Title Abstract and Settlement 

Offices (49.8%); (c) Offices of Lawyers (47.8%); and (d) Other Activities Related to Real Estate 

(86.9%). To obtain an overall small business percentage, one has to weigh the relative 

importance of these four industries, which is particularly difficult given that single-family real 

estate activities may represent a small percentage of an industry such as (c), and that the singlefamily-real-estate-related firms in such an industry may have a different small business make-up 

than the other firms in that industry. There is also the problem mentioned above of the double 

counting of title insurance commissions, rendering it difficult to estimate the revenue of Direct 

Title Insurance Carriers. Because the Direct Title Insurance Carriers industry is dominated by 

large businesses, their treatment in the analysis can significantly affect the overall small business 

percentage for the title and settlement industry. With respect to this issue, this section attempts to 

estimate the share of title and related work done by the Direct Title Insurance Carriers. Because 

there is some uncertainty surrounding the various estimates, sensitivity analyses are provided to 

present a range of estimates. 

Discussion of Direct Title Insurance Carriers Industry Revenue Share Estimates. 

HUD estimated the share of title industry revenue earned from residential transactions by the 5 

large Direct Title Insurance Carriers (DTIC) using information gleaned from their 2005 annual 

reports and SEC filings (form 10-K). Data from the consolidated financial statistics of DTIC 

firms compiled by the American Land Title Association (ALTA) was used for total market 

comparisons, and as the data source for the collection of small regional DTIC firms. The 5 

major DTICs, Fidelity National Title, First American, Land America, Old Republic, and Stewart, 

provided different levels of detail in their reports and filings. To fill in missing elements, a 

number of calculations and assumptions were made as detailed below. HUD estimates that in 

2005, the 5 largest DTICs accounted for 42.6 percent of the $24.8 billion revenue attributable to 

the title and closing process for 16.5 million residential lending transactions. 

This discussion traces the computations for Fidelity National Title as its 2005 annual 

report provided the most complete data among the 5 large DTICs. Some Fidelity National Title 

figures were used as parameters to compute figures for the other DTICs where data were less 

complete. The table below illustrates the firm-by-firm computation for Fidelity National Title. 

Numbers in plain text are copied from the annual report, while numbers in italics are HUD 

calculations. DTICs derive title-related revenue from 3 sources: premiums on title policies sold 

by independent agents, premiums on policies sold directly by DTIC employees (this includes 

what ALTA characterizes as “affiliated agents”); and fees on title-related and closing services 

performed by their employees. In the table, these three sources are: Agent Premiums; Direct 

Premiums; and Title, Escrow and Other Fees. Fidelity National Title was the only DTIC to 

separately report Direct Premiums and Title, Escrow and Other Fees. All companies reported 

Agent Premiums. The other big 4 reported either total revenue or total direct revenue (from 

which the opposing figure could then be derived). The key factor “Direct Premium percent of 

Direct Revenue” for the other big 4 is assumed to be the same 65 percent derived from Fidelity 

National Title (Old Republic reported a figure for Title, Escrow and Other Fees, but as derived 

from its computed figure for direct revenue, the residual appeared to be only the pure insurance 

portion of Direct Premiums, whereas Fidelity’s figure appeared to be similar to a full agent 

premium including agent commissions). 

 5-88 
Although all of the DTICs emphasized the importance of commercial title transactions 

(orders) to the results of their direct operations, only Fidelity provided figures on the number of 

commercial orders and the revenue generated. As shown in the table, Fidelity indicated that 8.1 

percent of direct revenue ($270,000,000 out of $3,347,337,000) and 1.6 percent of direct orders 

(35,000 out of 2,169,656) were commercial. These figures were applied to the other big 4 firms. 

This allows the derivation of direct residential orders (2,134,656) and direct revenue 

($3,077,377,000). Commercial Revenue as a percent of Direct Revenue (8.1 percent) was used 

to derive Commercial Premiums ($176,244,014) and Residential Direct Premiums 

($2,008,748,986). 

 5-89 
Illustrative Computation of DTIC Revenue Share 

Fidelity National Title, 2005 

Revenue $6,111,310,000 

Agent Premiums $2,763,973,000 

Direct Revenue $3,347,337,000 

Direct Premiums $2,184,993,000 

Title, Escrow and Other Fees $1,162,344,000 

Direct Commercial Revenue $270,000,000 

Direct Residential Revenue $3,077,337,000 

Direct Premium percent of Direct Revenue 65% 

Total Direct Orders Closed 2,169,656 

Commercial Orders 35,000 

Residential Direct Orders 2,134,656 

Comm. Orders as Pct of Direct 1.6% 

Average Total Direct Revenue per Order $1,543 

Average Commercial Revenue per Order $7,714 

Average Direct Residential Revenue per Order $1,442 

Commercial Revenue as Percent of Direct 8.1% 

Direct Premiums $2,184,993,000 

Commercial Premiums $176,244,014 

Residential Direct Premiums $2,008,748,986 

Direct Premium per Order 

Average Commercial Premium per Order $5,036 

Average Residential Direct Premium per Order $941 

Average Title, Escrow and Fees per Direct Order $501 

Agent Orders 2,937,217 

Agent Total Revenue $4,234,315,208 

Agent Commissions $2,140,912,000 

Net Agent Premiums $623,061,000 

Agent Title, Escrow and Fees $1,470,342,208 

 5-90 
Total Residential Orders 5,071,873 

Total DTIC Residential Revenue $3,700,398,000 

Total Title Function Residential Revenue $7,311,652,208 

Percent of Title Function Revenue to DTIC 50.6% 

Fidelity reported “fee per direct order” as “almost $1,500”. Based on other data, the figure for 

Average Direct Revenue per Order was $1,543. First American and Land America reported 

figures of $1,472 and $1,657 respectively. Based on the assumption that 75 percent of their 

reported orders closed in 2005, average revenue per order for Stewart was estimated at $1,575. 

The average of these four figures ($1,562) was used as the figure for Old Republic. 

Average Commercial Premium per Order ($5,036) and Average Residential Direct 

Premium per Order ($941) were derived by dividing respective total premium revenues by the 

number of orders. Under the assumption that the average premium per agent order is the same as 

Average Residential Direct Premium per Order (implicit is the assumption that agents do not 

handle commercial orders), the number of Agent Orders (2,937,217) is Agent Premiums 

($2,763,973,000) divided by Average Residential Direct Premium per Order ($941). 

Average Title, Escrow, and Fees per Direct Order ($501) results from subtracting 

Average Residential Direct Premium per Order ($941) from Average Direct Residential Revenue 

per Order ($1,442). Again, assuming that agent orders have the same average cost profile as 

direct residential orders, Agent Title, Escrow, and Fees ($1,470,342,208) is equal to Average 

Title, Escrow, and Fees per Direct Order ($501) times Agent Orders (2,937,217). Added to 

Agent Premiums (displayed broken out between Agent Commissions of $2,140,912,000 and Net 

Agent Premiums of $623,061,000), this figure results in Agent Total Revenue associated with 

title insurance policies issued by Fidelity of $4,234,315,208. 

Total Residential Orders (5,071,873) is the sum of Residential Direct Orders (2,134,656) 

and Agent Orders (2,937,217). Fidelity’s share of Total DTIC Residential Revenue 

($3,700,398,000) is the sum of Direct Residential Revenue ($3,077,337,000) and Net Agent 

Premiums ($623,061,000). Total Title Function Residential Revenue attributable to title policies 

sold directly or through agents by Fidelity ($7,311,652,208) is the sum of Fidelity’s share of 

Total DTIC Residential Revenue ($3,700,398,000), Agent Commissions ($2,140,912,000) and 

Agent Title, Escrow and Fees ($1,470,342,208). Fidelity retained 50.6 percent of the Total Title 

Function Residential Revenue attributable to title policies it sold in 2005. 

As stated above, a similar analysis was performed for the other 4 of the big 5 DTICs 

based on their 2005 annual reports or SEC filings, as well as on data from ALTA on the small 

regional DTICs in 2005. Important figures from the national totals are reported below. 

 5-91 
− Total Residential Orders (a proxy for loan closings): 16,476,713;136 

− Total Residential Orders for “Big 5”: 16,120,486; 

− Average Direct Residential Revenue per Order: $1,459; 

− Residential Direct Premium per Order: $938; 

− Title, Escrow and Fees per Direct Order: $521; 

− Total DTIC Residential Revenue for “Big 5”: $10,573,392,295; 

− Total Title Function Residential Revenue: $24,823,392,649; 

− Percent of Title Function Revenue to “Big 5” DTICs: 42.6 percent. 

The baseline analysis will assume that Direct Title Insurance Carriers account for 43% of 

industry revenues. 

Before proceeding, a few comments should be made about some of the other estimates. 

Consider the Offices of Lawyers category, which had a small business percentage of 47.8%. It 

seems reasonable to assume that lawyers that do single-family real estate are mainly small 

businesses (rather than the large corporate firms), which suggests that the 47.8% substantially 

understates the small business percentage for lawyers doing single-family real estate work. Also 

consider the "other activities" category, which includes escrow firms but also other unrelated 

firms (fiduciaries, multiple listing services, etc.). While this category has a large small business 

share (86.9%), its share of the single-family real estate settlement and closing market is not 

known. Given these issues, HUD assumed that small businesses accounted for 90% of the 

revenue of single-family real-estate-related firms these two industries and that these two 

industries together accounted for one-third of industry revenue remaining after the large insurers. 

The 90% assumption favors small businesses. It is assumed that the "title agent" category, with 

its 49.8% small business share, accounts for the remaining two-thirds revenues (after the large 

insurers). In particular, it is assumed that the remaining 53% of revenue is split 2/3-1/3 between 

the title agent and combined lawyers/other activity industries.137, 138 This results in the following 

distribution of revenues: (a) 43.0% for Direct Title Insurance Carriers; (b) 38.0% for Title 

Abstract and Settlement Offices; and (c) 19.0% for the combined "lawyers" and "other activities" 

categories. Multiplying these revenue shares by the respective small business percentages (4.8%, 

49.8%, and 90.0%) gives 38.1% as the small business estimate for the overall settlement and title 

industry; this is considered the baseline in the analysis below. 

Table 5-16 includes several sensitivity analyses expressing the overall small business 

percentage (first column of data) as a function of the revenue share for Direct Title Insurance 

 

136 The Office of Federal Enterprise Oversight (OFHEO) estimates that originations were $3,120 billion in 2005; 

using an average loan amount of $187,485 from HMDA yields 16,641,336 in loans originated, a figure strikingly 

close to the estimate (16,476,713) derived from the above analysis of title industry reports. In addition, the average 

origination estimate for 2005 from Fannie Mae, Freddie Mac, and the Mortgage Bankers Association of America 

was $3,088 billion, which translated into 16,470,656 mortgages, again practically the same as the 16,476,713 

derived in the text.. 

137 The term “title agent” will frequently be used to refer to the Title Abstract and Settlement Offices industry. 

138 The assumption of a 1/3-2/3 split between title agents and the combined lawyers/other real estate activities 

industries is subject to sensitivity analysis below. For example, an equal split is considered. 

 5-92 
Carriers, or DTIC (see first 3 rows). If the DTIC share of industry revenue is as high as 50%, 

then the small business share of industry revenues falls to 34.0% (see #3). The small business 

share is 42.8% if the DTIC revenue share is 35%. Thus, as the DTIC share increases from 35% 

to 50%, the small business share of industry revenue declines by approximately 9 percentage 

points, from 42.8% to 34.0%. 

Estimated Small 

Business % for $1.35 Billion in $1.79 Billion in $2.5 Billion in

Overall Industry Total Transfers Total Transfers Total Transfers

1. 35% DTIC Share2 42.8% $0.58 $0.77 $1.07

2. BASE CASE: 43% DTIC Share 38.1% $0.51 $0.68 $0.95

3. 50% DTIC Share 34.0% $0.46 $0.61 $0.85

4. Base With 60/40 Split for Title

Agents and Lawyers/ Escrow 39.6% $0.53 $0.71 $0.99

5. Base With 50/50 Split for Title 

Agents and Lawyers/ Escrow 41.9% $0.57 $0.75 $1.05

6. 35% DTIC Share and 

60/40 Split 44.5% $0.60 $0.80 $1.11

Note: Scenarios 1-3 assume a 66/33 split for title agents and lawyers/escrow. Scenarios 4 and 5 assume a 53% share for DTIC.

1

 The $1.35 billion figure corresponds to GFE savings of 7.5% of title and settlement costs while $1.79 billions corresponds to

10% savings in title and settlement costs. The $2.5 billion corresponds to $2.00 per loan savings.

2

 DTIC is Direct Title Insurance Carriers.

Small Business Share of Total

Transfers Under GFE ($ Billions)1

Table 5-16. Sensitivity Analysis of Small Business Revenues in the Title and Settlement Industry

 5-93 
The small business percentage used for the title and settlement industry in the economic 

analysis of the 2002 proposed rule was 80%139 – a figure much higher than the upper end 

(42.8%) of the above range. The proposed rule did not include the effects of the large insurers. 

If the DTIC share is placed at zero in the above analysis, then the small business share is 

63.2%.140 Obviously, excluding large insurers from the analysis (as they were in the economic 

analysis of the proposed rule), overestimates the small business share of the title and settlement 

industry. As explained above, this economic analysis141 attempts to estimate the share of larger 

insurers and provide a more realistic estimate of the small business percentage for the title and 

settlement industry, although one subject to some uncertainty. An additional change since the 

2002 proposed rule is that the Census-based small business share of the Title Abstract and 

Settlement Offices industry fell from 64.1% (1997 Census of Business) to 49.8% (2002 Census 

of Business). Including this effect, as well as zeroing out the DTIC industry, would increase the 

small business share to 72.7 percent. 

IV.B.5.b. Consumer Savings and Transfers under the New GFE: Title and Settlement 

Industry 

Title and Closing Fee Estimates. To estimate savings from the new GFE, one has to 

have a measure of the expected dollar volume of title and settlement activity. As explained in 

Section VII.E of Chapter 3, HUD estimated third party fees using mainly a sample of FHA loans 

and the analysis of industry data from the title industry (see above). The following mean values 

for third party fees are used:142 (a) $350 for appraisal, (b) $25 for credit report, (c) $70 for tax 

service, (d) $15 for the flood certificate, (e) $26 for pest inspection, (f) $58 for survey, and (g) 

$1,435 for title insurance and settlement agent charges. Combined, these charges come to 

$1,979.143 The average price of the first six items is $544 per loan, or 31.5 percent of total 

third-party fees. The title insurance and settlement agent charges average $1,435, or 72.5 percen

of third-party fees, or $17.938 billion in aggregate fees. Third party fees ($24.738 billion) ar

t 

e 

 

139 See Section V.C of Chapter 3 of the Economic Analysis of the 2002 proposed rule for the derivation of the 80% 

estimate. As noted in the text, that estimate did not include the effect of larger title insurers. The analysis in this 

section includes the effect of large insurers. 

140 This results in the following distribution of revenues: (a) 0.0 percent for Direct Title Insurance Carriers; (b) 66.66 

percent for Title Abstract and Settlement Offices; and (c) 33.3 percent for the combined "lawyers" and "other 

activities" categories. Multiplying these revenue shares (a-b) by the respective small business percentages (4.8%, 

49.8%, and 90.0%) yields the overall small business percentage of 63.2 percent. 

141 The term “Economic Analysis” is used throught this document to refer to the Regulatory Impact Analysis and the 

Final Regulatory Flexibility Analysis together. 

142 As explained in Section III.E of Chapter 3, the mean values are taken over all loans; this is why flood, survey, 

and pest inspections may appear low. . 

143 The average price for all third-party fees in the 2002 proposed rule was $1,583, but that did not include pest 

inspections ($26) and surveys ($58). Including these two latter figures yields $1,667,. 

 5-94 
1.03% of total mortgage volume ($2.4 trillion), and title and settlement charges, 0.75%. These 

figures point to the importance of the title and settlement industry in processing mortgages.144 

Chapter 3 (Sections IV, V, and VII) explains how the new GFE will reduce third party 

fees, especially title and settlement fees. Section V of Chapter 2 summarizes the evidence that 

title and settlement fees are too high in today's market and that they could be reduced with the 

new GFE. Chapter 3 provides numerous estimates of consumer savings from the new GFE. Step 

(8) of Section VII.E.1 of Chapter 3 provides support for the projected $200 savings (the “title 

approach”) and the 7.5%-10% savings in title and settlement fees with the new GFE. The 

projections are reasonable given the benefits of the GFE and evidence of excess costs in the 

settlement and closing industry. The GFE with its tolerances and discounting will encourage 

lenders to enter into volume-discount and other business arrangements that substantially reduce 

settlement and closing costs. Techniques such as average cost pricing will also be used to lower 

the costs of producing a mortgage. As discussed above, title and settlement fees are projected to 

total $17.938 billion (assuming $2.4 trillion in originations) – this is the amount that would come 

under the effect of the new GFE. Under the GFE, a 7.5%-10% reduction in title and settlement 

costs would save borrowers $1.35-$1.79 billion (see Section VII.E of Chapter 3). Based on the 

information presented in Chapter 3, these projected consumer savings of title and settlement fees 

are reasonable, if not conservative. 

Because title and settlement fees have the most potential of all third-party fees for 

reduction, Chapter 3 also discuss an analysis of savings from the new GFE based on lowering 

title and settlement fees. This approach (called the ‘title approach”) projects savings in title and 

settlement fees of $150-$200 per loan transaction under the new GFE. Step (8) of Section 

VII.E.1 of Chapter 3 provides evidence supporting the GFE savings. A $150-$200 reduction in 

title and settlement fees from the new GFE would represent aggregate savings of $1.875- $2.50 

billion (assuming 12.5 million loan originations). The analysis below will first focus on the 

savings of 7.5%-10% for the GFE and then key results for the title approach will be discussed. 

Consumer Savings and Revenue Transfers for Title and Settlement Firms Under the 

New GFE. Section VII.E of Chapter 3 conducted analyses with respect to consumer savings in 

title and settlement costs and transfers from title and settlement firms due to the new GFE. The 

first set of estimates ranged from 7.5% to 10.0%, or from $1.35 billion to $1.79 billion, given the 

projection of $17.938 billion in total revenues for the title and settlement industry.145 For the 

case of $1.79 billion in transfers, Table 5-16 show how transfers from small businesses v

depending on the revenue share of Direct Title Insurance Carriers (DTIC). As the DTIC share 

ary 

 

144 As explained in Chapter 3, origination costs were estimated to be 1.75 percent of total mortgage originations, or 

$42.0 billion. Thus, total settlement costs (origination costs and third party fees) are estimated to be $66.738 billion, 

or 2.78 percent of the mortgage amount. (The $66.738 billion includes yield spread premiums paid indirectly by the 

borrower.) 

145 The earlier analysis of the annual reports of major title companies estimated $24.823 billion in residential 

revenues for the title industry, or 0.80 percent of total 2005 mortgage originations ($3.1 billion). In this analysis, 

mortgage originations are projected to fall to $2.4 trillion, which explains why projected title revenues ($17.9 

billion) are less than estimated 2005 title revenues ($24.8 billion). 

 5-95 
increases from 35% to 50%, the small business share of transfers under the new GFE falls from 

$765 million to $609 million, a decline of $156 million. For the case of $1.35 billion in transfers, 

the small business share of transfers falls from $577 million to $459 million, as the DTIC share 

increases from 35% to 50%.146 

The transfers associated with the new GFE can be allocated to the different components 

of the title and settlement industry, subject to the uncertainty discussed earlier. (See Table 5-16.) 

In the case of $1.79 billion in transfers (a 10% fee reduction) and assuming a DTIC share of 

43%, the transfers would be allocated as follows: (a) $770 million for Direct Title Insurance 

Carriers; (b) $680 million for Title Abstract and Settlement Offices; and (c) $340 million for the 

combined "lawyers" and "other activities" categories (hereafter referred to as the lawyer-escrow 

category). In this case, the $682 million in transfers from small businesses is allocated as 

follows: (a) $37 million147 for Direct Title Insurance Carriers; (b) $339 million for Title Abstract 

and Settlement Offices; and (c) $306 million for the lawyer-escrow category. These transfer 

allocations depend importantly on the DTIC share of industry revenue and the split of the 

remaining revenue between (b) and (c). For example, if the DTIC revenue share is 35% (instead 

of 43%) and if remaining industry revenue is split on a 60/40 basis (instead of a 66/33 basis) 

between (b) and (c), then transfers from small title and settlement agents increase moderately to 

$797 million (from $682 million) and are allocated as follows: (a) $30 million for Direct Title 

Insurance Carriers; (b) $348 million for Title Abstract and Settlement Offices; and (c) $419 

million for the lawyer-escrow category. Table 5-17 reports several additional sensitivity 

analyses, some of which will be discussed later. 

In the case of the title approach that projects $150-$200 in savings per loan under the new 

GFE, aggregate savings would be $1.875-$2.50 billion. Using the $200 projection (see Table 5-

17) and the above the base case (DTIC share of 43%), the $2.50 billion savings would be 

allocated as follows: (a) $1,075 million for Direct Title Insurance Carriers; (b) $950 million for 

Title Abstract and Settlement Offices; and (c) $475 million for the lawyer-escrow category. In 

this case, small business transfers would be $0.95 billion, allocated as follows: (a) $52 million 

for Direct Title Insurance Carriers; (b) $473 million for Title Abstract and Settlement Offices; 

and (c) $428 million for the lawyer-escrow category. Under the title approach, small business 

transfers increase from $0.85 billion to $1.07 billion as one reduces the DTIC share from 50% to 

35%. 

IV.B.5.c. Transfers as a Share of Revenue for Industry Components 

The section takes a closer look at the revenue and transfer estimates for the three 

component industry categories. As has been emphasized, the lawyer-escrow group earns a 

substantial portion of its revenues from non-mortgage-origination-related activities. In addition, 

 

146 While data for 35% and 50% are presented, it is likely that the former is too small and the latter, too large. The 

best estimate is 43%, as discussed earlier. The range is presented for sensitivity reasons, given the 43% estimate is 

subject to some parameter assumptions. 

147 As was noted earlier, the Census-Bureau-reported small businesses in this category are probably errors, as title 

insurance companies are large firms. 

 5-96 
as discussed above, it is difficult to estimate the mortgage-related revenues of large title insurers 

because they not only engage in other businesses but their revenue data include commissions that 

are returned to local title agents. Still, it is interesting to relate the revenue transfers from the 

RESPA rule to available information about industry revenues. 

(1) Large title insurers. As discussed in Section IV.B.4 of this chapter, it is estimated 

that large title insurers had revenues of $18.087 billion in 2004 and $12.805 billion in 2002 (but 

as noted above, these revenue figures include amounts that are returned to local title agents as 

commissions). The firms in this industry are large -- in 2002, the top 8 firms accounted for 

87.7% of industry revenue, according to data from the Census Bureau (see Table 5-15). 

Therefore, there is no small business issue with this industry. Various estimates of 

mortgage-related revenues and transfers for the DTIC industry have already been discussed and 

several estimates for both the new GFE are presented in the sensitivity analyses reported in 

Tables 5-17. 

V. Other Third Party Settlement Services 

Other third party settlement services include appraisals, surveys, pest inspections, credit 

reports, tax services and flood plain certifications. This section includes overviews of the 

appraisal (V.A), surveying (V.B), pest inspection (V.C), and credit reporting industries (V.D). 

There is also a description of the economic statistics for each industry, with an emphasis on each 

industry’s share of small business activity. In addition, estimates of the consumer savings and 

revenue transfers from the RESPA rule are developed using the economic statistics represented. 

In each case, the small business share of revenue transfers is highlighted. 

V.A. Appraisers 

V.A.1. Overview of Appraisal Industry 

Real estate appraisers are specialists in the business of assessing the value of real estate. 

The central task for an appraiser is to prepare a written description of the land or real property 

and submit an estimate of its market value. Ideally, a valuation would be based on a careful 

examination of the property itself as well as the surrounding neighborhood and a consideration of 

market trends in the area. The most reliable method of appraising the value of a home is to 

analyze the prices of similar properties (“comparables”) that have been recently sold. However, 

an acceptable appraisal practice is to base the value of real estate on the cost of construction less 

depreciation. 

The appraisal is useful for a wide variety of parties: buyers, sellers, lenders, insurers, 

brokers, and officials of local governments. A potential homebuyer may want a house appraised 

to ensure that the selling price is not inflated beyond what is a normal market price. Property 

owners may hire an appraiser to challenge the assessment of property value by tax assessors. The 

role of the appraiser in the settlement process is to provide a lender with an estimate that would 

allow the lender to verify whether the selling price is high enough to justify the loan requested. 

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Given the potentially conflicting interests in the appraised value of a property, professional ethics 

(Uniform Standards of Professional Appraisal Practice) emphasize the appraiser’s role as an 

objective, independent, and unbiased third party. Every state has an appraiser regulatory law and 

requires that unbiased individuals who have been licensed or certified prepare appraisals. 148 The 

appraisal industry is highly localized. In a recent article in Secondary Marketing Executive, 

Keen argues, “(i)t is not economically feasible to send an appraiser from Atlanta to provide 

services in Birmingham, Alabama. The appraiser may have a lower rate for the actual appraisal, 

but the additional travel expense would consume the rate differential.”149

The introduction of information technology into the appraisal industry may lead to 

significant changes in business practices. The combination of statistical methodology, large data 

sets on housing prices, and advances in computer power allows the estimation of the value of a 

house with information on its location and a few other characteristics. These hedonic pricing 

models, referred to as automated valuation models (AVMs) in the real estate industry, have 

proven useful in supplanting traditional appraisals for home equity and home improvement 

loans. In addition, some lenders make use of AVMs for first mortgages. However, electronic 

appraisals have not been used as significantly for first mortgages, despite their lower cost 

(electronic appraisals range from $2 to $70 while human appraisals range from $200 to $400) 

and convenience (an electronic appraisal can be delivered electronically within a matter of 

minutes while a full appraisal can take up to three weeks to complete and requires the 

homeowner to be on-site). 150 Developing econometric models and expanding databases used for 

AVMs is an ongoing process and may have not reached the point where AVMs are universally 

trusted. However, both technological progress and the expansion of data sets are improving 

automated valuations and they are becoming more accepted in the market. In 2000, ten percent 

of all new originations in the residential mortgage market had an AVM, either in place of or in 

addition to a human appraisal. The number of major AVMs has increased from four in 1998 to 

nine today. When introduced, AVMs were employed only as a tool for quality control but they 

are now being use as the only source of an appraisal in some cases.151 Whether AVMs will be 

able to replace a substantial amount of the work done by appraisers or simply be used as a 

complement to a traditional appraisal is an important issue for the appraisal industry. Secondary 

market agencies will likely play an important role in the future use of AVMs. Freddie Mac, for 

example, is a leading proponent of AVMs, and has contributed to the development of the 

technology. 

 

148 Appraisal Institute, Appraising Residential Properties, 3rd Edition, 1999. 

149 Jeff Keen, “New RESPA Regulations Would Shift More Power to Service Providers”, Secondary Marketing 

Executive, December 2002. 

150 H. Stan Banton, “The Growing Debate Over Appraisal Technology,” Mortgage Banking, October 2002. 

151 RatingsDirect, “As RMBS Issuance Growth Persists, Regulatory Changes and Technological Advances Emerge”, 

Standard and Poor’s, www.standardandpoors.com/ratingsdirect, 23 April 2003. 

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V.A.2. Description of Economic Data: Appraisal Industry 

Census Bureau data from the year 2004 indicate that the real estate appraisal industry152

employed a total of 45,021 people at 15,689 operating firms in the U.S. These employer firms 

had an estimated total annual revenue of $4.96 billion. 153 In 2004, an Office of Real Estate 

Appraisers averaged 2.9 employees per firm with estimated revenue of $316,080 per firm. 

Ninety percent of real estate appraiser employees worked at firms employing fewer than 100 

employees; a vast majority (82%) worked at firms employing fewer than 20 employees. In 

addition to the 15,689 employer firms in 2004, the Census reports that there were 49,802 nonemployer real estate appraisers yielding a total of 65,491 appraisal firms. Most of the nonemployer firms are sole proprietorships. 154 While the data do not provide many details about 

these non-employer firms, Census methodology ensures that nonemployers meet a reasonable 

definition of small. 

Census Bureau data from 2002 provide somewhat more detailed information about the 

Office of Real Estate Appraiser industry. In 2002, 42,040 people were on the payroll of 13,579 

employer firms, compared to 45,021 people working at 15,689 employer firms in 2004. These 

firms generated an estimated annual revenue of almost $5 billion in 2004 and a total revenue of 

$4.6 billion in 2002 ($4.8 billion in 2004 dollars). The average number of employees per firm 

was 3.1 in 2002 compared to 2.9 in 2004. The average revenue per firm in 2002 was $339,620 

($356,610 in 2004 dollars) with an average payroll of $37,024 per employee (almost $38,890 in 

2004 dollars). The 2004 estimates were lower: $316,080 average revenue per firm and average 

payroll of $38,235 per employee. In addition to the 13,579 firms from the Office of Real Estate 

Appraisers that had employees in 2002, the Census recorded 39,727 non-employer firms. In 

2004, the Census reported 49,802 non-employer firms. 

 

152 The Census defines the appraisal industry as follows: “This industry comprises establishments primarily engaged 

in estimating the fair market value of real estate.” 

153 If the average cost for a full appraisal is $350 and the number of appraisals equaled the number of single-family 

originations in 2004, which amounted to 15,873,505 (based on estimates by Fannie Mae, Freddie Mac and the 

Mortgage Bankers Association) then the revenues generated from single-family originations would be $5.6 billion. 

This figures is greater than the estimated revenue. Indeed, one would expect the revenue from single-family loan 

originations to be lesser than the total revenue of the industry. Appraisers earn revenue from commercial and 

multifamily real estate appraisals activities and other revenue-generating activity by appraisers in the residential 

sector (e.g., doing appraisals for local governments as part of their tax assessment activities). In addition, some 

single-family mortgage transactions, such as appraisals for home equity lines of credit or second mortgages, are not 

included in this analysis. There are a few potential explanations for the discrepancy between our estimates of the 

industry’s revenue in 2004. First, our estimate of $5.6 billion from single-family originations may be too large: 

perhaps many appraisers charge a fee of less than $350. For example, a fee of $300 would be consistent with our 

estimated revenue of the real estate appraisal industry using census figures. Another possibility is that the number of 

originations that generate revenue for appraisers is overstated. Some mortgages do not require a traditional 

appraisal. Reducing the number of settlements requiring an appraisal by only 11% would account for the difference 

between the two estimates. Second, it is possible that we underestimated the revenue of real estate appraisers in 

2004. The estimate for 2004 is based on offices’ of real estate appraisal share of “Activities Related to Real 

Estate.” A increase of this share would account for the difference between the two estimates. 

154 See the technical appendix for a definition of nonemployer establishments. 

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V.A.2.a. Census Bureau Data for Small Businesses: Real Estate Appraisal 

An insight into size standards for small business can be gained by estimating the number 

of employees of a firm at the size standard limit. Dividing our size standard of $2.5 million155

by the estimated revenue per employee for 2004 yields an approximate size standard of 2

employees for the appraisal industry in 2004.

3 

 

156 

The greater financial detail provided in 2002 data make the 2002 data better suited for the 

task of determining how many firms meet the SBA’s definition of small. Unfortunately, the 

breakdown of the 2002 Economic Census data by revenue does not allow us to calculate the 

share of firms earning less than $1.5 million (the SBA size standard in 2002) or $2 million (the 

SBA size standard as of 2006). However, a generous approximation of the percentage of small 

businesses can be obtained by calculating the share of firms earning less than $2.5 million. Of 

the total employer firms operating for the entire year, 99.0% had annual revenues less than $2.5 

million, which approximates the SBA definition of small. These small employer firms accounted 

for 75.1% of revenue, 82.8% of employees, and 78.4% of annual payroll. Of all firms in the 

appraisal industry, employer and nonemployer, 99.8% are small.157 158 These small businesses 

account for 83.1% of the revenue earned by the appraisal industry.159

Examining data on industry concentration is an alternative way of understanding the 

extent to which the appraisal industry is characterized by small firms. The four largest firms in 

the appraisal industry account for only 0.2% of establishments, 10% of revenue, and 5% of 

employees. Even the fifty largest firms account for as little as 0.9% of the establishments, 19.8% 

of the revenue, and 12.9% of employees. 

155 Note that the size standard for Real Estate Appraisal in 2002 was $1.5 million and is currently $2 million (since 

July 31, 2006). The larger size standard of $2.5 million is used for consistency with the revenue data from the 

Economic Census of 2002. This will slightly overestimate the proportion of firms that are small businesses. 

156 A similar calculation using 2002 data also yields an alternative definition of small of 23 employees. 

157 The percentage, 99.8 percent, of all firms that are considered small (approximating SBA’s definition of a small 

business) is derived by adding the 39,727 nonemployer firms to the 10,685 employer firms operating the entire year 

that meet the approximation of SBA size standards and dividing by the sum of all 10,791 employer firms operating 

the entire year and the number of nonemployer firms. 

158 The 2002 data on the percentage (99.0%) of employer firms that are small can be applied to the 2004 data 

reported in the text to arrive at an updated estimate for the number of small firms. Multiplying the number of 

employer firms in 2004 (15,689) by 0.99 yields an estimated 15,532 small employer firms which, when added to the 

number of non-employer firms (49,802) in 2004, yields 65,334 small firms in 2004. These small firms represent 

99.8% of all firms in 2004. (As noted in the text, these calculations define a small employer business as an 

employer firm with revenue less than $2.5 million annually.) 

159 The revenue share of small firms (83.1%) is calculated by adding the revenue earned by employer firms in 2002 

operating the entire year that meet an approximation of the SBA standard, $3.2 billion, to the revenue earned by 

nonemployer firms, $2 billion, and dividing by the total revenue across all firms, which is equal to $3.4 billion 

earned by all employer firms operating the entire year plus the revenue of nonemployer firms. The percentage 

small by the SBA definition will be is less than 83.1 percent because the approximation, $2.5 million, of the size 

standard is greater than the size standard itself, $1.5 million. 

 5-100 
Number of 

Establishments

Share of 

Establishments Share of Revenue

Share of Annual 

Payroll ($1,000)

Share of 

Employees

All Firms 13,770 100.0% 100.0% 100.0% 100.0% 

4 Largest Firms 22 0.2% 10.0% 6.4% 5.0% 

8 Largest Firms 30 0.2% 12.9% 8.0% 6.7% 

20 Largest Firms 67 0.5% 16.3% 11.6% 9.7% 

50 Largest Firms 128 0.9% 19.8% 15.7% 12.9% 

Table 5-17. Concentration of Largest Firms 2002: Real Estate Appraisers

 “Very Small” Appraisal Firms. A final method of characterizing a small business is by 

the number of employees. Although this is not the Small Business Administration’s method of 

defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.” In 2004, employer firms, employing less 

than twenty employees, employed an average 2.4 employees, accounted for 98.8% of all 

employer firms in the Real Estate Appraisal industry, employed 82.2% of its employees, and 

received 80.6% of its (estimated) revenue. Including nonemployer firms would yield that “very 

small firms” constitute 99.7% of all Real Estate Appraisal firms in 2004 and earn 86.8% of the 

industry’s (estimated) revenue. 

Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. For the year 2004, 

adding the 45,021 employees in employer firms (from Table 5-58) to 49,802 (which assumes one 

worker for each non-employer firm) yields 94,823 as one estimate of the number of workers in 

the industry. The 2002 data on the percentage of employees in small employer firms (82.8% 

from Table 5-60) can be applied to the 2002 data to arrive at an estimate for the number of 

workers in small employer firms. Multiplying the number of employees (45,021) by 0.828 

yields an estimated 37,227 employees in small employer firms in 2002 which, when added to 

49,802 (which assumes one worker for each non-employer firm), yields 87,079 workers in small 

firms in 2002. Workers in small firms represent 91.8% of all industry workers (94,823) in 2004. 

V.A.3. Consumer Savings, Revenue Estimates and Small Business Transfers: Appraisal 

Industry 

The predicted cost savings for consumers of appraisal services determines the economic 

impact of the reforms on the appraisal industry. The projected revenue for the appraisal industry 

from settlements is $4.375 billion ($350 average fee times 12,500,000 projected mortgage 

originations). Appraisal services represent 17.7% of all third-party settlement fees. As explained 

in Chapter 3, the new GFE will encourage originators and packagers to seek cost reductions in 

all third-party services. These cost reductions will likely come from increased and innovative use 

of new technology, volume discounts, and mutually advantageous business arrangements. The 

cost savings for consumers of the GFE are estimated to be from 7.5% to 10% (or $35 per 

appraisal) of current fees. This translates to a transfer of $328 million-$438 million from the 

appraisal industry. Small appraisal firms account for 83.1% of industry revenues. Therefore, 

transfers from small appraisal firms would have been $273 million-$364 million. These two sets 

of transfer estimates, respectively, represent 4.5%-6.0% of total industry revenue and 4.5%-6.0% 

of small industry revenue in 2004, based on estimated industry revenue from the Census Bureau 

($7.3 billion in the case of large industries and $6.1 billion in the case of small industries). 

 5-101 
If the RESPA rule had been in effect in 2004, the savings and transfers would have been 

larger because of the larger volume of mortgages: $417 million-$556 million for the total 

industry and $347 million - $462 million for small appraisal firms. In these cases, the estimates 

represent 5.7%-7.6% of 2004 revenue. That these transfer rates are less than the projected 

savings rates (7.5%-10% for the GFE) stem from appraisers having other income-producing 

activities than settlement services for residential mortgage originations.160

For estimates of the allocation of consumer savings of the GFE by size of firm, see Table 

A.6. In addition, Table A.6 shows estimates of the allocation of consumer savings per firm for 

the GFE. 

Earlier, it was estimated that, in 2002, small business accounted for 83.1% of the 

industry’s total revenue. Assuming that this ratio applies to the revenue from settlement services, 

small appraisal firms earn $6.1 billion from settlement services. It is not expected that small 

business in the appraisal industry will bear a disproportionate share of the price decrease. Since 

appraisals are locally provided services, small firms are just as competitive as larger ones. 

Because it is not expected that small business will bear a greater burden of the reform than large 

business, the estimates of the economic impact of the GFE will be from $273 million to $364 

million, as noted above. 

The local orientation of the appraisal industry could change over time. For example, the 

necessity of appraisers visiting homes could be rendered unnecessary in some cases by the 

automated valuation appraisal, which is currently being used by some lenders and permitted by 

Fannie Mae and Freddie Mac. However, it is unlikely that RESPA reform would be the catalyst, 

as the technology advances seem to be taking place in any event. Yet, according to Don Kelley, 

vice president of the Appraisal Institute, AVMs will not be a threat to the appraisal industry 

because of the need for local expertise in the real industry. He said that “(i)t’s hard to calibrate 

local variations. This is obvious because no one is doing nationwide models with great 

success.”161 Thus, the only change that RESPA reform will introduce is that appraisals will occur 

at lower prices negotiated between providers and originators. Lenders will always need 

appraisers with local expertise to verify that the property in question is sufficiently valuable. 

Since large originators will have to deal with multiple appraisal firms in order to ensure complete 

geographic coverage, and large multi-jurisdictional appraisal firms have no apparent cost 

advantages over smaller providers (and may have location-related cost disadvantages), there is 

no reason to believe that small appraisal firms will be excluded from any business transactions. 

Those who will bear the burden of the price decreases expected from the rule will be 

those who charged noncompetitive prices to begin with. There is no reason to believe that a 

 

160 The adjustment for 2004 in the text uses a ratio of 1.27, which is 15,873,505 (estimated 2004 mortgages, based 

on the average mortgage origination estimates for 2004 by Freddie Mac, Fannie Mae, and the Mortgage Bankers 

Association of America) divided by the projected 12,500,000 loans (which is also based on these agencies 

projections for 2008). If OFHEO’s 2004 mortgage origination estimate had been used, the adjustment ratio would 

have been 1.34 (16,783,573 divided by 12,500,000) and the adjusted 2004 transfer share of industry revenue would 

have been higher at 6.0%-8.4%. 

161 “AVMs and Appraiser Technology Advancing,” Inside Mortgage Technology, May 19, 2003. 

 5-102 
disproportionate percentage of small appraisal firms charge overly high prices. Therefore, there 

is no reason to believe that small firms will bear a disproportionate share of the burden of this 

reform. 

V.B. Surveyors 

V.B.1. Overview of the Surveying Industry 

Surveying properties can be a highly technical task. It involves the drawing or mapping 

of a parcel of real property. Surveyors engage in several major activities: a determination of the 

size, structure, and shape of land; surveying land for the positioning of boundaries and 

demarcations; design and administration of geographic information systems for mapping and 

charting reports; a visible and evaluative assessment of the environment and the general 

surroundings of the property; an assessment of the land value; and an assessment of potential or 

future construction projects.162 For a single-family real estate transaction, lenders and other 

parties rely on the survey for demarcating the property. A dispute concerning property 

boundaries may result in a significant loss for the property owner who loses. However, the lender 

will suffer only when the loss is greater than the homeowner’s equity. To guard against this 

possibility, survey coverage is often part of the title insurance policy that a lender will purchase. 

As a result of lenders being able to insure themselves against property line disputes through title 

insurance, many lenders do not request a survey before closing a loan. In a small sample of FHA 

loans, 110 out of 212 had a survey. While FHA loans may or may not be representative of all 

loans with respect to the use of surveys, the data do show that they are not usually required. 

V.B.2. Description of Economic Data: Surveying and Mapping 

Census Bureau data from the year 2004 demonstrate that the Surveying & Mapping 

Services industry employed 61,623 in 9,028 firms.163 These firms had estimated annual revenue 

of almost $4.9 billion. In 2004, the Surveying and Mapping Services industry averaged 6.8 

employees and an estimated revenue of $540,082 per firm. Approximately 90% of surveying 

and mapping employees worked at firms employing fewer than 100 employees; well over half 

(62%) worked at firms employing fewer than 20 employees. In addition to the 9,028 employer 

firms, the Census reports a total of 9,196 non-employer firms. 

Census 2002 figures provide somewhat more detailed information about Surveying and 

Mapping Services. In 2002, the sector employed 59,174 people at 8,856 operating firms in the 

 

162 Plog et al., “What Every Real Estate Professor Should Know About Surveys.” Report produced by MXP Land 

Surveying, <www.markxplog.com>, 2001. 

163 The data reported by the Census fall within a broad definition of surveying; this industry comprises 

establishments primarily engaged in performing surveying and mapping services of the surface of the earth, 

including the floor. These services may include surveying and mapping of areas above or below the surface of the 

earth, such as the creation of view easements or segregating rights in parcels of land by creating underground utility 

easements. 

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U.S. These firms generated an aggregate revenue of almost $4.3 billion. The average number of 

employees per firm was 6.7 compared to 6.8 in 2004. The average revenue per firm in 2002 was 

$483,027, which is $507,192 in 2004 dollars,164 and less than the 2004 estimate of $540,082. In 

addition to the 8,856 employer firms from the Surveying and Mapping industry in 2002, there 

were an estimated 8,651 nonemployer firms. The grand total of both employer and nonemployer 

operating firms for 2004 was 18,224; the total for 2002 was 17,507 according to the Census. 

V.B.2.a. Census Bureau Data for Small Businesses: Surveying and Mapping 

The greater financial detail provided for 2002 makes the 2002 data better suited for the 

task of determining how many firms meet the SBA’s definition of small. An insight into size 

standards can be gained by estimating the number of employees of a firm at the size standard 

limit. Dividing our size standard of $5 million165 by the estimated revenue per employee for 

2004 yields an approximate size standard of 63 employees for the Surveying and Mapping 

industry.166 As mentioned we can reach a more accurate definition of “small” using the 2002 

revenue data. Of the total employer firms, 99.1% had annual revenues less than $5 million and 

are considered small by the SBA definition.167, 168 In 2002, 99.6% of all survey firms (including 

nonemployers) were small according to the SBA’s definition.169 These small businesses account 

for 81.3%170 of the revenue earned by the surveying and mapping services industry.171

Examining data on industry concentration is an alternative way of understanding the 

extent to which the surveying and mapping industry is characterized by small firms. The four 

 

164 See Technical Appendix for the description of the price deflator used. 

165 Note that the size standard for Surveying and Mapping at the time was $4 million and is currently $4.5 million 

(since July 31, 2006). The larger size standard of $5 million is used for consistency with the Census data on the 

revenue of firms. This may slightly overestimate the proportion of firms that are small businesses. 

166 A similar calculation using 2002 data yields an alternative definition of small of less than 69 employees. 

167 The breakdown of the 2002 Economic Census data by revenue does not allow us to calculate the share of firms 

earning less than $4.5 million (the SBA size standard). However, a generous estimate of the percentage of small 

businesses can be obtained by calculating the share of firms earning less than $5 million. 

168 The 2002 data on the percentage (99.1%) of employer firms that are small can be applied to the 2004 data 

reported in the text to arrive at an updated estimate for the number of small firms. Multiplying the number of 

employer firms in 2004 (9,028) by 0.991 yields an estimated 8,947 small employer firms which, when added to the 

number of non-employer firms (9,196) in 2004, yields 18,143 small firms in 2004. These small firms represent 

99.6% of all firms (18,224) in 2004. 

169 This is derived by adding the 9,342 nonemployer firms to the 7,412 employer firms operating the entire year that 

meet SBA size standards and dividing by the sum of all 7,450 employer firms operating the entire year and the 

number of nonemployer firms. 

170 81.3 percent is the percentage of firms earning less than $5 million. The SBA size standard for surveying was $4 

million, so that the percentage of firms earning less than $4 million would be less than 83.2 percent. 

171 The revenue share of small firms is calculated by adding the revenue earned by employer firms operating the 

entire year considered small by SBA standards, or $3.33 billion, to the revenue earned by nonemployer firms, $222 

million, and dividing by the total revenue across all employer firms operating the entire year and nonemployers 

($4.46 billion). 

 5-104 
largest firms in the surveying and mapping industry account for only 0.3% of establishments, 

5.3% of revenue, and 3.2% of employees. Even the fifty largest firms account for as little as 

1.4% of the establishments, 17.1% of the revenue, and 11.2% of employees. 

Number of 

Establishments

Share of 

Establishments Share of Revenue

Share of Annual 

Payroll ($1,000)

Share of 

Employees

All Firms 9,120 100.0% 100.0% 100.0% 100.0% 

4 Largest Firms 23 0.3% 5.3% 4.0% 3.2% 

8 Largest Firms 30 0.3% 7.3% 5.9% 4.2% 

20 Largest Firms 64 0.7% 11.6% 10.1% 6.9% 

50 Largest Firms 129 1.4% 17.1% 15.4% 11.2% 

Table 5-18. Concentration of Largest Firms 2002: Surveying and Mapping (except geophysical) Services

“Very Small” Surveying and Mapping Firms. An alternative method of characterizing 

a small business is by the number of employees. Although this is not the Small Business 

Administration’s method of defining a small business, Census data on firms with less than 

twenty employees reveals the characteristics of those firms that are “very small.” In 2004, 

employer firms, employing less than twenty employees, employed an average of 4.5 employees, 

accounted for 93.3% of all employer firms in the Surveying and Mapping industry, employed 

61.7% of its employees, and received 55.7% of its (estimated) revenue. Including nonemployer 

firms would yield that “very small” firms constitute 96.7% of all Surveying and Mapping firms 

in 2004 and earn 58.6% of the industry’s revenue. 

Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. For the year 2004, 

adding the 61,623 employees in employer firms (from Table 5-66) to 9,196 (which assumes one 

worker for each non-employer firm) yields 70,819 as one estimate of the number of workers in 

the industry. The 2002 data on the percentage of employees in small employer firms operating 

the entire year (87.0% from Table 5-68) can be applied to the 2004 data to arrive at an estimate 

for the number of workers in small employer firms. Multiplying the number of employees 

(61,623) by 0.87 yields an estimated 53,612 employees in small employer firms in 2004 which, 

when added to 9,196 (which assumes one worker for each non-employer firm), yields 62,808 

workers in small firms in 2004. Workers in small firms represent 88.7% of all industry workers 

(70,819) in 2004. As discussed in Chapter 6, not all these workers are engaged in single-family 

mortgage-related activity. 

V.B.3. Consumer Savings, Revenue Estimates, and Small Business Transfers: Surveyors 

The predicted cost savings for consumers of surveyor services determines the economic 

impact of the reforms on the surveying and mapping industry. The projected revenue for the 

surveying and mapping industry associated with residential mortgage settlements is $725 

million, which equals $58 (average fee over all loans including those refinance and home 

purchase loans without a survey) times 12,500,000 mortgage originations. This represents 2.9% 

of all third-party settlement fees. 

While there was a scenario (the “title approach”) where this industry was not affected by 

RESPA reform, there were two scenarios that projected cost savings for consumers to be 7.5% 

and 10% of current fees. This translates to a transfer of $54 million-$73 million from the 

surveying industry. Small surveyor firms account for 81.3% of industry revenues. Therefore, 

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transfers from small survey firms would have been $44 million-$59 million. These two sets of 

transfer estimates, respectively, represent 1.03%-1.40% of total industry revenue and 1.03%-

1.40% of small industry revenue in 2004, based on estimated industry revenue from the Census 

Bureau ($5.218 billion in the case of large industries and $4.242 billion in the case of small 

industries). 

If the RESPA rule had been in effect in 2004, the savings and transfers would have been 

larger because of the higher volume of mortgages: $69 million-$93 million for the total industry 

and $56 million - $75 million for small survey firms. In these cases, the estimates represent 

1.3%-1.8% of 2004 revenue. 

For estimates of the allocation of consumer savings of the GFE by size of firm, see Table 

A.7. In addition, Table A.7 shows estimates of the allocation of consumer savings per firm for 

the GFE. 

It is not expected that surveyors will bear a disproportionate burden of the price decrease 

from RESPA reform. The reason is that surveys are provided on-site at the mortgaged property. 

The transportation cost of visiting individual sites, especially the opportunity cost of the time 

spent in transit, adds substantially to the cost of providing the service. These transportation costs 

counterbalance, or even overwhelm, any scale economies that may otherwise exist in the 

production of these services. 

Even if a surveying firm is efficient and charges low prices, it may find it difficult to 

compete against providers who are located sufficiently closer to the site in question. Thus, 

surveying services are by economic necessity provided by local firms. Reinforcing the local 

orientation of these third-party services are the value of local expertise and the importance of 

personal networks in receiving referrals. 

It is not likely that the local orientation of the surveying industry will change over time. 

Even with advances in GIS technology, on-site surveys will always be more accurate. Thus, 

there will be no significant change in the local provision of surveys under packaging. Nor is it 

likely that there will be a reduction of the number of these services purchased since this reform 

will not result in a drop in the number of mortgages that require these services. 

One trend of some concern to surveyors is that lenders appear to be substituting survey 

coverage in their title insurance for an actual survey.172 If there were to be a dispute over 

property lines that led to a decrease in the property value, then the homeowner would bear the 

brunt of that loss. However, if the decrease in property value were to exceed the owner’s equity, 

then the excess loss would be a cost paid by the lender. To avoid such a situation, lenders have 

traditionally required surveys before closing. An alternative strategy is for lenders to insure 

themselves against the remote possibility that such a loss would occur. As represented by the 

American Congress on Surveying and Mapping, surveyors worry that this trend could be 

 

172 Comments from Curtis W. Sumner, President, Executive Director, American Congress on Surveying and 

Mapping, to Rules Docket Clerk, HUD, regarding “Docket No. FR-4627-P-01, Real Estate Settlement Procedures 

Act (RESPA); Simplifying and Improving the Process of Obtaining Mortgage Settlement Costs to Consumers,” 

October 28, 2002, page 1. 

 5-106 
hastened by the RESPA rule to the disservice of the consumers.173 However, it is important to 

note that this practice has already become accepted and so is not likely to be affected by RESPA 

reform. 

V.C. Pest Inspectors 

V.C.1. Overview of Industry: Pest Inspection 

The exterminating and pest control industry comprises establishments primarily engaged 

in exterminating and controlling birds, mosquitoes, rodents, termites, and other insects and pests 

(except for crop production and forestry production). Establishments providing fumigation 

services are included in this industry. Examples of industries include: exterminating services, 

fumigating services, mosquito eradication services, and termite control services. 

Extermination and pest control professionals provide a valuable service for homeowners. 

They rely on training, expertise and sophisticated techniques to control infestations in an 

efficient, economical and safe manner, which in turn protects the long-term interests of the 

homeowner’s family and environment. A preliminary inspection and surveying of the premises is 

conducted. The primary question is whether termites are present. Based on the inspection, pest 

control experts provide a description of each extermination project and a success rate estimate 

for each procedure. In a small sample of FHA loans, 99 out of 212 had a pest inspection. While 

FHA loans may or may not be representative of pest inspections, the data do show that they are 

not usually required. 

Firms will base their fees on the scale and nature of the procedure, the potential need to 

alter the structure or remove walls, and the degree and complexity of pest infestation. The 

exterminating and pest control industry can be highly dangerous. Therefore, most pests and 

extermination specialists are required to undergo extensive training to obtain a license. They 

must also carry liability insurance to cover potential damage to property or individuals. 

V.C.2. Description of Economic Data: Exterminating and Pest Control 

Statistics of U.S. Business 2004 indicate that the Exterminating and Pest Control industry 

had a total employment of 95,437 with 10,065 operating firms in the U.S. The aggregate 

estimated annual revenue of these firms was $7.4 billion. In 2004, the Exterminating and Pest 

Control industry employed an average of 9.5 employees and recorded an average annual 

(estimated) revenue of $734,931 per firm. Almost 61% of the employees worked at firms 

employing fewer than 100 employees, and well over a third (40.7%) worked at firms employing 

fewer than 20 employees. In addition to the 10,065 employer firms, the Census reports 7,935 

non-employer firms, yielding a total of 18,000 firms. 

 

173 Ibid. 

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Census Bureau data from 2002 provide greater detailed information about the 

Exterminating and Pest Control industry. In 2002 the sector employed 90,948 people at 9,618 

operating firms. These firms generated aggregate revenue of $6.6 billion. The average number of 

employees per firm in 2002 was 9.5 (the same as in 2004). The average revenue per firm was 

$685,905 in 2002, which is $720,219 in 2004 dollars when adjusted for inflation.174 This is 

somewhat less than the 2004 estimate of $734,931. In addition to the 9,618 employer firms in 

2002, the Census reports 7,910 non-employer firms, bringing the grand total of firms to 17,528 

for the entire Exterminating and Pest Control industry. Between 2002 and 2004, the number of 

firms grew by 2.7% and the number of workers grew by 4.6% (assuming one worker per 

nonemployer firm). Average annual growth rates were 1.4% and 2.3% respectively. 

V.C.2.a. Census Bureau Data for Small Businesses: Exterminating and Pest Control 

The greater financial detail provided makes the 2002 data better suited for the task of 

determining how many firms meet the SBA’s definition of small. An insight into size standards 

can be gained by estimating the number of employees of a firm at the size standard limit. 

Dividing the most recent size standard ($6.0 million, effective October 1, 2002) by the revenue 

per employee for 2002 yields an approximate size standard of 83 employees per firm for the 

Exterminating and Pest Control Service industry. Of the total employer firms that were reported 

by the Census in 2002, 99.0% had annual revenues less than $5 million and are considered small 

by the SBA definition. The percentage, 99.9%, of all firms (nonemployer and employer) that 

were small in 2002 according to the SBA’s definition is derived by adding the 55,946 

nonemployer firms to the 7,969 employer firms operating the entire year that meet SBA size 

standards and dividing by the sum of all 63,998 employer firms operating the entire year and the 

number of nonemployer firms.175 These small businesses accounted for 57.0% of the revenue 

earned by the extermination services industry in 2002.176

The pest control industry is characterized by more industry concentration than most 

industries involved in the settlement process. The four largest firms earn 27.6% of revenues and 

employ 21.2% of employees. 

 

174 See the technical appendix for information on the price deflator used to convert values to 2006 dollars. 

175 The 2002 data on the percentage 99.0% (Table 5-64) of employer firms that are small (earning less than $5 

million) can be applied to the 2004 data reported in the text to arrive at an updated estimate for the number of small 

firms. Multiplying the number of employer firms in 2004 (10,065) by 0.990 yields an estimate of 9,964 small 

employer firms which, when added to the estimated number of non-employer firms (58,076) in 2004, yields 68,040 

small firms in 2004. These small firms represent 99.9% of all firms in 2004. 

176 The revenue share of small firms is calculated by adding the revenue earned by employer firms operating the 

entire year considered small by SBA standards, or $3.3 billion, to the estimated revenue earned by nonemployer 

firms, $904 million, and dividing by the total revenue across all employers operating the entire year and 

nonemployer firms, which is equal to $7.3 billion. 

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Number of 

Establishments

Share of 

Establishments Share of Revenue

Share of Annual 

Payroll ($1,000)

Share of 

Employees

All Firms 11,321 100.0% 100.0% 100.0% 100.0% 

4 Largest Firms 749 6.6% 27.6% 26.0% 21.2% 

8 Largest Firms 863 7.6% 32.1% 30.6% 24.8% 

20 Largest Firms 1,195 10.6% 38.8% 37.9% 33.0% 

50 Largest Firms 1,439 12.7% 44.6% 44.6% 38.7% 

Table 5-19. Concentration of Largest Firms 2002: Exterminating and Pest Control Services

“Very Small” Pest Inspection Firms. A final method of characterizing a small business 

is by the number of employees. Although this is not the Small Business Administration’s method 

of defining a small business, Census data on firms with less than twenty employees reveals the 

characteristics of those firms that are “very small.” In 2004, employer firms, employing less 

than twenty employees, employed an average of 4.1 employees, accounted for 93.7% of all 

employer firms in the Exterminating and Pest Control industry, employed 40.7% of its 

employees, and received 37.3% of its (estimated) revenue. Including the number of 

nonemployer firms would yield that “very small” firms constitute 99.1% of all Exterminating 

and Pest Control firms in 2004 and earn 45% of the industry’s revenue. 

Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. For the year 2004, add 

the 95,437 employees in employer firms (from Table 5-62) to the number of nonemployer firms 

58,076 (assuming one worker per firm) to arrive at an estimate of 153, 513 workers in the 

industry. The 2002 data on the percentage of employees in small employer firms (57.5% from 

Table 5-64) can be applied to the 2004 data to arrive at an estimate for the number of workers in 

small firms. Multiplying the number of employees (95,437) by 0.575 yields an estimated 54,876 

employees in small employer firms in 2004 which, when added to 58,076, yields 112,952 

workers in small firms in 2004. Workers in small firms represent 73.6% of all industry workers 

in 2004. As discussed in Chapter 6, not all these workers are engaged in single-family mortgagerelated activity. 

V.C.3. Consumer Savings, Revenue Estimates, and Small Business Transfers: Pest 

Inspection 

The predicted cost savings for consumers of pest inspection services determines the 

economic impact of the reforms on the exterminating and pest control industry. The projected 

revenue for the exterminating and pest control industry from transactions associated with 

residential mortgage settlements is $325 million, which equals $26 (average fee over all loans 

including those refinance and home purchase loans without a pest inspection) times 12,500,000 

mortgage originations. This represents 1.3% of all third-party settlement fees. 

While there was a scenario (the “title approach”) where this industry was not affected by 

RESPA reform, there were two scenarios that projected cost savings for consumers to be 7.5% 

and 10% of current fees. This translates to a transfer of $24 million-$33 million from the pest 

inspection industry. Small pest inspection firms account for 53.9% of industry revenues. 

Therefore, transfers from small pest inspection firms would have been $13 million-$18 million. 

These two sets of transfer estimates, respectively, represent 0.31%-0.42% of total industry 

revenue and 0.31%-0.42% of small industry revenue in 2004, based on estimated industry 

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revenue from the Census Bureau ($7.768 billion in the case of large industries and $4.187 billion 

in the case of small industries). 

If the RESPA rule had been in effect in 2004, the savings and transfers would have been 

larger because of the higher volume of mortgages: $30 million-$42 million for the total industry 

and $17 million - $23 million for small survey firms. In these cases, the estimates represent 

0.39%-0.53% of 2004 revenue. 

For estimates of the allocation of consumer savings of the GFE by size of firm, see Table 

A.9. In addition, Table A.9 shows estimates of the allocation of consumer savings per firm for 

the GFE. 

Pest inspections are provided on-site at the mortgaged property. The transportation cost 

of visiting individual sites, especially the opportunity cost of the time spent in transit, adds 

substantially to the cost of providing the service. These transportation costs counterbalance, or 

even overwhelm, any scale economies that may otherwise exist in the production of these 

services. As noted above in the data description, the exterminating and pest control industry is 

more concentrated than other industries involved in closing such the appraisal and survey 

industries. This is primarily because the exterminating and pest control industry is engaged in 

many other activities in addition to pest inspections for settlements. However, pest inspections 

are by economic necessity provided by local firms. 

The only change that RESPA reform will introduce is that pest inspections will occur at 

lower prices negotiated between inspectors and originators. There will be no significant change 

in the local provision of pest inspections. Nor will there be a reduction of the number of these 

services purchased since this reform will not result in a drop in the number of mortgages that 

require these services. Since large originators will have to deal with multiple settlement services 

providers in order to ensure complete geographic coverage, there is no reason to believe that 

small settlement services providers will be excluded from any business transactions. 

The improved shopping for third-party services could lead to some reduction in prices fir 

these services. There is no reason to believe that a disproportionate percentage of small firms 

will experience the price reduction. Therefore, there is no reason to believe that small firms will 

bear a disproportionate share of the burden of this reform. 

V.D. Credit Bureaus 

V.D.1. Overview of Industry 

The credit bureau industry is comprised of establishments that gather information on an 

individual’s credit and employment history. The industry also collects data on an individual’s 

accounts with various businesses. This information is provided to financial institutions, retailers, 

and others who have a need to evaluate the credit worthiness of these persons. The industries 

involved within the Credit Bureau classification are consumer credit reporting bureaus and 

agencies, credit investigation services, and credit rating services. Credit bureaus also provide 

credit reports on businesses. 

 5-110 
The Consumer Data Industry Association, which is a trade association for consumer 

information, has over 400 credit bureaus; the majority are considered small businesses. The 

largest entities within the credit reporting industry are the three credit bureaus, Experian, Equifax 

and TransUnion. Each operates a national database, which houses all consumer credit reporting 

information. The remaining credit bureaus receive credit-reporting information from Experian, 

Equifax and TransUnion. The top three credit bureaus also provide a variety of other services, 

but credit reporting for the purposes of evaluating applications and underwriting is the only 

activity included in the settlement process. 

An individual’s credit history is an important factor during the initial application and 

underwriting process. Automated underwriting systems are known to depend heavily on credit 

history information, such as the FICO score. Thus, the credit reporting bureaus’ main role within 

the mortgage process occurs during the initial application process, when an individual is first 

applying for a loan and during the underwriting process. Credit scores are also used during the 

servicing process as a tool in resolving delinquent loans. At application, the lender normally 

chooses the application fee, which covers the initial cost of processing the loan request and 

checking the individual’s credit history. The actual cost of obtaining an in-depth credit report 

from the three credit bureaus varies from $25 to $75. Often an important task for originators 

during the underwriting process is following up on issues raised by the applicant’s credit history. 

V.D.2. Description of Economic Data 

Census Bureau data from the year 2004 indicate that the Credit Bureau Industry 

employed 25,555 people at 740 firms. These firms had estimated annual revenue of 5.4 billion 

dollars. Also, in 2004 Credit Bureau Industry averaged 34.5 employees per firm and had 

estimated annual revenue per firm of $7.3 million. An estimated 23.4% of Credit Bureau 

Industry office employees worked at firms employing fewer than 100; 11.5% worked at firms 

employing fewer than 20. In addition to the 740 firms from the Credit Bureau Industry offices 

that had employees in 2004, there were 545 Credit Bureau Industry offices with no employees. 

While the data do not provide many details about these non-employer firms (see the technical 

appendix for a definition of nonemployer establishments), Census methodology ensures that 

nonemployers meet a reasonable definition of small. The average revenue of a nonemployer 

credit bureau is $34,859. 

Census Bureau data from 2002 provide more detailed information about the Credit 

Bureau industry. In 2002 the sector employed 25,957 people at 741 firms. These firms had 

annual revenue of over $4.6 billion ($4.8 billion in 2004 prices). In contrast with the revenue 

estimate ($5.4 billion) for 2004, the 2002 revenue figure is taken directly from Census 

publications. In 2002, the Credit Bureau industry averaged 35 employees per employer firm. 

Average revenue per firm was $6.2 million, which, after adjusting for inflation, 177 is $6.5 

million, less than the 2004 estimate of $7.3 million. When one counts only the employer firms 

operating the entire year, the total number of firms falls to 641; aggregate revenue remains near 

$4.6 billion; but average revenue per firm rises to $7.1 million ($7.5 million at the 2004 price 

 

177 See the technical appendix for information on the price deflator used to convert 2002 to 2004 dollars. 

 5-111 
level). In addition to the 741 firms from the Credit Bureau industry that had employees in 2002, 

there were 520 nonemployer firms (very small firms that make up only a fraction of this 

industry’s revenue) with an average revenue of $42,446 ($44,569 at the 2004 price level). 

According to the 2002 Economic Census, the four largest credit bureau firms comprised 

62.3% of the revenue within the industry, an average of $714 million each; and employed an 

average of 48.7% of the employees, an average of 3,159 employees per firm. 

V.D.2.a. Census Bureau Data for Small Businesses: Credit Bureau Industry 

The greater financial detail provided in the 2002 Economic Census makes the 2002 data 

better suited for the task of determining how many firms meet the SBA’s definition of small. 

The 2002 size standard for Credit Bureau Industry is $6 million of revenue. We estimate that 

there were 594 employer firms that met the SBA’s definition of small and that these firms 

accounted for 10.1% of employer firms’ aggregate revenue.178 Adding the 520 firms that the 

Census reports have no employees to the calculations, 96% of the 1,114 total meet the SBA’s 

definition of small. These firms accounted for 10.5% of the industry’s total 2002 revenue. 

“Very Small” Credit Bureaus. An alternative method of characterizing a small business 

is by the number of employees. Although this is not the Small Business Administration’s 

method of defining a small business, Census data on firms with less than twenty employees 

reveals the characteristics of those firms that are “very small.” In 2004, employer firms, 

employing less than twenty employees, employed an average of 4.7 employees, accounted for 

83.8% of all employer firms in the Credit Bureau industry, employed 11.5% of its employees, 

and received 5.8% of its (estimated) revenue. Including nonemployer firms would yield that 

“very small” firms constitute 90.7% of all Credit Bureaus in 2004, employ 13.3% of its 

employees, and earn 6.1% of the industry’s (estimated) revenue. 

Number of Employees. Analysis in Chapter 6 will require an estimate of the number of 

workers in the industry as a whole and in small firms within the industry. For the year 2004, 

adding the 25,555 employees in employer firms (from Table 5-70) to 545 (which assumes one 

worker for each non-employer firm) yields 26,100 as one estimate of the number of workers in 

the industry. We estimate that slightly more than 20% of employees worked for small firms in 

2002.179 This estimate of the percentage of employees in small employer firms can be applied 

 

178 Of the firms in this sector that had employees, there were 590 that had annual revenues less than $5 million. 

These firms earned 9.6% of the aggregate revenue of firms operating the entire year. To calculate the aggregate 

revenue of firms earning between $5 million and $6 million, we make the simplifying and generous assumption that 

all of these firms earn the maximum of $6 million. We further assume that the number of firms earning between $5 

million and $6 million is one fifth of the total number of firms in the $5 million to $10 million range (one fifth of 20 

is 4). Thus, our estimate of the aggregate revenue of firms earning between $5 million and $6 million is $24 

million. Adding this to the revenue data for firms earning less than $5 million, our estimate is that small employer 

firms earned $461 million in 2002 or 10.1% of the aggregate revenue of employer firms. 

179 By assuming that all employer firms earning revenues within the $5 million to $10 million range earn the same 

revenue per employee ($100,392) combined with our assumption that firms earning between $5 million and $6 

million all earn $6 million yields an estimate of 60 employees per firm (or a total of 240). Multiplied by the number 

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to the 2004 data to arrive at an estimate for the number of workers in small firms. Multiplying 

the number of employees (25,555) by 0.2 yields an estimated 5,114 employees in small employ

firms in 2004 which, when added to 545 (which assumes one worker for each non-employer 

firm), yields 5,659 workers in small firms in 2004. Workers in small firms represent 21.7% of 

all industry workers (26,100) in 2004. 

er 

 

V.D.3. Consumer Savings, Revenue Estimates, and Small Business Transfers: Credit 

Bureaus 

The predicted cost savings for consumers of credit reports determines the economic 

impact of the reforms on the credit reporting industry. The projected revenue for the credit 

bureaus associated with residential mortgage settlements is $312.5 million (which equals $25 

times12,500,000 mortgage originations). This represents 1.3% of all third-party settlement fees. 

While there was a scenario (the “title approach”) where this industry was not affected by 

RESPA reform, there were two scenarios that projected cost savings for consumers to be 7.5% 

and 10% of current fees. This translates to a transfer of $23 million-$31 million from the Credit 

Bureau industry. Small credit bureaus account for 10.5% of industry revenues. Therefore, 

transfers from small credit bureaus would have been $2.4 million-$3.3 million. These two sets 

of transfer estimates, respectively, represent 0.42%-0.57% of total industry revenue and 0.42%-

0.57% of small industry revenue in 2004, based on estimated industry revenue from the Census 

Bureau ($5.425 billion in the case of large industries and $0.569 billion in the case of small 

industries). 

If the RESPA rule had been in effect in 2004, the savings and transfers would have been 

larger because of the higher volume of mortgages: $29 million-$39 million for the total industry 

and $3.05 million - $4.19 million for small credit bureaus. In these cases, the estimates represent 

0.53%-0.72% of 2004 revenue.180 

VI. Office of Real Estate Agents and Brokers Industry 

VI.A. Overview of Industry 

Although real estate agents generally do not provide settlement services per se, they can 

be involved in the settlement process in number of ways. Real estate agents provide information 

about the settlement process and may accompany their clients to the settlement table. Frequently 

real estate agents refer potential buyers to lenders and title settlement companies. While some 

homebuyers may limit their relationship with their real estate agent, many homebuyers depend 

on the real estate agent for wide-ranging advice and referrals throughout the entire purchasing 

of firms (4) within that range and added to the number of employees (4,922) working for firms earning less than $5 

million yields a total of 5,162 employees (20% of the employer total) working for small employer firms. 

180 That this losses are not 7.5%-10% of the industry’s total revenue stems from credit bureaus having many more 

income-producing activities than producing credit reports for residential mortgage originations. 

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process. Homebuyers usually develop a business relationship with a real estate agent prior to 

establishing such relationships with lender, settlement agents, or other professionals involved in 

the settlement process. Consequently, homebuyers tend to view real estate agents as a trusted 

source of information about the home-buying process. Most real estate agents and brokers are 

represented by the National Association of Realtors (NAR). See Section VII.D.4 of Chapter 4 

for a review of NAR’s comments on the 2002 proposed rule and for analysis of the competitive 

impacts of packaging on the real estate industry. 

VI.B. Description of Economic Data 

VI.B.1. Census Bureau Data 

Census Bureau data from the year 2004 indicate that the Real Estate Agents Brokers 

industry employed 323,045 people at 86,258 firms. These firms had estimated annual revenue of 

$92 billion. Thus, in 2004 the Real Estate Agents Brokers Industry averaged 3.7 employees per 

firm and had estimated annual revenue per firm of $1.1 billion. Within the Real Estate Agents 

Brokers industry, 70.3% of the office employees worked at firms employing fewer than 100; 

53.9% worked at firms employing fewer than 20. In addition to the 86,258 firms from the Real 

Estate Agents Brokers industry offices that had employees in 2004, the Census reports that there 

were 702,898 nonemployer firms in the Real Estate Agents Brokers industry. While the data do 

not provide many details about these non-employer firms, it seems likely they would meet any 

reasonable definition of small (the average revenue per firm was $48,781). According to the 

National Association of Realtors (NAR), eighty-five percent of the residential brokerage firms 

have a single office; sixty-seven percent have a sales force of five or fewer agents. 

Data from the 2002 Economic Census provide information on revenue. Employer firms 

of the Real Estate Agents Brokers industry numbered 68,649, employed a total of 280,754 

employees, earned an aggregate revenue of $63.4 billion ($66.6 billion in 2004 dollars), 181 and 

had a payroll amounting to $10.4 billion ($10.9 billion in 2004 dollars). Employer firms 

operating the entire year numbered 49,089, employed a total of 263,841 employees, earned an 

aggregate revenue of $59.4 billion ($62.3 in 2004 dollars), and had a payroll amounting to $9.8 

billion ($10.3 billion in 2004 dollars). For firms operating the entire year in 2002, the average 

number of employees was 5.4; the average payroll was $199,000 ($209,000 in 2004 dollars); and 

the average revenue per firm was $1.2 million ($1.3 million in 2004 dollars). In addition to the 

68,649 from the Real Estate Agents Brokers industry that had employees, there were 569,949 

nonemployer firms in 2002 earning an aggregate revenue of $26 billion ($27.3 billion in 2004 

dollars). 

 

181 See the technical appendix for information on the price deflator used to convert 2002 to 2004 dollars. 

 5-114 
VI.B.2. Census Bureau Data for Small Businesses: Real Estate Agents and Brokers 

The greater financial detail provided in the 2002 data makes the 2002 data better suited 

for the task of determining how many firms meet the SBA’s definition of small. Although the 

SBA size standard is $1.5 million in revenue, we use a standard of $2.5 million because it is 

consistent with the manner in which the 2002 Economic Census presents its data. This will have 

the effect of slightly overestimating the proportion of businesses that are small. It is estimated 

that in 2002, at least 99.5% of real estate agencies and brokerages were small businesses.182

These small businesses account for 54.1% of the revenue earned by real estate agents and 

brokers and 84.5% of its workers.183 The fifty largest firms earned only 22% of the industry’s 

revenue and employed 16.1% of its employees. 

An Alternative Definition of Small. An alternative method of characterizing a small 

business is by the number of employees. Although this is not the Small Business 

Administration’s method of defining a small business, Census data on firms with less than 

twenty employees reveals the characteristics of those firms that are “very small.” In 2004, 

employer firms, employing less than twenty employees, accounted for 97.7% of all employer 

firms in the Real Estate Agent and Broker industry, employed 53.9% of its employees, and 

received 52.3% of its (estimated) revenue. The average number of employees per firm was 2.1, 

which is less than the average number (2.9) of employees who worked for firms earning less than 

$2.5 million in 2002, our approximation of the SBA’s definition of small. Including 

nonemployer firms would yield that “very small” firms constitute 99.7% of all Real Estate Agent 

and Broker firms in 2004, earn 65.3% of the industry’s (estimated) revenue, and employ 85.5% 

of its employees.184

NAR’s comments on the 2002 proposed rule competitive nature of the mortgage market 

are also discussed in Section V.D of Chapter 2. See Sections II.C.5. and IV.A.2 of Chapter 6 for 

a discussion of similar comments on the 2008 proposed rule. 

 

182 The numerator (615,643) is derived by adding the number of employer firms operating the entire year earning 

less than $2.5 million (45,694) to the number of nonemployer firms (569,949). The denominator (619,643) is 

derived by adding the number of employer firms operating the entire year (49,089) to the number of nonemployer 

firms. Note that this method implicitly assumes that nonemployer firms operate the entire year. 

183 The revenue share of small firms is calculated in the same way as the share of firms. The number of people 

working at a nonemployer firm is assumed to be one. 

184 These proportions are derived by defining the amount “small” as equal to the sum of employer firms with less 

than twenty firms and plus nonemployer firms. 

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VII. Miscellaneous Services 

VII.A. New Single-Family General Contractors 

VII.A.1. Overview of Industry 

The New Single-Family General Contractors industry comprises general contractor 

establishments primarily responsible for the entire construction of new single-family housing, 

such as single-family detached houses and town houses or row houses where each housing unit 

(1) is separated from its neighbors by a ground-to-roof wall and (2) has no housing units 

constructed above or below. This industry includes general contractors responsible for the onsite assembly of modular and prefabricated houses. Single-family housing design-build firms 

and single-family construction management firms acting as general contractors are included in 

this industry. 

VII.A.2. Description of Economic Data 

VII.A.2.a. Census Bureau Data 

Census Bureau data from the year 2004 indicate that the New Single-Family General 

Contractors industry employed 443,667 people at 113,948 establishments185. These 

establishments had estimated annual revenue of $116 billion. Thus, in 2004 the New SingleFamily General Contractors industry averaged 3.9 employees per establishment and had 

estimated annual revenue per establishment of $1.0 million. Within the New Single-Family 

General Contractors industry, 90.8% of the employees worked at establishments employing 

fewer than 100; 73.2% worked at establishments employing fewer than 20. In addition to the 

113,948 establishments from the New Single-Family General Contractors industry offices that 

had employees in 2004, the Census reports that there were 167,109 nonemployer establishments 

in the New Single-Family General Contractors industry. While the data do not provide many 

details about these non-employer establishments, it seems likely they would meet any reasonable 

definition of small. 

Data from the 2002 Economic Census provide information on revenue. Employer 

establishments of the New Single-Family General Contractors industry numbered 58,472, 

employed a total of 273,055 employees, earned an aggregate revenue of $62.2 billion ($65.3 

billion in 2004 dollars), 186 and had a payroll amounting to $8.3 billion ($8.7 billion in 2004 

dollars). In addition to the 58,472 establishments from the New Single-Family General 

 

185 Census Data for the New Single-Family General Contractors industry is reported only for establishments. No 

firm data is released. 

186 See the technical appendix for information on the price deflator used to convert 2002 to 2004 dollars. 

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Contractors industry that had employees, there were 133,525 nonemployer establishments in 

2002 earning an aggregate revenue of $13.7 billion ($14.4 billion in 2004 dollars). 

VII.A.2.b. Census Bureau Data for Small Businesses: New Single-Family General 

Contractors 

The greater financial detail provided in the 2002 data makes the 2002 data better suited 

for the task of determining how many establishments meet the SBA’s definition of small. 

Although the SBA size standard is $28.5 million in revenue, we use a standard of $10.0 million 

because it is consistent with the manner in which the 2002 Economic Census presents its data187. 

This will have the effect of slightly underestimating the proportion of businesses that are small. 

The need for the more detailed data is negated by the fact that the data shows that over 97 

percent of the industry’s establishments are small using the $10 million threshold. It is estimated 

that in 2002, at least 99.6% of New Single-Family General Contractors were small businesses.188

These small businesses account for 80.6% of the revenue earned by real estate agents and 

brokers and 91.8% of its workers.189 

An Alternative Definition of Small. An alternative method of characterizing a small 

business is by the number of employees. Although this is not the Small Business 

Administration’s method of defining a small business, Census data on establishments with less 

than twenty employees reveals the characteristics of those establishments that are “very small.” 

In 2004, employer establishments, employing less than twenty employees, accounted for 97.6% 

of all employer establishments in the New Single-Family General Contractors industry, 

employed 73.2% of its employees, and received 77.9% of its (estimated) revenue. The average 

number of employees per firm was 2.9, which is less than the average number (4.1) of employees 

who worked for establishments earning less than $10 million in 2002, our approximation of the 

SBA’s definition of small. Including nonemployer establishments would yield that “very small” 

establishments constitute 99.0% of all New Single-Family General Contractors establishments in 

2004, earn 84.2% of the industry’s (estimated) revenue, and employ 80.5% of its employees.190

 

187 The Small Business Administration (SBA) published special tabulations of the 2002 economic census which 

provides more detailed revenue data, specifically firms earning between $10 million and $50 million in revenue. 

This data, however, is reported using the obsolete 1997 NAICS industrial classification, which defined the New 

Single-Family General Contractors within a broader industry titled Single Family Housing Construction, which 

included general contractors, operative builders and remodeling contractors. Estimates of 2002 nonemployer firms 

and the 2002 Economic Census are not available using these definitions. However, the data shows that over 99 

percent of the industry’s establishments are classified as small, negating the need for the more detailed data. 

188 The numerator (190,997) is derived by adding the number of employer establishments earning less than $10 

million (57,759) to the number of nonemployer establishments (133,525). The denominator (191,997) is derived by 

adding the number of employer establishments (58,472) to the number of nonemployer establishments. 

189 The revenue share of small firms is calculated in the same way as the share of firms. The number of people 

working at a nonemployer firm is assumed to be one. 

190 These proportions are derived by defining the amount “small” as equal to the sum of employer firms with less 

than twenty firms and plus nonemployer firms. 

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Alternatively, it may be appropriate to classify New Single-Family General Contractors 

by the number of housing starts per establishment, rather than revenue or employment size. 

Using housing starts to define small single-family contractors avoids inherent differences 

between establishments within the industry, such as worker productivity and sales price which 

then affects how many workers an establishment hires or how much revenue it generates. 

Instead, it provides a real measure of an establishment’s output. 

Table 5-20 shows New Single-Family General Contractor establishments by housing start 

size. In 2002, establishments with less than 25 housing starts accounted for 98.0% of all 

establishments in the New Single-Family General Contractors industry. These establishments 

accounted for 44.7% of all single-family housing starts.191 

Establishments

Share of 

Establishments

Total SingleFamily StartsShare of SingleFamily Starts

All Housing Starts 58,494 100.0% 190,052 100.0% 

Establishments with <25 Starts 57,344 98.0% 84,889 44.7% 

Establishments with 25-99 Starts 841 1.4% 33,876 17.8% 

Establishments with 100-499 Starts 275 0.5% 43,301 22.8% 

Establishments with <500 Starts 34 0.1% 27,986 14.7% 

Table 5-20. Establishments by Housing Starts Size: New Single-Family General Contractors, 2002

VII.B. New Housing Operative Builders 

VII.B.1. Overview of Industry 

The New Housing Operative Builders industry comprises establishments primarily 

engaged in building new homes on land that is owned or controlled by the builder rather than the 

homebuyer or investor. The land is included with the sale of the home. Establishments in this 

industry build single and/or multifamily homes. These establishments are often referred to as 

merchant builders, but are also known as production or for-sale builders. 

VII.B.2. Description of Economic Data 

VII.B.2.a. Census Bureau Data 

Census Bureau data from the year 2004 indicate that the New Housing Operative 

Builders industry employed 158,231 people at 10,774 establishments192. These establishments 

had estimated annual revenue of $9.9 billion. Thus, in 2004 the New Housing Operative 

Builders industry averaged 14.7 employees per establishment and had estimated annual revenue 

 

191 These firms also accounted for 8.1% of the industry’s multi-family housing starts, which includes condos as well 

as rental apartments. However, because Census does not report the number of condo versus rental apartment starts, 

the multi-family numbers are not presented. 

192 Census Data for the New Housing Operative Builders industry is reported only for establishments. No firm data 

is released. 

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per establishment of $12.5 million. Within the New Housing Operative Builders industry, 47.9% 

of the employees worked at establishments employing fewer than 100; 24.3% worked at 

establishments employing fewer than 20. In addition to the 10,774 establishments from the New 

Housing Operative Builders industry offices that had employees in 2004, the Census reports that 

there were 66,033 nonemployer establishments in the New Housing Operative Builders industry. 

While the data do not provide many details about these non-employer establishments, it seems 

likely they would meet any reasonable definition of small. 

Data from the 2002 Economic Census provide information on revenue. Employer 

establishments of the New Housing Operative Builders industry numbered 26,043, employed a 

total of 240,292 employees, earned an aggregate revenue of $140 billion ($147 billion in 2004 

dollars), 193 and had a payroll amounting to $10.5 billion ($11.0 billion in 2004 dollars). In 

addition to the 26,043 from the New Housing Operative Builders industry that had employees, 

there were 52,762 nonemployer establishments in 2002 earning an aggregate revenue of $9.9 

billion ($10.4 billion in 2004 dollars). 

VII.B.2.b. Census Bureau Data for Small Businesses: New Housing Operative Builders 

The greater financial detail provided in the 2002 data makes the 2002 data better suited 

for the task of determining how many establishments meet the SBA’s definition of small. 

Although the SBA size standard is $28.5 million in revenue, we use a standard of $10.0 million 

because it is consistent with the manner in which the 2002 Economic Census presents its data194. 

This will have the effect of slightly underestimating the proportion of businesses that are small. 

The need for the more detailed data is negated by the fact that the data shows that over 99 

percent of the industry’s establishments are small using the $10 million threshold. It is estimated 

that in 2002, at least 97.4% of New Housing Operative Builders were small businesses.195 These 

small businesses account for 31.9% of the revenue earned by real estate agents and brokers and 

55.8% of its workers.196 

An Alternative Definition of Small. An alternative method of characterizing a small 

business is by the number of employees. Although this is not the Small Business 

Administration’s method of defining a small business, Census data on establishments with less 

 

193 See the technical appendix for information on the price deflator used to convert 2002 to 2004 dollars. 

194 The Small Business Administration (SBA) published special tabulations of the 2002 economic census which 

provides more detailed revenue data, specifically firms earning between $10 million and $50 million in revenue. 

This data, however, is reported using the obsolete 1997 NAICS industrial classification, which defined the New 

Housing Operative Builders within a broader industry titled Single Family Housing Construction, which included 

general contractors, operative builders and remodeling contractors. Estimates of 2002 nonemployer firms and the 

2002 Economic Census are not available using these definitions. However, the data shows that over 97 percent of 

the industry’s establishments are classified as small, negating the need for the more detailed data. 

195 The numerator (76,794) is derived by adding the number of employer establishments earning less than $10 

million (24,032) to the number of nonemployer establishments (52,762). The denominator (78,805) is derived by 

adding the number of employer establishments (26,043) to the number of nonemployer establishments. 

196 The revenue share of small firms is calculated in the same way as the share of firms. The number of people 

working at a nonemployer firm is assumed to be one. 

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than twenty employees reveals the characteristics of those establishments that are “very small.” 

In 2004, employer establishments, employing less than twenty employees, accounted for 84.1% 

of all employer establishments in the New Housing Operative Builders industry, employed 

24.3% of its employees, and received 17.7% of its (estimated) revenue. The average number of 

employees per establishments was 4.2, which is less than the average number (4.6) of employees 

who worked for establishments earning less than $10 million in 2002, our approximation of the 

SBA’s definition of small. Including nonemployer establishments would yield that “very small” 

establishments constitute 97.8% of all New Housing Operative Builders establishments in 2004, 

earn 46.6% of the industry’s (estimated) revenue, and employ 38.4% of its employees.197

Alternatively, it may be appropriate to classify New Housing Operative Builders by the 

number of housing starts per establishment, rather than revenue or employment size. Using 

housing starts to define small new housing operative builders avoids inherent differences 

between establishments within the industry, such as worker productivity and sales price which 

then affects how many workers an establishment hires or how much revenue it generates. 

Instead, it provides a real measure of an establishment’s output. 

Table 5-21 shows New Housing Operative Builder establishments by housing start size. 

In 2002, establishments with less than 25 housing starts accounted for 88.6% of all 

establishments in the New Single-Family General Contractors industry. These establishments 

accounted for 14.1% of all single-family housing starts.198 

Establishments

Share of 

Establishments

Total SingleFamily StartsShare of SingleFamily Starts

All Housing Starts 26,079 100.0% 523,067 100.0% 

Establishments with <25 Starts 23,098 88.6% 73,494 14.1% 

Establishments with 25-99 Starts 1,955 7.5% 81,570 15.6% 

Establishments with 100-499 Starts 805 3.1% 149,717 28.6% 

Establishments with <500 Starts 221 0.8% 218,286 41.7% 

Table 5-21. Establishments by Housing Starts Size: New Housing Operative Builders, 2002

 

197 These proportions are derived by defining the amount “small” as equal to the sum of employer firms with less 

than twenty firms and plus nonemployer firms. 

198 These firms also accounted for 6.4% of the industry’s multi-family housing starts, which includes condos as well 

as rental apartments. However, because Census does not report the number of condo versus rental apartment starts, 

the multi-family numbers are not presented. 

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Technical and Data Appendix for Chapter 5 

I. Description of Data Sets 

I.A. Employer Firms 

Throughout the chapter, data on employer firms are presented for both 2002 and 2004. 

The 2002 data are from the 2002 Economic Census and the 2004 data are from Statistics of U.S. 

Businesses, an annual series. The primary difference between the two series is that revenue data 

are available for 2002, but not for 2004. 

I.A.1. Statistics of U.S. Businesses 

The 2004 data on employer firms are from Statistics of U.S. Businesses (SUSB), an 

annual series that provides national and subnational data on the distribution of economic data by 

size and industry. 199 Statistics of U.S. Businesses covers most of the country's economic 

activity. The series excludes data on self-employed individuals, employees of private 

households, railroad employees, agricultural production employees, and most government 

employees. 

ard 

er 

. 

s, 

d 

, and payroll of an industry. The data are classified by the 

employment size of enterprises. 

I.A.2. Classification by Employment Size 

here 

companies with only one establishment, the enterprise and the establishment are the same. The 

 

Basic data items from the Statistics of U.S. Businesses are extracted from the Stand

Statistical Establishment List, a file of all known single and multi-establishment employ

companies maintained and updated by the U.S. Census Bureau. The annual Company 

Organization Survey provides individual establishment data for multi-establishment companies

Data for single-establishment companies are obtained from various Census Bureau program

such as the Annual Survey of Manufactures and Current Business Surveys, as well as from 

administrative records of the Internal Revenue Service, the Social Security Administration, an

the Bureau of Labor Statistics. These data were developed in cooperation with, and partially

funded by, the Office of Advocacy of the U.S. Small Business Administration (SBA). The 

variables included in the annual series of the Statistics of U.S. Businesses include the number of 

firms, establishments, employees

An establishment is a single physical location at which business is conducted or w

services or industrial operations are performed. An enterprise is a business organization 

consisting of one or more domestic establishments under common ownership or control. For 

199 The description of Statistics of U.S. Businesses is taken from the Census Bureau’s web site: 

http://www.census.gov/csd/susb/susb.htm 

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employment of a multi-establishment enterprise is determined by summing the employment of 

all associated establishments. 

The size of an enterprise is determined by the summed employment of all associated 

establishments. The enterprise size group of zero includes enterprises for which no associated 

establishments reported paid employees in the mid-March pay period, but paid employees at 

some time during the year. 

A firm is defined as that part of an enterprise tabulated within a particular industry. For 

example, an enterprise with establishments in more than one industry is counted as a firm in each 

industry in which it operates an establishment, but is also counted as only one firm in all-industry 

tabulations. Thus, summing the firms across industries would overstate the number of unique 

firms. 

Employment size is determined only for the entire enterprise. Hence, counterintuitive 

results are possible. For example, it would be possible that enterprises classified as having more 

than one hundred employees have an average of less than one hundred employees in a particular 

industry. However, for 2004, the averages for the industries described in our analysis are 

consistent with the size classification. 

Economic Census. The quinquennial200 Economic Census is the major source of facts 

about the structure and functioning of the Nation's economy. It reports statistics on the number of 

establishments; employment; payroll; and value of sales, receipts, revenue, or shipments for 

establishments with paid employees. 201

The Economic Census is conducted on an establishment basis.202 A company operating at 

more than one location is required to file a separate report for each store, factory, shop, or other 

location. Each establishment is assigned a separate industry classification based on its primary 

activity and not that of its parent company. 

I.A.3. Comparison of 2002 Economic Census with SUSB 

For the covered sectors and their industries, the firm size reports of the 2002 Economic 

Census provide aggregate revenue in all displays, classification by receipt size of firm, and more 

detailed classification of employment size than is shown in SUSB. 

Data are classified by the employment size of the firm, that is, that part of the enterprise 

within the industry category shown and not on the employment size of the entire enterprise as 

 

200 The Economic Census is taken every five years, covering years ending in 2 and 7. 

201 For 2002 Economic Census data, see http://www.census.gov/econ/census02/ 

202 For a detailed description of the methodology, see http://www.census.gov/econ/census02/guide/index.html 

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shown in Statistics of U.S. Businesses. In both programs, industry is determined on an 

establishment-by-establishment basis.203

The 2002 Economic Census summarizes data for many service industries separately 

depending on whether the firm is subject to Federal income tax or is tax-exempt. Statistics of 

U.S. Businesses combines both types of firms within the same industry. 

The 2002 Economic Census generally uses respondent-reported data. The Statistics of 

U.S. Businesses uses administrative record data. Although efforts are made to resolve significant 

differences in the data, differences are known to exist. 

I.B. Description of Basic Terms 

I.B.1. Establishments 

An establishment is a single physical location at which business is conducted or services 

or industrial operations are performed. It is not necessarily identical with a company or 

enterprise, which may consist of one or more establishments. When two or more activities are 

carried on at a single location under a single ownership, all activities generally are grouped 

together as a single establishment. The entire establishment is classified on the basis of its major 

activity and all data are included in that classification. 

An establishment with zero employment is an establishment reporting no paid employees 

in the mid-March pay period, but paid employees at some time during the year. Establishment 

counts represent the number of locations with paid employees any time during the year. 

I.B.2. Annual Payroll 

Payroll includes all forms of compensation, such as salaries, wages, commissions, 

dismissal pay, bonuses, vacation allowances, sick-leave pay, and employee contributions, to 

qualified pension plans paid during the year to all employees. For corporations, payroll includes 

amounts paid to officers and executives; for unincorporated businesses, it does not include profit 

or other compensation of proprietors or partners. Payroll is reported before deductions for social 

security, income tax, insurance, union dues, etc. This definition of payroll is the same as that 

used by the Internal Revenue Service (IRS) on Form 941. For Finance, Insurance, and Real 

Estate, payroll excludes commissions paid to independent (nonemployee) agents, such as 

insurance and real estate agents. 

 

203 Statistics of U.S. Businesses is developed from the same database that is used to produce County Business 

Patterns (CBP); nonetheless, CBP classifies establishments by the employment size of the establishment rather than 

the employment size of the entire enterprise. 

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I.B.3. Number of Employees 

Paid employees consists of full-time and part-time employees, including salaried officers 

and executives of corporations, who (for all sectors except Construction and Manufacturing) 

were on the payroll during the pay period including March 12. Included are employees on paid 

sick leave, paid holidays, and paid vacations; not included are proprietors and partners of 

unincorporated businesses. The definition of paid employees is the same as that used on IRS 

Form 941. For Finance, Insurance, and Real Estate, the number of employees excludes 

independent (nonemployee) agents. 

I.B.4. Sales, Receipts, or Revenues 

The total sales, shipments, receipts, revenue, or business done by establishments are 

counted by the Economic Census. For Finance, Insurance, and Real Estate, this includes revenue 

from all business activities whether or not payment was received in the Census year, including 

commissions and fees from all sources, rents, net investment income, interest, dividends, 

royalties, and net insurance premiums earned. Revenue from leasing property marketed under 

operating leases is included, as well as interest earned from property marketed in the Census year 

under capital, finance, or full payout leases. Revenue also includes the total value of service 

contracts, amounts received for work subcontracted to others, and rents from real property sublet 

to others. 

I.B.5. Nonemployer Firms 

A nonemployer business is one that has no paid employees, has annual business receipts 

of $1,000 or more ($1 or more in the construction industries), and is subject to federal income 

taxes. 204 Nonemployers are typically self-employed individuals or partnerships operating 

businesses that they have not chosen to incorporate. Self-employed owners of incorporated 

businesses typically pay themselves wages or salary, so that the business is an employer. Note 

that many businesses use leased or contract employees. In cases where all employees are leased 

or contracted, the payroll for the business is zero, placing it in the potential nonemployer 

universe. If the establishment's receipts are large, it may be dropped from nonemployer 

tabulations because its receipts exceed the cutoffs to be considered a nonemployer. 

In terms of sales or receipts, nonemployers account for roughly 3% of business activity. 

At the same time, nonemployers account for nearly three quarters of all businesses. Most 

nonemployer businesses are very small, and many are not the primary source of income for their 

owners. 

The Bureau of the Census releases tabulations of nonemployers. Since the reference year 

of 1998, the nonemployer statistics tabulations have been released as an annual data series. Data 

include the number of establishments and the aggregate revenue of the industry. Nonemployer 

 

204 The description of the Nonemployer series is taken from the Census Bureau’s web site: 

http://www.census.gov/epcd/nonemployer/view/define.html 

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statistics data originate chiefly from administrative records of the Internal Revenue Service 

(IRS). Data are primarily comprised of sole proprietorship businesses filing IRS Form 1040, 

Schedule C, although a small percentage of the data is derived from filers of partnership and 

corporation tax returns that report no paid employees. 

I.C. Size Standards 

SBA's size standards define whether a business entity is small and, thus, eligible for 

Government programs and preferences reserved for “small business” concerns. Size standards 

have been established for types of economic activity, or industry, generally under the North 

American Industry Classification System (NAICS). For most of the industries considered, a 

“small” business is defined by revenue (see table below). 

For the purposes of estimating the economic impact of the RESPA rule on small 

businesses, the share of revenue earned by small businesses is required. Data on the distribution 

of revenues is only available from the Economic Census, the most recent of which reports data 

for 2002. The most common size standard for 2002 for the industries under consideration was 

revenue less than six million dollars. Unfortunately, it is not possible to know the exact number 

of firms earning less than six million dollars of revenue from the 2002 Economic Census data. 

The data are not presented in a detailed enough breakdown. This is also the case for other 

revenue size standards, such as $1.5 and $4 million. 

To estimate the total revenue for employer firms in 2002 earning below $6 million in 

revenue, we add the revenue of firms earning less than $5 million (given by the Economic 

Census) to an estimate of the aggregate revenue of those earning between $5 million and $6 

million. To estimate the revenue between $5 million and $6 million, we assume that the 

distribution is linear implying that the number of firms in this range is one fifth of the number of 

firms earning between $5 million and $10 million. A further assumption that the firms in the $5 

million to $6 million range earn the maximum of $6 million yields the aggregate revenue. Our 

estimate of the proportion of employer firms that are small is achieved by dividing by the total 

number of firms operating the entire year in 2002. The number of employees in this range is 

estimated by dividing the aggregate revenue by the revenue per employee ratio for firms with 

revenue between $5 million and $10 million. 

 For other revenue size standards, such as $1.5 and $4 million, generous estimates are 

taken directly from the Economic Census (below $2.5 and $5 million respectively). This was not 

done for the $6 million dollar standard because the next boundary is $10 million dollars, which is 

significantly higher. For 2004, it is not possible to calculate the size distribution by revenue 

because those data are not provided. 

For three of the industries considered in this analysis (Commercial Banks, Savings 

Institutions, and Credit Unions), the SBA definition of small is by the dollar amount of assets 

($150 million in 2002). However, data on assets are not collected by the Census as part of the 

Economic Census or the Statistics of U.S. Businesses. Instead, asset data collected by the 

Federal Deposit Insurance Corporation (FDIC) for Commerical Banks and Savings Institutions is 

used. Asset data for Credit Unions comes from the National Credit Union Administration. 

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II. Description of Methodology 

In some cases, data were not available. However, fairly straightforward methods for 

estimating the missing data were possible. 

II.A. Estimating Nonemployer Statistics for Sub-industries 

For disclosure purposes, sub-industry (six-digit NAICS industry) data are not provided in 

the Nonemployer Statistics for the following industries: Real Estate Credit (522292), Mortgage 

and Non-mortgage Loan Brokers (522310), Commercial Banking (522110), Savings Institutions 

(522120), Credit Unions (522130), Direct Title insurance carriers (524127), Offices of Lawyers 

(541110), and Title Abstract and Settlement Offices (541191). An estimate of the number of 

nonemployer firms in each six-digit sub-industry can be calculated by multiplying the number of 

nonemployer firms in the corresponding four-digit industry (Nondepository credit Intermediation 

(5222), Activities Related to Credit Intermediation (5223), Insurance Carriers (5241), and Legal 

Services (5411)) by a ratio calculated from employer data. The ratio is the share of small 

employer firms (1-4 employees) of a six-digit sub-industry in the four-digit industry. To 

calculate the share of revenue of nonemployer firms, employer revenue data are used for 2002 

and employer payroll data are used for 2004. 

Consider the loan brokerage industry. The nonemployer statistics do not provide data for 

the six-digit sub-industry of Mortgage and Non-mortgage Loan Brokers (NAICS 522310), but 

they are provided for the four-digit industry of Activities Related to Credit Intermediation 

(5223). Thus, an estimate of the proportion of nonemployer firms in Activities Related to Credit 

Intermediation that are Mortgage and Non-mortgage Loan Brokers can be obtained by examining 

the proportion of small employer firms in Activities Related to Credit Intermediation that are 

Mortgage and Non-mortgage Loan Brokers. 

In 2004, 68.3% of the firms with 1-4 employees in Activities Related to Credit 

Intermediation are Mortgage and Non-mortgage Loan Brokers. Applying this ratio to the 

number of Nonemployers in Activities Related to Credit Intermediation (45,392) yields an 

estimate of 31,014 nonemployer firms in the brokerage industry. Estimating the revenue of 

nonemployer firms in 2004 is not as straightforward because revenue data are not available that 

year for employer firms. Instead, the share of payroll of brokers is used as an approximation of 

the share of revenue. In 2004, Mortgage and Non-mortgage Loan Brokers accounted for 71.0% 

of the payroll of firms with 1-4 employees in Activities Related to Credit Intermediation. 

Multiplying the estimated total revenue of Activities Related to Credit Intermediation ($2.1 

billion) by the above percentage of 71.0% yields an estimate of $1.5 billion of the revenue of 

nonemployer Loan Brokers. 

 5-126 
II.B. Estimating Revenue of Employer Firms for 2004 

Revenue statistics for employer firms are available from the Economic Census of 2002, 

but are not available for more recent years. To estimate revenue for 2004, payroll statistics for 

2004 are multiplied by a revenue-payroll ratio for the relevant firm size calculated from 2002 

data. Consider the loan broker industry. 

For firms with less than 20 employees, the ratio of revenue to payroll for 2002 is 2.92; for 

firms with between 20 and 99 employees, it is 2.34; and for firms with 100 or more, the ratio is 

2.42. These ratios are used to estimate the revenues for the different categories of firms. For 

example, firms with less than twenty employees are estimated to have earned $8.75 billion (2.92 

times $2.99 billion). The estimated revenue of the different firm sizes are aggregated to arrive at 

an estimate of total revenues ($18.4 billion). The most direct method of estimating revenue for 

the entire industry would be to multiply the revenue-payroll ratio of the entire industry (2.68) in 

2002 by the total payroll in 2004. This would yield an estimate of $18.9 billion. This is slightly 

lower than the sum of the parts because payroll and revenue are not distributed identically across 

firm sizes. Since this analysis focuses on the size distribution, a method is chosen such that the 

estimate of the whole is consistent with the estimates of the parts. 

II.C. Miscellaneous 

II.C.1. Calculating the Percentage of Small Businesses 

For 2002, the sum of small businesses is calculated by adding the number of employer 

firms, operating for the entire year, under the appropriate revenue size standard to the number of 

nonemployer firms. Doing so implicitly assumes that all nonemployer firms have operated for 

the entire year, are below the revenue size standard, and have exactly one person working fulltime at the firm. 

II.C.2. Dollar Values 

All dollar values presented are expressed in current dollars; i.e., 2002 data are expressed 

in 2002 dollars, and 2004 data, in 2004 dollars. Consequently, when making comparisons with 

prior years, users of the data should consider the changes in the price level that has occurred. In 

order to inflate 2002 dollars to 2004 dollars multiply by 188.9/179.9, or 1.05. The price deflator 

is based on price levels as measured by the U.S. Consumer Price Index (not seasonally adjusted, 

the U.S. city average for all items, and base period of 1982-84). 

 5-127 
III. Description of NAICS (North American Industry Classification System) Industries 

III.A. Mortgage Lending 

522110 Commercial Banking 

This industry comprises establishments primarily engaged in accepting demand and other 

deposits and making commercial, industrial, and consumer loans. Commercial banks and 

branches of foreign banks are included. 

522120 Savings Institutions 

This industry comprises establishments primarily engaged in accepting time deposits, 

making mortgage and real estate loans, and investing in high-grade securities. Savings and loan 

associations and savings banks are included in this industry. 

522130 Credit Unions 

This industry comprises establishments primarily engaged in accepting members' share 

deposits in cooperatives that are organized to offer consumer loans to their members. 

522310 Mortgage and Nonmortgage Loan Brokers 

This industry comprises establishments primarily engaged in arranging loans by bringing 

borrowers and lenders together on a commission or fee basis. 

522292 Real Estate Credit 

This U.S. industry comprises establishments primarily engaged in lending funds with real 

estate as collateral. This includes: construction lending, farm mortgage lending, Federal Land 

Banks, home equity credit lending, loan correspondents (i.e., lending funds with real estate as 

collateral), mortgage banking (i.e., nondepository mortgage lending), and mortgage companies. 

III.B. Settlement Services 

524127 Direct Title Insurance Carriers 

This U.S. industry comprises establishments primarily engaged in initially underwriting 

insurance policies to protect the owners of real estate or real estate creditors against loss 

sustained by reason of any title defect to real property (i.e., assuming the risk and assigning 

premiums). 

531210 Offices of Real Estate Agents and Brokers 

This industry comprises establishments primarily engaged in acting as agents and/or 

brokers in one or more of the following: (1) selling real estate for others; (2) buying real estate 

for others; and (3) renting real estate for others. 

 5-128 
531320 Offices of Real Estate Appraisers 

This industry comprises establishments primarily engaged in estimating the fair market 

value of real estate. 

531390 Other Activities Related to Real Estate 

This industry comprises establishments primarily engaged in performing real estate 

related services (except lessors of real estate, offices of real estate agents and brokers, real estate 

property managers, and offices of real estate appraisers). Examples of establishments in this 

industry are: real estate escrow agencies, real estate fiduciaries offices, and real estate listing 

services. 

541110 Offices of Lawyers 

This industry comprises offices of legal practitioners known as lawyers or attorneys (i.e., 

counselors-at-law) primarily engaged in the practice of law. Establishments in this industry may 

provide expertise in a range or in specific areas of law, such as criminal law, corporate law, 

family and estate law, patent law, real estate law, or tax law. 

541191 Title Abstract and Settlement Offices 

This U.S. industry comprises establishments (except offices of lawyers and attorneys) 

primarily engaged in one or more of the following activities: (1) researching public land records 

to gather information relating to real estate titles; (2) preparing documents necessary for the 

transfer of the title, financing, and settlement; (3) conducting final real estate settlements and 

closings; and (4) filing legal and other documents relating to the sale of real estate. Real estate 

settlement offices, title abstract companies, and title search companies are included in this 

industry. 

541370 Surveying and Mapping (Except Geophysical) Services 

This industry comprises establishments primarily engaged in performing surveying and 

mapping services of the surface of the earth, including the sea floor. These services may include 

surveying and mapping of areas above or below the surface of the earth, such as the creation of 

view easements or segregating rights in parcels of land by creating underground utility 

easements. 

561450 Credit Bureaus 

This industry comprises establishments primarily engaged in compiling information, such 

as credit and employment histories on individuals and credit histories on businesses, and 

providing the information to financial institutions, retailers, and others who have a need to 

evaluate the credit worthiness of these persons and businesses. Examples of industries in this 

classification include: Consumer credit reporting bureaus, Credit agencies, Credit bureaus, Credit 

investigation services, Credit rating services, Credit reporting bureaus; Credit investigation 

services, and Mercantile credit reporting bureaus. 

 5-129 
 5-130 

561710 Exterminating and Pest Control Services 

This industry comprises establishments primarily engaged in exterminating and 

controlling birds, mosquitoes, rodents, termites, and other insects and pests (except for crop 

production and forestry production). Establishments providing fumigation services are included 

in this industry. Examples of industries include: Exterminating services, Fumigating services, 

Mosquito eradication services, and Termite control services. 

III.C. Miscellaneous Services 

236115 New Single-Family General Contractors 

This U.S. industry comprises general contractor establishments primarily responsible for 

the entire construction of new single-family housing, such as single-family detached houses and 

town houses or row houses where each housing unit (1) is separated from its neighbors by a 

ground-to-roof wall and (2) has no housing units constructed above or below. This industry 

includes general contractors responsible for the on-site assembly of modular and prefabricated 

houses. Single-family housing design-build firms and single-family construction management 

firms acting as general contractors are included in this industry. 

236117 New Housing Operative Builders 

This U.S. industry comprises establishments primarily engaged in building new homes on 

land that is owned or controlled by the builder rather than the homebuyer or investor. The land 

is included with the sale of the home. Establishments in this industry build single and/or 

multifamily homes. These establishments are often referred to as merchant builders, but are also 

known as production or for-sale builders. 
IV. Data Appendix 

IV.A. Mortgage Brokers 

Table 5-22. Mortgage and Non-mortgage Loan Brokers: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 19,138 17,802 1,093 243

Total Establishments 20,838 18,067 1,619 1,152

Total Employment 138,328 61,481 39,697 37,150

Total Payroll ($1,000) $7,052,212 $2,992,813 $1,864,679 $2,194,720

Estimated Revenue ($1,000) $18,422,897 $8,748,057 $4,363,163 $5,311,677

Share of Firms 100.0% 93.0% 5.7% 1.3%

Share of Establishments 100.0% 86.7% 7.8% 5.5%

Share of Employment 100.0% 44.4% 28.7% 26.9%

Share of Payroll 100.0% 42.4% 26.4% 31.1%

Share of Estimated Revenue 100.0% 47.5% 23.7% 28.8%

Employees per Firm 7.2 3.5 36.3 152.9

Payroll per Firm $368,493 $168,117 $1,706,019 $9,031,770

Payroll per Employee $50,982 $48,679 $46,973 $59,077

Estimated Revenue per Firm $962,634 $491,409 $3,991,915 $21,858,752

Estimated Revenue per Employee $133,183 $142,289 $109,912 $142,979

Distribution by Number of Employees

1. Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

2. In the Statistics of U.S. Businesses, a firm is defined as that part of an enterprise tabulated within a particular 

 industry. Employment size is determined only for the entire enterprise. This result makes sense only when one is 

 aware that an enterprise can participate in more than one industry. 

Table 5-23. Mortgage and Non-mortgage Loan Brokers: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 19,138 $18,422,897 $962,634

Firms with less than 100 Employees 18,895 $13,111,220 $693,899

Nonemployer Firms (estimated)

2 31,014 $1,497,546 $48,285

Total (All Firms) 50,152 19,920,442 $397,198

Total "Small" (nonemp. + Firms < 100emp.) 49,909 14,608,766 $292,705

Percentage Firms "Small" 99.5% 73.3% 73.7%

1. Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

2. Data for Nonemployer firms of the sub-industry Mortgage and non-mortgage loan brokers were estimated from 

employer data on Activities related to credit intermediation. 

 5-131 
Table 5-24. Mortgage and Non-mortgage Loan Brokers: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms Operating 

for the Entire 

Year

Firms Operating 

Entire Year, 

earning less than 

$5 million in 

revenue

Share of Firms 

Operating Entire 

Year, earning less 

than $5 million in 

revenue

Firms Operating 

Entire Year, 

earning $5-10 

million in revenue

Share of Firms 

Operating Entire 

Year, earning $5-

10 million in 

revenue

Total Number of Firms 15,590 12,365 11,980 96.9% 244 2.0%

Number of Establishments 17,041 13,810 12,614 91.3% 478 3.5%

Revenue ($1,000) $14,123,022 $13,386,940 $8,303,854 62.0% $1,660,112 12.4%

Annual Payroll ($1,000) $5,261,535 $5,060,845 $3,211,839 63.5% $648,839 12.8%

Number of Employees 105,147 101,318 72,734 71.8% 10,911 10.8%

Employees per Firm 6.7 8.2 6.1 44.7

Payroll per Firm $337,494 $409,288 $268,100 $2,659,176

Payroll per Employee $50,040 $49,950 $44,159 $59,467

Revenue per Firm $905,903 $1,082,648 $693,143 $6,803,738

Revenue per Employee $134,317 $132,128 $114,167 $152,150

Table 5-25. Mortgage and Non-mortgage Loan Brokers: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 15,590 $14,123,022 $905,903

Firms Operating Entire Year 12,365 $13,386,940 $1,082,648

Firms Operating Entire Year, earning <$5 mill. 11,980 $8,303,854 $693,143

Share earning <$5 million 96.9% 62.0%

Firms Operating Entire Year, earning <$6 mill. ( 12,029 $8,596,654 $714,673

Share earning <$6 million (Estimate) 97.3% 64.2%

Nonemployer Firms (estimated) 25,105 $1,226,911 $48,871

Total (All Firms) 40,695 $15,349,933

Total (Nonemp. + Employers entire year) 37,470 $14,613,851

Share of "Small Firms", firms earning <$5 mill. 99.0% 65.2%

Share of "Small Firms", firms earning <$6 mill. 99.1% 67.2%

* Data for Nonemployer firms of the sub-industry Mortgage and non-mortgage loan brokers were estimated from employer 

data on Activities related to credit intermediation. 

 5-132 
IV.B. Real Estate Credit 

Table 5-26. Real Estate Credit: 2004 Industry Characteristics of Industry (employers) 

Data Total <20 20-99 100+

Total Firms 9,502 8,042 895 565

Total Establishments 24,863 8,164 1,356 15,343

Total Employment 360,951 27,031 35,742 298,178

Total Payroll ($1,000) $24,479,460 $1,446,960 $1,997,964 $21,034,536

Estimated Revenue ($1,000) $105,703,258 $5,700,852 $6,275,938 $93,726,468

Share of Firms 100.0% 84.6% 9.4% 5.9%

Share of Establishments 100.0% 32.8% 5.5% 61.7%

Share of Employment 100.0% 7.5% 9.9% 82.6%

Share of Payroll 100.0% 5.9% 8.2% 85.9%

Share of Estimated Revenue 100.0% 5.4% 5.9% 88.7%

Employees per Firm 38.0 3.4 39.9 527.7

Payroll per Firm $2,576,243 $179,925 $2,232,362 $37,229,267

Payroll per Employee $67,819 $53,530 $55,900 $70,544

Estimated Revenue per Firm $11,124,317 $708,885 $7,012,221 $165,887,554

Estimated Revenue per Employee $292,847 $210,901 $175,590 $314,331

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-27. Real estate credit 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 9,502 $105,703,258 $11,124,317

Firms with less than 100 Employees 8,937 $11,976,790 $1,340,135

Nonemployer Firms (estimated)

2 6,830 $599,306 $87,744

Total (All Firms) 16,332 106,302,563 $6,508,774

Total "Small" (nonemp. + Firms < 100emp.) 15,767 12,576,095 $797,611

Percentage Firms "Small" 96.5% 11.8% 12.3%

2. Data for Nonemployer firms of the sub-industry Real estate credit were estimated from employer data on 

 Nondepository credit intermediation. 

 5-133 
Table 5-28. Real estate credit 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms Operating 

for the Entire 

Year

Firms earning less 

than $5 million in 

revenue

Share of Firms 

earning less than 

$5 million in 

revenue

Firms earning $5-

10 million in 

revenue

Share of Firms, 

earning $5-10 

million in revenue

Total Number of Firms 15,590 12,365 11,980 96.9% 244 2.0%

Number of Establishments 17,041 13,810 12,614 91.3% 478 3.5%

Revenue ($1,000) $14,123,022 $13,386,940 $8,303,854 62.0% $1,660,112 12.4%

Annual Payroll ($1,000) $5,261,535 $5,060,845 $3,211,839 63.5% $648,839 12.8%

Number of Employees 105,147 101,318 72,734 71.8% 10,911 10.8%

Employees per Firm 6.7 8.2 6.1 44.7

Payroll per Firm $337,494 $409,288 $268,100 $2,659,176

Payroll per Employee $50,040 $49,950 $44,159 $59,467

Revenue per Firm $905,903 $1,082,648 $693,143 $6,803,738

Firms Operating for the Entire Year

Table 5-29. Real estate credit 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 15,590 $14,123,022 $905,903

Firms Operating Entire Year 12,365 $13,386,940 $1,082,648

Firms Operating Entire Year, earning <$5 mill. 11,980 $8,303,854 $693,143

Share earning <$5 million 96.9% 62.0%

Firms Operating Entire Year, earning <$6 mill. ( 12,029 $8,596,654 $714,673

Share earning <$6 million (Estimate) 97.3% 64.2%

Nonemployer Firms (estimated) 25,105 $1,226,911 $48,871

Total (All Firms) 40,695 $15,349,933

Total (Nonemp. + Employers entire year) 37,470 $14,613,851

Share of "Small Firms", firms earning <$5 mill. 99.0% 65.2%

Share of "Small Firms", firms earning <$6 mill. 99.1% 67.2%

* Data for Nonemployer firms of the sub-industry Real estate credit were estimated from employer data on 

 Nondepository credit intermediation. 

 5-134 
IV.C. Commercial Banks 

Table 5-30. Commercial Banking: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 6,978 1,962 3,602 1,414

Total Establishments 83,030 2,328 9,980 70,722

Total Employment 1,631,328 21,153 159,827 1,450,348

Total Payroll ($1,000) $80,733,881 $1,074,683 $5,889,268 $73,769,930

Estimated Revenue ($1,000) $496,855,046 $5,980,167 $33,389,841 $457,485,038

Share of Firms 100.0% 28.1% 51.6% 20.3%

Share of Establishments 100.0% 2.8% 12.0% 85.2%

Share of Employment 100.0% 1.3% 9.8% 88.9%

Share of Payroll 100.0% 1.3% 7.3% 91.4%

Share of Estimated Revenue 100.0% 1.2% 6.7% 92.1%

Employees per Firm 233.8 10.8 44.4 1025.7

Payroll per Firm $11,569,774 $547,749 $1,634,999 $52,171,096

Payroll per Employee $49,490 $50,805 $36,848 $50,864

Estimated Revenue per Firm $71,203,073 $3,047,995 $9,269,806 $323,539,631

Estimated Revenue per Employee $304,571 $282,710 $208,912 $315,431

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll 

ratios. 

Table 5-31. Commercial Banking: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 6,978 $496,855,046 $71,203,073

Firms with less than 100 Employees 5,564 $39,370,008 $7,075,846

Nonemployer Firms (estimated)

2 285 $37,520 $131,692

Total (All Firms) 7,263 496,892,566 $68,415,128

Total "Small" (nonemp. + Firms < 100emp.) 5,849 39,407,528 $6,737,591

Percentage Firms "Small" 80.5% 7.9% 9.8%

1. Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

2. Data for Nonemployer firms of the sub-industry Commercial Banks were estimated from employer data on 

 Firm counts from 2004 and revenue data from 2004 were used. 

 5-135 
Table 5-32. Commercial Banking: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms Operating 

for the Entire 

Year

Firms Operating 

Entire Year, 

earning less than 

$5 million in 

revenue

Share of Firms 

Operating Entire 

Year, earning less 

than $5 million in 

revenue

Firms Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of Firms 

Operating Entire 

Year, earning $5-

10 million in 

revenue

Total Number of Firms 7,285 6,979 3,080 44.1% 1,616 23.2%

Number of Establishments 81,357 81,042 4,711 5.8% 4,571 5.6%

Revenue ($1,000) $488,659,993 $485,926,987 $7,890,497 1.6% $11,471,472 2.4%

Annual Payroll ($1,000) $79,150,729 $78,941,851 $1,752,168 2.2% $2,281,276 2.9%

Number of Employees 1,737,056 1,733,793 54,770 3.2% 68,635 4.0%

Employees per Firm 238.4 248.4 17.8 42.5

Payroll per Firm $10,864,891 $11,311,341 $568,886 $1,411,681

Payroll per Employee $45,566 $45,531 $31,991 $33,238

Revenue per Firm $67,077,556 $69,627,022 $2,561,850 $7,098,683

Revenue per Employee $281,315 $280,268 $144,066 $167,137

Table 5-33. Commercial Banking: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 7,285 $488,659,993 $67,077,556

Firms Operating Entire Year 6,979 $485,926,987 $69,627,022

Firms Operating Entire Year, earning <$5 mill. 3,080 $7,890,497 $2,561,850

Share earning <$5 million 44.1% 1.6%

Firms Operating Entire Year, earning <$6 mill. ( 3,403 $9,829,697 $2,888,369

Share earning <$6 million (Estimate) 48.8% 2.0%

Nonemployer Firms (estimated) 237 $33,778 $142,381

Total (All Firms) 7,522 $488,693,771

Total (Nonemp. + Employers entire year) 7,216 $485,960,765

Share of "Small Firms", firms earning <$5 mill. 46.0% 1.6%

Share of "Small Firms", firms earning <$6 mill. 50.4% 2.0%

 5-136 
IV.D. Savings Institutions 

Table 5-34. Savings Institutions: 2004 Characteristics of Industry (employers) 

Data Total <20 20-99 100+

Total Firms 1,390 327 616 447

Total Establishments 16,399 400 2,023 13,976

Total Employment 248,962 3,143 29,959 215,860

Total Payroll ($1,000) $12,006,662 $139,996 $1,173,505 $10,693,161

Estimated Revenue ($1,000) $92,507,359 $953,408 $7,716,917 $83,837,034

Share of Firms 100.0% 23.5% 44.3% 32.2%

Share of Establishments 100.0% 2.4% 12.3% 85.2%

Share of Employment 100.0% 1.3% 12.0% 86.7%

Share of Payroll 100.0% 1.2% 9.8% 89.1%

Share of Estimated Revenue 100.0% 1.0% 8.3% 90.6%

Employees per Firm 179.1 9.6 48.6 482.9

Payroll per Firm $8,637,886 $428,122 $1,905,041 $23,922,060

Payroll per Employee $48,227 $44,542 $39,170 $49,537

Estimated Revenue per Firm $66,552,057 $2,915,622 $12,527,463 $187,554,886

Estimated Revenue per Employee $371,572 $303,343 $257,583 $388,386

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-35. Savings Institutions: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 1,390 $92,507,359 $66,552,057

Firms with less than 100 Employees 943 $8,670,325 $9,194,406

Nonemployer Firms (estimated)

2 111 $7,781 $70,011

Total (All Firms) 1,501 92,515,140 $61,630,204

Total "Small" (nonemp. + Firms < 100emp.) 1,054 8,678,106 $8,232,457

Percentage Firms "Small" 70.2% 9.4% 13.4%

1. Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

2. Data for Nonemployer firms of the sub-industry Savings Institutions were estimated from employer data on 

 Depository credit inter-mediation. Firm counts from 2004 and revenue data from 2004 were used. 

 5-137 
Table 5-36. Savings Institutions: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of 

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Total Number of Firms 1,480 1,431 444 31.0% 290 20.3%

Number of Establishments 16,744 16,692 684 4.1% 801 4.8%

Revenue ($1,000) $77,459,937 $77,323,272 $1,107,439 1.4% $2,119,990 2.7%

Annual Payroll ($1,000) $10,109,162 $10,084,055 $211,018 2.1% $363,499 3.6%

Number of Employees 246,426 245,806 6,576 2.7% 10,513 4.3%

Employees per Firm 166.5 171.8 14.8 36.3

Payroll per Firm $6,830,515 $7,046,859 $475,266 $1,253,445

Payroll per Employee $41,023 $41,024 $32,089 $34,576

Revenue per Firm $52,337,795 $54,034,432 $2,494,232 $7,310,310

Revenue per Employee $314,333 $314,570 $168,406 $201,654

Table 5-37. Savings Institutions: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 1,480 $77,459,937 $52,337,795

Firms Operating Entire Year 1,431 $77,323,272 $54,034,432

Firms Operating Entire Year, earning <$5 mill. 444 $1,107,439 $2,494,232

Share earning <$5 million 31.0% 1.4%

Firms Operating Entire Year, earning <$6 mill. ( 502 $1,455,439 $2,899,281

Share earning <$6 million (Estimate) 35.1% 1.9%

Nonemployer Firms (estimated) 93 $7,005 $75,694

Total (All Firms) 1,573 $77,466,942

Total (Nonemp. + Employers entire year) 1,524 $77,330,277

Share of "Small Firms", firms earning <$5 mill. 35.2% 1.4%

Share of "Small Firms", firms earning <$6 mill. 39.0% 1.9%

 5-138 
IV.E. Credit Union Industry 

Table 5-38. Credit Unions: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 8,358 6,220 1,602 536

Total Establishments 16,043 6,701 4,234 5,108

Total Employment 229,213 35,572 70,063 123,578

Total Payroll ($1,000) $7,711,752 $981,656 $2,194,368 $4,535,728

Estimated Revenue ($1,000) $44,636,510 $4,871,891 $11,362,337 $28,402,282

Share of Firms 100.0% 74.4% 19.2% 6.4%

Share of Establishments 100.0% 41.8% 26.4% 31.8%

Share of Employment 100.0% 15.5% 30.6% 53.9%

Share of Payroll 100.0% 12.7% 28.5% 58.8%

Share of Estimated Revenue 100.0% 10.9% 25.5% 63.6%

Employees per Firm 27.4 5.7 43.7 230.6

Payroll per Firm $922,679 $157,823 $1,369,768 $8,462,179

Payroll per Employee $33,644 $27,596 $31,320 $36,703

Estimated Revenue per Firm $5,340,573 $783,262 $7,092,595 $52,989,332

Estimated Revenue per Employee $194,738 $136,959 $162,173 $229,833

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-39. Credit Union Industry: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 8,358 $44,636,510 $5,340,573

Firms with less than 100 Employees 7,822 $16,234,228 $2,075,457

Nonemployer Firms (estimated)

2 7,226 $203,128 $28,112

Total (All Firms) 15,584 44,839,638 $2,877,347

Total "Small" (nonemp. + Firms < 100emp.) 15,048 16,437,356 $1,092,352

Percentage Firms "Small" 96.6% 36.7% 38.0%

1. Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

2. Data for Nonemployer firms of the sub-industry Credit Unions were estimated from employer data on 

 Firm counts from 2004 and revenue data from 2004 were used. 

 5-139 
Table 5-40. Credit Unions: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of 

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Total Number of Firms 8,836 8,617 7,345 85.2% 544 6.3%

Number of Establishments 16,295 16,074 8,867 55.2% 1,784 11.1%

Revenue ($1,000) $37,050,065 $36,994,154 $7,256,066 19.6% $3,891,443 10.5%

Annual Payroll ($1,000) $6,466,086 $6,456,010 $1,561,336 24.2% $796,462 12.3%

Number of Employees 208,038 207,411 60,064 29.0% 26,926 13.0%

Employees per Firm 23.5 24.1 8.2 49.5

Payroll per Firm $731,789 $749,218 $212,571 $1,464,085

Payroll per Employee $31,081 $31,127 $25,995 $29,580

Revenue per Firm $4,193,081 $4,293,159 $987,892 $7,153,388

Revenue per Employee $178,093 $178,362 $120,806 $144,524

Table 5-41. Credit Unions: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 8,836 $37,050,065 $4,193,081

Firms Operating Entire Year 8,617 $36,994,154 $4,293,159

Firms Operating Entire Year, earning <$5 mill. 7,345 $7,256,066 $987,892

Share earning <$5 million 85.2% 19.6%

Firms Operating Entire Year, earning <$6 mill. ( 7,454 $7,908,866 $1,061,052

Share earning <$6 million (Estimate) 86.5% 21.4%

Nonemployer Firms (estimated) 6,017 $182,868 $30,394

Total (All Firms) 14,853 $37,232,933

Total (Nonemp. + Employers entire year) 14,634 $37,177,022

Share of "Small Firms", firms earning <$5 mill. 91.3% 20.0%

Share of "Small Firms", firms earning <$6 mill. 92.1% 21.8%

 5-140 
IV.F. Title Abstract and Settlement Offices 

Table 5-42. Title abstract & settlement offices: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 8,008 7,248 631 129

Total Establishments 9,769 7,349 1,044 1,376

Total Employment 79,819 31,303 21,749 26,767

Total Payroll ($1,000) $3,292,848 $1,123,652 $851,836 $1,317,360

Estimated Revenue ($1,000) $8,915,858 $3,125,697 $2,106,527 $3,683,635

Share of Firms 100.0% 90.5% 7.9% 1.6%

Share of Establishments 100.0% 75.2% 10.7% 14.1%

Share of Employment 100.0% 39.2% 27.2% 33.5%

Share of Payroll 100.0% 34.1% 25.9% 40.0%

Share of Estimated Revenue 100.0% 35.1% 23.6% 41.3%

Employees per Firm 10.0 4.3 34.5 207.5

Payroll per Firm $411,195 $155,029 $1,349,978 $10,212,093

Payroll per Employee $41,254 $35,896 $39,167 $49,216

Estimated Revenue per Firm $1,113,369 $431,250 $3,338,394 $28,555,308

Estimated Revenue per Employee $111,701 $99,853 $96,856 $137,619

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-43. Title abstract and settlement offices: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 8,008 $8,915,858 $1,113,369

Firms with less than 100 Employees 7,879 $5,232,224 $664,072

Nonemployer Firms (estimated)

2 6,203 $333,770 $53,809

Total (All Firms) 14,211 9,249,628 $650,884

Total "Small" (nonemp. + Firms < 100emp.) 14,082 5,565,993 $395,259

Percentage Firms "Small" 99.1% 60.2% 60.7%

8 Revenue is estimated for employer firms using revenue-payroll ratios calculating from 2002 data. 

 5-141 
Table 5-44. Title abstract and settlement offices: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of 

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Total Number of Firms 6,252 5,258 5,073 96.5% 107 2.0%

Number of Establishments 8,013 7,014 5,533 78.9% 349 5.0%

Revenue ($1,000) $7,600,419 $7,433,115 $3,423,742 46.1% $726,668 9.8%

Annual Payroll ($1,000) $2,608,123 $2,559,153 $1,320,401 51.6% $278,786 10.9%

Number of Employees 65,833 64,807 37,643 58.1% 6,295 9.7%

Employees per Firm 10.5 12.3 7.4 58.8

Payroll per Firm $417,166 $486,716 $260,280 $2,605,477

Payroll per Employee $39,617 $39,489 $35,077 $44,287

Revenue per Firm $1,215,678 $1,413,677 $674,895 $6,791,290

Revenue per Employee $115,450 $114,696 $90,953 $115,436

Table 5-45. Title abstract and settlement offices: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 6,252 $7,600,419 $1,215,678

Firms Operating Entire Year 5,258 $7,433,115 $1,413,677

Firms Operating Entire Year, earning <$5 mill. 5,073 $3,423,742 $674,895

Share earning <$5 million 96.5% 46.1%

Firms Operating Entire Year, earning <$6 mill. ( 5,094 $3,552,142 $697,264

Share earning <$6 million (Estimate) 96.9% 47.8%

Nonemployer Firms (estimated) 5,778 $297,785 $51,534

Total (All Firms) 12,030 $7,898,204

Total (Nonemp. + Employers entire year) 11,036 $7,730,900

Share of "Small Firms", firms earning <$5 mill. 98.3% 48.1%

Share of "Small Firms", firms earning <$6 mill. 98.5% 49.8%

 5-142 
IV.G. Offices of Lawyers 

Table 5-46. Offices of Lawyers: 2004 Characteristics of Industry (employers) 

Data Total <20 20-99 100+

Total Firms 166,704 158,661 6,933 1,110

Total Establishments 173,044 159,551 9,139 4,354

Total Employment 1,122,723 516,890 257,392 348,441

Total Payroll ($1,000) $74,131,522 $24,855,287 $18,305,726 $30,970,509

Estimated Revenue ($1,000) $189,579,592 $73,151,313 $39,060,403 $77,367,876

Share of Firms 100.0% 95.2% 4.2% 0.7%

Share of Establishments 100.0% 92.2% 5.3% 2.5%

Share of Employment 100.0% 46.0% 22.9% 31.0%

Share of Payroll 100.0% 33.5% 24.7% 41.8%

Share of Estimated Revenue 100.0% 38.6% 20.6% 40.8%

Employees per Firm 6.7 3.3 37.1 313.9

Payroll per Firm $444,690 $156,657 $2,640,376 $27,901,359

Payroll per Employee $66,028 $48,086 $71,120 $88,883

Estimated Revenue per Firm $1,137,223 $461,054 $5,633,983 $69,700,790

Estimated Revenue per Employee $168,857 $141,522 $151,755 $222,040

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-47. Offices of Lawyers 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 166,704 $189,579,592 $1,137,223

Firms with less than 100 Employees 165,594 $112,211,715 $677,632

Nonemployer Firms (estimated)

2 234,849 $13,985,539 $59,551

Total (All Firms) 401,553 203,565,131 $506,945

Total "Small" (nonemp. + Firms < 100emp.) 400,443 126,197,254 $315,144

Percentage Firms "Small" 99.7% 62.0% 62.2%

* Revenue is estimated for employer firms using revenue-payroll ratios calculating from 2002 data. 

 5-143 
Table 5-48. Offices of Lawyers: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms Operating 

for the Entire 

Year

Firms Operating 

Entire Year, 

earning less than 

$5 million in 

revenue

Share of Firms 

Operating Entire 

Year, earning less 

than $5 million in 

revenue

Firms Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of Firms 

Operating Entire 

Year, earning $5-

10 million in 

revenue

Total Number of Firms 162,593 136,934 133,148 97.2% 2,108 1.5%

Number of Establishments 169,120 143,438 135,327 94.3% 3,156 2.2%

Revenue ($1,000) $172,863,871 $168,013,231 $71,269,426 42.4% $14,406,204 8.6%

Annual Payroll ($1,000) $66,761,394 $65,084,824 $26,780,420 41.1% $6,564,815 10.1%

Number of Employees 1,080,428 1,045,862 594,558 56.8% 90,810 8.7%

Employees per Firm 6.6 7.6 4.5 43.1

Payroll per Firm $410,604 $475,301 $201,133 $3,114,239

Payroll per Employee $61,792 $62,231 $45,043 $72,292

Revenue per Firm $1,063,169 $1,226,965 $535,265 $6,834,063

Revenue per Employee $159,996 $160,646 $119,870 $158,641

Table 5-49. Offices of Lawyers: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 162,593 $172,863,871 $1,063,169

Firms Operating Entire Year 136,934 $168,013,231 $1,226,965

Firms Operating Entire Year, earning <$5 mill. 133,148 $71,269,426 $535,265

Share earning <$5 million 97.2% 42.4%

Firms Operating Entire Year, earning <$6 mill. ( 133,570 $73,799,026 $552,514

Share earning <$6 million (Estimate) 97.5% 43.9%

Nonemployer Firms (estimated) 218,777 $12,477,720 $57,034

Total (All Firms) 381,370 $185,341,591

Total (Nonemp. + Employers entire year) 355,711 $180,490,951

Share of "Small Firms", firms earning <$5 mill. 98.9% 46.4%

Share of "Small Firms", firms earning <$6 mill. 99.1% 47.8%

 5-144 
IV.H. Direct Title Insurance Carriers 

Table 5-50. Direct Title Insurance Carriers: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 1,959 1,778 124 57

Total Establishments 6,229 1,781 210 4,238

Total Employment 75,702 6,366 4,177 65,159

Total Payroll ($1,000) $4,754,017 $237,687 $182,352 $4,333,978

Estimated Revenue ($1,000) $18,087,340 $796,541 $558,079 $16,732,720

Share of Firms 100.0% 90.8% 6.3% 2.9%

Share of Establishments 100.0% 28.6% 3.4% 68.0%

Share of Employment 100.0% 8.4% 5.5% 86.1%

Share of Payroll 100.0% 5.0% 3.8% 91.2%

Share of Estimated Revenue 100.0% 4.4% 3.1% 92.5%

Employees per Firm 38.6 3.6 33.7 1143.1

Payroll per Firm $2,426,757 $133,682 $1,470,581 $76,034,702

Payroll per Employee $62,799 $37,337 $43,656 $66,514

Estimated Revenue per Firm $9,232,945 $447,998 $4,500,634 $293,556,493

Estimated Revenue per Employee $238,928 $125,124 $133,608 $256,798

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-51. Direct Title Insurance Carriers: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 1,959 $18,087,340 $9,232,945

Firms with less than 100 Employees 1,902 $1,354,620 $712,208

Nonemployer Firms (estimated)

2 135 $2,731 $20,190

Total (All Firms) 2,094 18,090,070 $8,637,972

Total "Small" (nonemp. + Firms < 100emp.) 2,037 1,357,350 $666,266

Percentage Firms "Small" 97.3% 7.5% 7.7%

1 Revenue is estimated for employer firms using revenue-payroll ratios calculating from 2002 data. 

2 Detailed Nonemployer firms are estimated using ratios computed from 2004 employer data. 

 5-145 
Table 5-52. Direct Title Insurance Carriers: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of 

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Total Number of Firms 1,201 943 887 94.1% 23 2.4%

Number of Establishments 4,375 4,117 944 22.9% 75 1.8%

Revenue ($1,000) $12,805,302 $12,763,346 $576,661 4.5% $159,633 1.3%

Annual Payroll ($1,000) $3,431,301 $3,419,262 $196,235 5.7% $49,399 1.4%

Number of Employees 63,278 63,144 5,702 9.0% 1,286 2.0%

Employees per Firm 52.7 67.0 6.4 55.9

Payroll per Firm $2,857,037 $3,625,941 $221,234 $2,147,783

Payroll per Employee $54,226 $54,150 $34,415 $38,413

Revenue per Firm $10,662,200 $13,534,831 $650,125 $6,940,565

Revenue per Employee $202,366 $202,131 $101,133 $124,131

Table 5-53. Direct Title Insurance Carriers: 2002 Firm Totals 

Firm Type

Number of 

Firms Revenue ($1,000) Revenue per Firm

All Employer Firms 68,649 $63,381,021 $923,262

Firms Operating Entire Year 49,089 $59,376,212 $1,209,562

Firms Operating Entire Year, earning <$5 mill. 47,510 $26,503,169 $557,844

Share earning <$5 million 96.8% 44.6%

Firms Operating Entire Year, earning <$2.5 mill. 45,694 $20,215,859 $442,418

Share earning <$2.5 million 93.1% 34.0%

Nonemployer Firms 569,949 $26,007,073 $45,631

Total (All Firms) 638,598 $89,388,094

Total (Nonemp. + Employers entire year) 619,038 $85,383,285

Share of "Small Firms", firms earning <$5 mill. 99.7% 61.5%

Share of "Small Firms", firms earning <$2.5 mill. 99.5% 54.1%

1

 use 2004 data to create ratio for estimating revenue 

 5-146 
IV.I. Office of Real Estate Appraisers 

Table 5-54. Real Estate Appraisers: 2004 Industry Characteristics (Employer Firms) 

Data Total <20 20-99 100+

Total Firms 15,689 15,494 150 45

Total Establishments 15,922 15,549 235 138

Total Employment 45,021 37,024 4,514 3,483

Total Payroll ($1,000) $1,721,397 $1,380,663 $205,799 $134,935

Estimated Revenue ($1,000) $4,958,984 $3,996,071 $436,683 $526,230

Share of Firms 100.0% 98.8% 1.0% 0.3%

Share of Establishments 100.0% 97.7% 1.5% 0.9%

Share of Employment 100.0% 82.2% 10.0% 7.7%

Share of Payroll 100.0% 80.2% 12.0% 7.8%

Share of Estimated Revenue 100.0% 80.6% 8.8% 10.6%

Employees per Firm 2.9 2.4 30.1 77.4

Payroll per Firm $109,720 $89,110 $1,371,993 $2,998,556

Payroll per Employee $38,235 $37,291 $45,591 $38,741

Estimated Revenue per Firm $316,080 $257,911 $2,911,218 $11,693,998

Estimated Revenue per Employee $110,148 $107,932 $96,740 $151,085

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-55. Real Estate Appraisers: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 15,689 $4,958,984 $316,080

Firms with less than 100 Employees 15,644 $4,432,754 $283,352

Nonemployer Firms 49,802 $2,334,356 $46,873

Total (All Firms) 65,491 7,293,340 $111,364

Total "Small" (nonemp. + Firms < 100emp.) 65,446 6,767,110 $103,400

Percentage Firms "Small" 99.9% 92.8% 92.8%

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

 5-147 
Table 5-56. Real Estate Appraisers: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning less 

than $2.5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $2.5 

million in 

revenue

Total Number of Firms 13,579 10,791 10,755 99.7% 10,685 99.0%

Number of Establishments 13,770 10,981 10,869 99.0% 10,770 98.1%

Revenue ($1,000) $4,611,696 $4,284,001 $3,438,765 80.3% $3,218,492 75.1%

Annual Payroll ($1,000) $1,557,043 $1,479,479 $1,262,538 85.3% $1,160,325 78.4%

Number of Employees 42,040 40,191 35,303 87.8% 33,298 82.8%

Employees per Firm 3.1 3.7 3.3 3.1

Payroll per Firm $114,666 $137,103 $117,391 $108,594

Payroll per Employee $37,037 $36,811 $35,763 $34,847

Revenue per Firm $339,620 $396,998 $319,736 $301,216

Revenue per Employee $109,698 $106,591 $97,407 $96,657

Table 5-57. Real Estate Appraisers: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 13,579 $4,611,696 $339,620

Firms Operating Entire Year 10,791 $4,284,001 $396,998

Firms Operating Entire Year, earning <$5 mill. 10,755 $3,438,765 $319,736

Share earning <$5 million 99.7% 80.3%

Firms Operating Entire Year, earning <$2.5 mill 10,685 $3,218,492 $301,216

Share earning <$2.5 million 99.0% 75.1%

Nonemployer Firms 39,727 $2,021,004 $50,872

Total (All Firms) 53,306 $6,632,700

Total (Nonemp. + Employers entire year) 50,518 $6,305,005

Share of "Small Firms", firms earning <$5 mill. 99.9% 86.6%

Share of "Small Firms", firms earning <$2.5 mil 99.8% 83.1%

 5-148 
IV.J. Extermination & Pest Control Services 

Table 5-58. Exterminating & Pest Control Services: 2004 Industry Characteristics 

(employers) 

Data Total <20 20-99 100+

Total Firms 10,065 9,432 556 77

Total Establishments 11,821 9,486 754 1,581

Total Employment 95,437 38,800 19,212 37,425

Total Payroll ($1,000) $2,963,040 $1,045,591 $603,123 $1,314,326

Estimated Revenue ($1,000) $7,397,076 $2,758,330 $1,337,594 $3,301,153

Share of Firms 100.0% 93.7% 5.5% 0.8%

Share of Establishments 100.0% 80.2% 6.4% 13.4%

Share of Employment 100.0% 40.7% 20.1% 39.2%

Share of Payroll 100.0% 35.3% 20.4% 44.4%

Share of Estimated Revenue 100.0% 37.3% 18.1% 44.6%

Employees per Firm 9.5 4.1 34.6 486.0

Payroll per Firm $294,390 $110,856 $1,084,754 $17,069,169

Payroll per Employee $31,047 $26,948 $31,393 $35,119

Estimated Revenue per Firm $734,931 $292,444 $2,405,744 $42,872,112

Estimated Revenue per Employee $77,507 $71,091 $69,623 $88,207

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-59. Exterminating & Pest Control Services: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 10,065 $7,397,076 $734,931

Firms with less than 100 Employees 9,988 $4,095,924 $410,084

Nonemployer Firms 7,935 $371,389 $46,804

Total (All Firms) 18,000 7,768,465 $431,581

Total "Small" (nonemp. + Firms < 100emp.) 17,923 4,467,313 $249,250

Percentage Firms "Small" 99.6% 57.5% 57.8%

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

 5-149 
Table 5-60. Exterminating & Pest Control Services: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of 

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Total Number of Firms 9,618 8,052 7,969 99.0% 39 0.5%

Number of Establishments 11,321 9,751 8,195 84.0% 143 1.5%

Revenue ($1,000) $6,597,034 $6,416,733 $3,269,753 51.0% $260,410 4.1%

Annual Payroll ($1,000) $2,622,362 $2,570,495 $1,313,695 51.1% $115,228 4.5%

Number of Employees 90,948 89,032 51,157 57.5% 3,393 3.8%

Employees per Firm 9.5 11.1 6.4 87.0

Payroll per Firm $272,651 $319,237 $164,851 $2,954,564

Payroll per Employee $28,834 $28,872 $25,680 $33,961

Revenue per Firm $685,905 $796,912 $410,309 $6,677,179

Revenue per Employee $72,536 $72,072 $63,916 $76,749

Table 5-61. Exterminating and Pest Control Services: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 9,618 $6,597,034 $685,905

Firms Operating Entire Year 8,052 $6,416,733 $796,912

Firms Operating Entire Year, earning <$5 mill. 7,969 $3,269,753 $410,309

Share earning <$5 million 99.0% 51.0%

Firms Operating Entire Year, earning <$6 mill. ( 7,977 $3,316,553 $415,775

Share earning <$6 million (Estimate) 99.1% 51.7%

Nonemployer Firms 7,910 $314,691 $39,784

Total (All Firms) 17,528 $6,911,725

Total (Nonemp. + Employers entire year) 15,962 $6,731,424

Share of "Small Firms", firms earning <$5 mill. 99.5% 53.2%

Share of "Small Firms", firms earning <$6 mill. 99.5% 53.9%

 5-150 
IV.K. Surveying & Mapping Services 

Table 5-62. Surveying & Mapping Services: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 9,028 8,419 535 74

Total Establishments 9,274 8,456 650 168

Total Employment 61,623 37,998 17,179 6,446

Total Payroll ($1,000) $2,332,454 $1,275,108 $723,949 $333,397

Estimated Revenue ($1,000) $4,875,859 $2,716,783 $1,413,562 $745,513

Share of Firms 100.0% 93.3% 5.9% 0.8%

Share of Establishments 100.0% 91.2% 7.0% 1.8%

Share of Employment 100.0% 61.7% 27.9% 10.5%

Share of Payroll 100.0% 54.7% 31.0% 14.3%

Share of Estimated Revenue 100.0% 55.7% 29.0% 15.3%

Employees per Firm 6.8 4.5 32.1 87.1

Payroll per Firm $258,358 $151,456 $1,353,176 $4,505,365

Payroll per Employee $37,850 $33,557 $42,142 $51,722

Estimated Revenue per Firm $540,082 $322,697 $2,642,172 $10,074,505

Estimated Revenue per Employee $79,124 $71,498 $82,284 $115,655

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-63. Surveying & Mapping Services: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 9,028 $4,875,859 $540,082

Firms with less than 100 Employees 8,954 $4,130,345 $461,285

Nonemployer Firms 9,196 $342,605 $37,256

Total (All Firms) 18,224 5,218,464 $286,351

Total "Small" (nonemp. + Firms < 100emp.) 18,150 4,472,950 $246,444

Percentage Firms "Small" 99.6% 85.7% 86.1%

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

 5-151 
Table 5-64. Surveying & Mapping Services: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Total Number of Firms 8,856 7,711 7,642 99.1%

Number of Establishments 9,120 7,972 7,819 98.1%

Revenue ($1,000) $4,277,685 $4,165,022 $3,330,021 80.0%

Annual Payroll ($1,000) $2,046,307 $2,005,619 $1,639,529 81.7%

Number of Employees 59,174 57,783 50,269 87.0%

Employees per Firm 6.7 7.5 6.6

Payroll per Firm $231,064 $260,098 $214,542

Payroll per Employee $34,581 $34,709 $32,615

Revenue per Firm $483,027 $540,140 $435,753

Revenue per Employee $72,290 $72,080 $66,244

Table 5-65. Surveying & Mapping Services: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 8,856 $4,277,685 $483,027

Firms Operating Entire Year 7,711 $4,165,022 $540,140

Firms Operating Entire Year, earning <$5 mill. 7,642 $3,330,021 $435,753

Share earning <$5 million 99.1% 80.0%

Nonemployer Firms 8,651 $291,561 $33,703

Total (All Firms) 17,507 $4,569,246

Total (Nonemp. + Employers entire year) 16,362 $4,456,583

Share of "Small Firms", firms earning <$5 mill. 99.6% 81.3% 

 5-152 
IV.L. Credit Bureau Industry 

Table 5-66. Credit Bureau Industry: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 740 620 84 36

Total Establishments 1,161 624 124 413

Total Employment 25,555 2,937 3,035 19,583

Total Payroll ($1,000) $1,496,078 $98,616 $133,933 $1,263,529

Estimated Revenue ($1,000) $5,406,573 $314,056 $419,160 $4,673,357

Share of Firms 100.0% 83.8% 11.4% 4.9%

Share of Establishments 100.0% 53.7% 10.7% 35.6%

Share of Employment 100.0% 11.5% 11.9% 76.6%

Share of Payroll 100.0% 6.6% 9.0% 84.5%

Share of Estimated Revenue 100.0% 5.8% 7.8% 86.4%

Employees per Firm 34.5 4.7 36.1 544.0

Payroll per Firm $2,021,727 $159,058 $1,594,440 $35,098,028

Payroll per Employee $58,543 $33,577 $44,129 $64,522

Estimated Revenue per Firm $7,306,179 $506,542 $4,990,001 $129,815,468

Estimated Revenue per Employee $211,566 $106,931 $138,109 $238,644

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-67. Credit Bureau Industry: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 740 $5,406,573 $7,306,179

Firms with less than 100 Employees 704 $733,216 $1,041,500

Nonemployer Firms 545 $18,998 $34,859

Total (All Firms) 1,285 5,425,571 $4,222,234

Total "Small" (nonemp. + Firms < 100emp.) 1,249 752,214 $602,253

Percentage Firms "Small" 97.2% 13.9% 14.3%

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

 5-153 
Table 5-68. Credit Bureau Industry: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Share of 

Firms 

Operating 

Entire Year, 

earning $5-10 

million in 

revenue

Total Number of Firms 741 641 590 92.0% 20 3.1%

Number of Establishments 1,109 1,009 615 61.0% 36 3.6%

Revenue ($1,000) $4,590,612 $4,571,669 $437,392 9.6% $131,212 2.9%

Annual Payroll ($1,000) $1,253,356 $1,248,978 $157,134 12.6% $48,056 3.8%

Number of Employees 25,957 25,793 4,922 19.1% 1,307 5.1%

Employees per Firm 35.0 40.2 8.3 65.4

Payroll per Firm $1,691,439 $1,948,484 $266,329 $2,402,800

Payroll per Employee $48,286 $48,423 $31,925 $36,768

Revenue per Firm $6,195,158 $7,132,089 $741,342 $6,560,600

Revenue per Employee $176,854 $177,245 $88,865 $100,392

Table 5-69. Credit Bureau Industry: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 741 $4,590,612 $6,195,158

Firms Operating Entire Year 641 $4,571,669 $7,132,089

Firms Operating Entire Year, earning <$5 mill. 590 $437,392 $741,342

Share earning <$5 million 92.0% 9.6%

Firms Operating Entire Year, earning <$6 mill. ( 594 $461,392 $776,754

Share earning <$6 million (Estimate) 92.7% 10.1%

Nonemployer Firms 520 $22,072 $42,446

Total (All Firms) 1,261 $4,612,684

Total (Nonemp. + Employers entire year) 1,161 $4,593,741

Share of "Small Firms", firms earning <$5 mill. 95.6% 10.0%

Share of "Small Firms", firms earning <$6 mill. 96.0% 10.5%

 5-154 
IV.M. Other Activities Real Estate Related to Real Estate 

Table 5-70. Other Activities Related to Real Estate: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 15,136 14,477 477 182

Total Establishments 15,814 14,513 618 683

Total Employment 67,274 30,689 15,376 21,209

Total Payroll ($1,000) $4,009,898 $1,667,289 $842,504 $1,500,105

Estimated Revenue ($1,000) $10,460,438 $5,257,275 $1,801,777 $3,401,386

Share of Firms 100.0% 95.6% 3.2% 1.2%

Share of Establishments 100.0% 91.8% 3.9% 4.3%

Share of Employment 100.0% 45.6% 22.9% 31.5%

Share of Payroll 100.0% 41.6% 21.0% 37.4%

Share of Estimated Revenue 100.0% 50.3% 17.2% 32.5%

Employees per Firm 4.4 2.1 32.2 116.5

Payroll per Firm $264,925 $115,168 $1,766,256 $8,242,335

Payroll per Employee $59,605 $54,329 $54,793 $70,730

Estimated Revenue per Firm $691,097 $363,147 $3,777,310 $18,688,936

Estimated Revenue per Employee $155,490 $171,308 $117,181 $160,375

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-71. Other Activities Related to Real Estate: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 15,136 $10,460,438 $691,097

Firms with less than 100 Employees 14,954 $7,059,052 $472,051

Nonemployer Firms 448,409 $29,659,464 $66,144

Total (All Firms) 463,545 40,119,902 $86,550

Total "Small" (nonemp. + Firms < 100emp.) 463,363 36,718,516 $79,244

Percentage Firms "Small" 100.0% 91.5% 91.6%

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

 5-155 
Table 5-72. Other activities related to real estate: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms 

Operating for 

the Entire 

Year

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $5 

million in 

revenue

Firms 

Operating 

Entire Year, 

earning less 

than $2.5 

million in 

revenue

Share of

Firms 

Operating 

Entire Year, 

earning less 

than $2.5 

million in 

revenue

Total Number of Firms 13,908 8,620 8,460 98.1% 8,225 95.4%

Number of Establishments 14,533 9,244 8,649 93.6% 8,330 90.1%

Revenue ($1,000) $8,238,695 $7,171,675 $4,119,093 57.4% $3,332,008 46.5%

Annual Payroll ($1,000) $2,853,742 $2,620,288 $1,525,429 58.2% $1,215,392 46.4%

Number of Employees 57,123 52,476 36,550 69.7% 31,259 59.6%

Employees per Firm 4.1 6.1 4.3 3.8

Payroll per Firm $205,187 $303,978 $180,311 $147,768

Payroll per Employee $49,958 $49,933 $41,735 $38,881

Revenue per Firm $592,371 $831,981 $486,890 $405,107

Revenue per Employee $144,227 $136,666 $112,697 $106,594

Table 5-73. Other activities related to real estate: 2002 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms 13,908 $8,238,695 $592,371

Firms Operating Entire Year 8,620 $7,171,675 $831,981

Firms Operating Entire Year, earning <$5 mill. 8,460 $4,119,093 $486,890

Share earning <$5 million 98.1% 57.4%

Firms Operating Entire Year, earning <$2.5 mill 8,225 $3,332,008 $405,107

Share earning <$2.5 million 95.4% 46.5%

Nonemployer Firms 335,115 $22,046,758 $65,789

Total (All Firms) 349,023 $30,285,453

Total (Nonemp. + Employers entire year) 343,735 $29,218,433

Share of "Small Firms", firms earning <$5 mill. 100.0% 89.6%

Share of "Small Firms", firms earning <$2.5 mil 99.9% 86.9%

 5-156 
IV.N. Office of Real Estate Agents and Brokers Industry 

Table 5-74. Real Estate Agents & Brokers Industry: 2004 Industry Characteristics (employers) 

Data Total <20 20-99 100+

Total Firms 86,258 84,250 1,544 464

Total Establishments 93,920 85,164 3,298 5,458

Total Employment 323,045 174,181 53,071 95,793

Total Payroll ($1,000) $15,210,338 $6,857,915 $2,269,946 $6,082,477

Estimated Revenue ($1,000) $91,691,826 $47,919,945 $13,248,281 $30,523,599

Share of Firms 100.0% 97.7% 1.8% 0.5%

Share of Establishments 100.0% 90.7% 3.5% 5.8%

Share of Employment 100.0% 53.9% 16.4% 29.7%

Share of Payroll 100.0% 45.1% 14.9% 40.0%

Share of Estimated Revenue 100.0% 52.3% 14.4% 33.3%

Employees per Firm 3.7 2.1 34.4 206.5

Payroll per Firm $176,335 $81,400 $1,470,172 $13,108,787

Payroll per Employee $47,084 $39,372 $42,772 $63,496

Estimated Revenue per Firm $1,062,995 $568,783 $8,580,493 $65,783,619

Estimated Revenue per Employee $283,836 $275,116 $249,633 $318,641

Distribution by Number of Employees

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-75. Real Estate Agents and Brokers: 2004 Firm Totals 

Firm Type

Number of 

Firms

Revenue 

($1,000)

Revenue per 

Firm

All Employer Firms1 86,258 $91,691,826 $1,062,995

Firms with less than 100 Employees 85,794 $61,168,226 $712,966

Nonemployer Firms 702,898 $34,288,373 $48,781

Total (All Firms) 789,156 125,980,199 $159,639

Total "Small" (nonemp. + Firms < 100emp.) 788,692 95,456,599 $121,032

Percentage Firms "Small" 99.9% 75.8% 75.8%

* Revenue is estimated for employer firms by multiplying 2004 payroll data by 2002 revenue-payroll ratios. 

Table 5-76. Real Estate Agents and Brokers: 2002 Industry Characteristics (employers) 

Data Type All Firms

Firms Operating 

for the Entire 

Year

Firms Operating 

Entire Year, 

earning less than 

$5 million in 

revenue

Share of Firms 

Operating Entire 

Year, earning less 

than $5 million in 

revenue

Firms Operating 

Entire Year, 

earning less than 

$2.5 million in 

revenue

Share of Firms 

Operating Entire 

Year, earning less 

than $2.5 million 

in revenue

Total Number of Firms 68,649 49,089 47,510 96.8% 45,694 93.1%

Number of Establishments 76,341 56,763 48,674 85.7% 46,240 81.5%

Revenue ($1,000) $63,381,021 $59,376,212 $26,503,169 44.6% $20,215,859 34.0%

Annual Payroll ($1,000) $10,383,693 $9,775,163 $4,685,151 47.9% $3,766,418 38.5%

Number of Employees 280,754 263,841 157,830 59.8% 134,196 50.9%

Employees per Firm 4.1 5.4 3.3 2.9

Payroll per Firm $151,258 $199,131 $98,614 $82,427

Payroll per Employee $36,985 $37,049 $29,685 $28,067

Revenue per Firm $923,262 $1,209,562 $557,844 $442,418

Revenue per Employee $225,753 $225,045 $167,922 $150,644

 5-157 
 5-158 

Table 5-77. Real Estate Agents and Brokers: 2002 Firm Totals 

Firm Type

Number of 

Firms Revenue ($1,000) Revenue per Firm

All Employer Firms 68,649 $63,381,021 $923,262

Firms Operating Entire Year 49,089 $59,376,212 $1,209,562

Firms Operating Entire Year, earning <$5 mill. 47,510 $26,503,169 $557,844

Share earning <$5 million 96.8% 44.6%

Firms Operating Entire Year, earning <$2.5 mill. 45,694 $20,215,859 $442,418

Share earning <$2.5 million 93.1% 34.0%

Nonemployer Firms 569,949 $26,007,073 $45,631

Total (All Firms) 638,598 $89,388,094

Total (Nonemp. + Employers entire year) 619,038 $85,383,285

Share of "Small Firms", firms earning <$5 mill. 99.7% 61.5%

Share of "Small Firms", firms earning <$2.5 mill. 99.5% 54.1%
 

CHAPTER 6 

REGULATORY FLEXIBILITY ANALYSIS 

I. Introduction ................................................................................................................................. 2 

II. Summary of the Regulatory Impact Analysis ............................................................................ 3 

II.A. Overview of Final Rule ...................................................................................................... 4 

II.B. Problems with the Mortgage Shopping Process and the Current GFE............................... 5 

II.C. Approach of the Final Rule ................................................................................................ 7 

III. Statement of Need for and Objectives of the Rule ................................................................. 22 

IV. Issues Raised in Comments on the 2008 Initial Regulatory Flexibility Analysis .................. 27 

IV.A. Comments Concerning the Initial Regulatory Flexibility Analysis................................ 27 

IV.B. Alternatives Considered to Minimize Impact on Small Businesses ............................... 30 

IV.C. Comments and Responses to Other Issues...................................................................... 30 

V. Description and Estimate of the Number of Small Entities..................................................... 31 

VI. Alternatives Which Minimize Impact on Small Businesses................................................... 32 

VII. Compliance Costs and Regulatory Burden: New GFE ........................................................ 33 

VII.A. Data Used in Compliance Cost Estimates..................................................................... 34 

VII.B. Compliance and Regulatory Burden: One-Time Costs ................................................. 36 

VII.C. Compliance and Regulatory Burden: Recurring Costs of the GFE............................... 44 

VII.D. Detailed Response to the NAR’s Analysis of the 2008 IRFA....................................... 48 

VII.E. Tolerances on Third-Party Fees..................................................................................... 53 

VII.F. Changes in the Final Rule to Reduce the Regulatory Burden of the GFE..................... 56 

VIII. Costs Associated with Changes to the HUD-1 .................................................................... 57 

VIII.A. Data on Settlement Service Providers.......................................................................... 57 

VIII.B. One-Time Costs of the New HUD-1............................................................................ 63 

VIII.C. Recurring Costs of the New HUD-1 ............................................................................ 65 

VIII.D. Changes in the Final Rule to Reduce the Regulatory Barrier of the HUD-1............... 66 

IX. Efficiencies and Reductions in Regulatory and Compliance Burden..................................... 68 

IX.A. Shopping Time Saved by Borrowers.............................................................................. 69 

IX.B. Time Saved by Originators and Third-Party Service Providers ..................................... 71 

IX.C. Time Saved from Average Cost Pricing ......................................................................... 71 

IX.D. Social Efficiencies .......................................................................................................... 71 

I. Introduction 

This chapter of the Regulatory Impact Analysis is the Final Regulatory Flexibility 

Analysis (FRFA) of the final rule as described under Section 604 of the Regulatory Flexibility 

Act. The requirements of the FRFA are listed below along with references to where the 

requirements are covered in the FRFA and where more detailed discussion can be found in other 

chapters of the Regulatory Impact Analysis (RIA). 

 6-1 
 

A description of the reasons why action by the agency is being considered can be found 

in Section III of this chapter, in Section II of Chapter 1 of the RIA, and in greater 

detail in the first sections of Chapters 3 and 4 of the RIA. 

A succinct statement of the objectives of, and legal basis for, the final rule is provided in 

Section III of this chapter. This is also discussed in Section II of Chapter 1 of the 

RIA and in greater detail in the first sections of Chapters 3 and 4 of the RIA. 

A description and an estimate of the number of small entities to which the rule will apply 

or an explanation of why no such estimate is available. Section V provides data on 

small businesses that may be affected by the rule. As explained in Section V, Chapter 

5 of the RIA also provides extensive documentation of the characteristics of the 

industries directly affected by the rule, including various estimates of the numbers of 

small entities, reasons why various data elements are not reliable or unavailable, and 

descriptions of methodologies used to estimate (if possible) necessary data elements 

that were not readily available. The industries discussed in Chapter 5 of the RIA 

included the following (with section reference): mortgage brokers (Section II); 

lenders including commercial banks, thrifts, mortgage banks, credit unions (Section 

III); settlement and title services including direct title insurance carriers, title agents, 

escrow firms, and lawyers (Section IV); and other third-party settlement providers 

including appraisers, surveyors, pest inspectors, and credit bureaus (Section V); and 

real estate agents (Section VI). As explained in Section V of this chapter, Appendix 

A includes estimates of revenue impacts for the new Good Faith Estimate (GFE). 

A description of the projected reporting, record keeping, and other compliance 

requirements of the rule, including an estimate of the classes of small entities that will 

be subject to the requirement and the types of professional skills necessary for 

preparation of the report or record. Compliance requirements and costs are discussed 

in Sections VII through IX of this chapter. In no case are any professional skills 

required for reporting, record keeping, and other compliance requirements of this rule 

that are not otherwise required in the ordinary course of business of firms affected by 

the rule. As noted above, Chapter 5 of the RIA includes estimates of the small 

entities that may be affected by the rule. 

An identification, to the extent practicable, of all relevant Federal rules which may 

duplicate, overlap or conflict with the final rule. The final rule provisions describing 

some loan terms in the new GFE and the HUD-1 are similar to the Truth in Lending 

Act (TILA) regulations; however the differences in approach between the TILA 

regulations and HUD’s RESPA rule make them more complementary than 

duplicative. Overlaps are discussed further in this chapter. 

In addition, this Chapter contains (c) a description of any significant alternatives to the 

final rule which accomplish the stated objectives of applicable statutes and which minimize any 

significant impact of the final rule on small entities. The FRFA also describes comments dealing 

with compliance and regulatory burden in the 2008 proposed rule. Some of the comments were 

on provisions of the 2008 proposed rule that have been dropped. Other comments were on 

impacts that the Department believes will be small or non-existent. Some of the compliance and 

 6-2 
 

regulatory burden comments concerned costs that are only felt during the start-up period and are 

one-time costs. These are discussed in Section VII.B, while comments on recurring costs of 

implementing the new GFE form are addressed in Section VII.C. Section VII.D discusses GFErelated changes in the final rule that reduce regulatory burden. Section VII.E discusses 

compliance issues related to GFE tolerances on settlement party costs, while Section VII.F 

discusses efficiencies associated with the new GFE. 

Before proceeding further, Section II provides a brief summary of the main findings from 

the Regulatory Impact Analysis that relate to the final rule. 

II. Summary of the Regulatory Impact Analysis 

There is strong evidence of information asymmetry between mortgage originators and 

settlement service providers and consumers, allowing loan originators to capture much of the 

consumer surplus in this market through price discrimination. The RESPA disclosure statute is 

meant to address this information asymmetry, but the evidence shows that the current RESPA 

regulations are not effective. The final rule will create a more level-playing field through a more 

transparent and standard disclosure of loan details and settlement costs; tolerances on settlement 

charges leading to prices that consumers can rely on; and a comparison page on the HUD-1 that 

allows the consumer to compare the amounts listed for particular settlement costs on the GFE 

with the total costs listed for those charges on the HUD-1, and to double check the loan details at 

settlement double check the loan details at settlement. These changes will encourage comparison 

shopping by informed consumers, which will place a competitive pressure on market prices, and 

enable consumers to retain more consumer surplus. 

II.A. Overview of Final Rule 

The Department of Housing and Urban Development has issued a final rule under the 

Real Estate Settlement Procedures Act (RESPA) to simplify and improve the process of 

obtaining home mortgages and to reduce settlement costs for consumers. This Regulatory Impact 

Analysis and Regulatory Flexibility Analysis examine the economic effects of that rule. As this 

Regulatory Impact Analysis demonstrates, the final rule is expected to improve consumer 

shopping for mortgages and to reduce the costs of closing a mortgage transaction for the 

consumer. Consumer savings were estimated under a variety of scenarios about originator and 

settlement costs. In the base case, the estimated price reduction to borrowers comes to $8.35 

billion or $668 per loan. This represents the substantial savings that can be achieved with the 

final rule. 

The final RESPA rule includes a new, simplified Good Faith Estimate (GFE) that 

includes tolerances on final settlement costs and a new method for reporting wholesale lender 

payments in broker transactions. The final rule allows service providers to use prices based on 

the average charges for the third-party services they purchase, making their business operations 

simpler and less costly. Competition among loan originators will put pressure for these cost 

savings to be passed on to borrowers. The new GFE will produce substantial shopping and 

price-reduction benefits for both origination and third-party settlement services. 

 6-3 
 

Because the final rule calls for significant changes in the process of originating a 

mortgage, this Regulatory Impact Analysis identifies a wide range of benefits, costs, efficiencies, 

transfers, and market impacts. The effects on consumers from improved borrower shopping will 

be substantial under this rule. Similarly, the use of tolerances will place needed controls on 

origination and third-party fees. Ensuring that yield spread premiums are credited to borrowers 

in brokered transactions could cause significant transfers to consumers. The increased 

competition associated with RESPA reform will reduce settlement service costs and result in 

transfers to consumers from service providers. Entities that will suffer revenue losses under the 

final rule are usually those who are charging prices higher than necessary or are benefiting from 

the current system's market failure. 

Note to Reader: A comprehensive summary of the problems with the current mortgage 

shopping system and the benefits and market impacts of the final rule is provided in Section I of 

Chapter 3. 

II.B. Problems with the Mortgage Shopping Process and the Current GFE 

The current system for originating and closing mortgages is highly complex and suffers 

from several problems that have resulted in high prices for borrowers. Studies indicate that 

consumers are often charged high fees and can face wide variations in prices, both for origination 

and third-party settlement services. The main points are as follows: 

• There are many barriers to effective shopping for mortgages in today’s market. The 

process can be complex and can involve rather complicated financial trade-offs, which 

are often not fully and clearly explained to borrowers. 

• Consumers often pay non-competitive fees for originating mortgages. Most observers 

believe that the market breakdown occurs in the relationship between the consumer and 

the loan originator -- the ability of the loan originator to price discriminate among 

different types of consumers leads to some consumers paying more than other 

consumers.1

• There is convincing statistical evidence that yield spread premiums are not always used 

to offset the origination and settlement costs of the consumer. Studies, including a recent 

HUD-sponsored study of FHA closing costs by the Urban Institute, find that yield spread 

premiums are often used for the originator’s benefit, rather than for the consumer’s 

benefit.2

 

1

 One could see price discrimination in a competitive market that was the result of different costs associated with 

originating loans for different applicants. For example, those who required more work by the originator to obtain 

loan approval might be charged more than those whose applications required little work in order to obtain an 

approval. The price discrimination we refer to in this paragraph and elsewhere in this analysis is not cost-based. It 

is the result of market imperfections, such as poor borrower information on alternatives that leads borrowers to 

accept loans at higher cost than the competitive level. 

2

 See Section IV.D of Chapter 2 for a discussion of these studies. 

 6-4 
 

• Borrowers can be confused about the trade-off between interest rates and closing costs. It 

may be difficult for borrowers (even sophisticated ones but surely unsophisticated ones) 

to understand the financial trade-offs associated with discount points, yield spread 

premiums, and upfront settlement costs. While many originators explain this to their 

borrowers, giving them an array of choices to meet their needs, some originators may 

only show borrowers a limited number of options. 

• There is also evidence that prices paid for third-party services are highly variable, 

indicating that there is much potential to reduce title, closing, and other settlement costs. 

For example, a recent analysis of FHA closing costs by the Urban Institute shows wide 

variation in title and settlement costs. There is not always an incentive in today’s market 

for originators to control these costs. Too often, high third-party costs are simply passed 

through to the consumer. And consumers may not be the best shoppers for third-party 

service providers due to their lack of expertise and to the infrequency with which they 

shop for these services. Consumers often rely on recommendations from the real estate 

agent (in the case of a home purchase) or from the loan originator (in the case of a 

refinance as well as a home purchase). 

Today’s GFE. Today’s GFE does not help the above situations, as it is not an effective 

tool for facilitating borrower shopping nor for controlling third-party settlement costs. The 

current GFE is typically comprised of a long list of charges, as today’s rules do not prescribe a 

standard form or consolidated categories. Such a long list of individual charges can be 

overwhelming, often confuses consumers, and seems to provide little useful information for 

consumer shopping. The current GFE certainly does not inform consumers what the major costs 

are so that they can effectively shop and compare mortgage offers among different loan 

originators. The current GFE does not explain how the borrower can use the document to shop 

and compare loans. Also, the GFE fails to make clear the relationship between the closing costs 

and the interest rate on a loan, notwithstanding that many mortgage loans originated today adjust 

up-front closing costs due at settlement, either up or down, depending on whether the interest 

rate on the loan is below or above “par.” Finally, current rules do not assure that the “good 

faith estimate” is a reliable estimate of final settlement costs. As a result, under today’s rules, the 

estimated costs on GFEs may be unreliable or incomplete, and final charges at settlement may 

include significant increases in items that were estimated on the GFE, as well as additional fees, 

which can add to the consumer’s ultimate closing costs. 

Thus, today’s GFE is not an effective tool for facilitating borrower shopping or for 

controlling origination and third-party settlement costs. There is enormous potential for cost 

reductions in today’s market, which is too often characterized by relatively high and highly 

variable charges for both origination and third-party services. 

In addition, today's RESPA rules hold back efficiency and competition by acting as a 

barrier to innovative cost-reduction arrangements. While today's mortgage market is 

characterized by increased efficiencies and lower prices due to technological advances and other 

innovations, that is not the case in the settlement area where aggressive competition among 

settlement service providers simply does not always take place. Existing RESPA regulations 

 6-5 
 

inhibit average cost pricing,3 which is an example of a cost reduction technique. Thus, a 

framework is needed that would encourage competitive negotiations and other arrangements that 

would lead to lower settlement prices. The new GFE will provide such a framework. 

II.C. Approach of the Final Rule 

II.C.1. Main Components of the New GFE and HUD-1 

The GFE format simplifies the process of originating mortgages by consolidating costs 

into a few major cost categories.4

 The GFE ensures that in brokered transactions, borrowers 

receive the full benefit of the higher price paid by wholesale lenders for a loan with a high 

interest rate; that is, so-called yield spread premiums. On both the GFE and HUD-1, the portion 

of any wholesale lender payments that arise because a loan has an above-par interest rate is 

passed through to borrowers as a credit against other costs. Thus, there is assurance that 

borrowers who take on an above-par loan receive funds to offset their settlement costs. The new 

GFE also includes a trade-off table that will assist consumers in understanding the relationship 

between higher interest rates and lower settlement costs. 

HUD conducted consumer tests to further improve the GFE form in the 2002 proposed 

rule. Numerous changes were made to make the GFE more user-friendly. The GFE form in the 

final rule includes a summary page containing the key information for shopping; during the tests, 

consumers reported that the summary page was a useful addition to the GFE. The trade-off 

table, another component of the GFE that consumers found useful, is also included in the final 

GFE. The final GFE is a form that consumers find to be clear and well written and, according 

the tests conducted, one that they can use to determine the least expensive loan. In other words, 

it is a shopping tool that is a vast improvement over today’s GFE with its long list of fees that 

can change (i.e., increase) at settlement. 

The final GFE includes a set of tolerances on originator and third-party costs: originators 

must adhere to their own origination fees, and give estimates subject to a 10 percent upper limit 

on the sum of certain third-party fees. The tolerances on originator and third-party costs will 

encourage originators not only to lower their own costs but also to seek lower costs for thirdparty services. 

The final rule would allow service providers to use pricing based on average charges for 

third-party services they purchase so long as the average is calculated using a documented 

method and the charge on the HUD-1 is no greater than the average paid for that service. This 

will make internal operations for the loan originator simpler and less costly and competition 

 

3

 The charges reported on the HUD-1 are required to be the specific charge paid in connection with the specific loan 

for which the HUD-1 is filled out. Pricing based on average charges is the practice of charging all borrowers the 

same average charge for a group of similar loans. Average cost pricing requires less record keeping and tracking for 

any individual loan since the numbers reported to the settlement agent need not be transaction specific. Average 

cost pricing is not permissible under RESPA because loan-specific prices are required. 

4

 See the proposed GFE in Exhibit 3-B of Chapter 3. 

 6-6 
 

among lenders will put pressure for these cost savings to be passed on to borrowers as well. The 

end result of all these changes should be lower third-party fees for consumers. 

To increase the value of the new GFE as a shopping document, HUD is proposing 

revisions to the HUD-1 Settlement Statement form that will make the GFE and HUD-1 easier to 

compare. The revised HUD-1 uses the same language to describe categories of charges as the 

GFE, and orders the categories of charges in the same way. This makes it much simpler to 

compare the two documents and confirm whether the tolerances required in the new GFE have 

been met or exceeded. In addition, the final rule introduces a comparison in the revised HUD-1 

that would: (1) compare the GFE estimates to the HUD-1 charges and advise borrowers whether 

tolerances have been met or exceeded; (2) verify that the loan terms summarized on the GFE 

match those in the loan documents, including the mortgage note; and (3) provide additional 

information on the terms and conditions of the mortgage. These components of the rule are 

required together to fully realize the consumer saving on mortgage closing cost estimated here. 

Given that there has been no significant change in the basic HUD-1 structure and layout, 

besides the addition of a comparison page, generating this new HUD-1 should not pose any 

problem for firms closing loans -- in fact, the closing process will be much simpler given that 

borrowers and closing agents can precisely link the information on the initial GFE to the 

information on the final HUD-1.The HUD-1 has also been adjusted to ensure that the new GFE 

(a shopping document issued early in the process) and the HUD-1 (a final settlement document 

issued at closing) work well together. The layout of the revised HUD-1 has new labeling of 

some lines so that each entry from the GFE can be found on the revised HUD-1 with the exact 

wording as on the GFE. This will make it much easier to determine if the fees actually paid at 

settlement are consistent with the GFE, whether the borrower does it alone or with the assistance 

of the settlement agent. The reduced number of HUD-1 entries that should result, as well as use 

of the same terminology on both forms should reduce the time spent by the borrower and 

settlement agents comparing and checking the numbers. 

The significant changes made to the final rule from the March 2008 proposed rule are: 

• A GFE form that is a shorter form than had been proposed. 

• Allowing originators the option not to fill out the tradeoff table on the GFE form. 

• A revised definition of application to eliminate the separate GFE application 

process. 

• Adoption of requirements for the GFE that are similar to recently revised Federal 

Reserve Board Truth-in-Lending regulations which limit fees charged in 

connection with early disclosures and defining timely provision of the disclosures. 

• Clarification of terminology that describes the process applicable to, and the terms 

of, an applicant's particular loan. 

• Inclusion of a provision to allow lenders a short period of time in which to correct 

certain violations of the new disclosure requirements. 

 6-7 
 

• A revised HUD-1/1A settlement statement form that includes a summary page of 

information that provides a comparison of the GFE and HUD-1/1A list of charges 

and a listing of final loan terms as a substitute for the proposed closing script 

addition. 

• Elimination of the requirement for a closing script to be completed and read by 

the closing agent. 

• A simplified process for utilizing an average charge mechanism. 

• No regulatory change in this rulemaking regarding negotiated discounts, including 

volume based discounts. 

II.C.2. Estimates and Sources of Consumer Savings from the Final Rule 

Overall Savings. Chapter 3 discusses the consumer benefits associated with the new 

GFE form and provides dollar estimates of consumer savings due to improved shopping for both 

originator and third-party services. Consumer savings were estimated under a variety of 

scenarios about originator and settlement costs.5

 In the base case, the estimated price reduction 

to borrowers comes to $8.35 billion annually, or 12.5 percent of the $66.7 billion in total charges 

(i.e., origination fees, appraisal, credit report, tax service and flood certificate and title insurance 

and settlement agent charges).6 Thus, there is an estimated $8.35 billion in transfers from firms 

to borrowers from the improved disclosures and tolerances of the new GFE. This would 

represent savings of $668 per loan. Sensitivity analysis was conducted with respect to the 

savings projection in order to provide a range of estimates. Because title fees account for over 

70 percent of third-party fees and because there is widespread evidence of lack of competition 

and overcharging in the title and settlement closing industry, one approach projected third-party 

savings only in that industry. This approach (called the “title approach”) projected savings of 

$200 per loan in title and settlement fees. In this case, the estimated price reduction to borrowers 

comes to $8.38 billion ($670 per loan), or 12.6 percent of the $66.7 billion in total charges – 

savings figures that are practically identical to the base case mentioned above.7

 Other 

projections also showed substantial savings for consumers. As explained in Chapter 3, estimated 

consumer savings under a more conservative projection totaled $6.48 billion ($518 per loan), or 

9.7 percent of total settlement charges. Thus, while consumer savings are expected to be $8.35 

billion (or 12.5 percent of total charges) in the base case or $8.38 billion (12.6 percent of total 

charges) in the title approach, they were $6.48 billion (or 9.7 percent of total charges) in a more 

conservative sensitivity analysis. This $6.48-$8.38 billion ($518 - $670 per loan) represents the 

substantial savings that can be achieved with the new GFE. 

 

5

 Throughout this Economic Analysis, the terms “borrowers” and “consumers” are often used interchangeably. 

6

 Government fees and taxes and escrow items are not included in this analysis, as they are not subject to 

competitive market pressures.

7

 If the savings in title and settlement closing fees due to RESPA reform were only $150, then the estimated price 

reduction to borrowers comes to $7.76 billion, or 11.6 percent of the $66.7 billion in total charges. 

 6-8 
 

Industry Breakdown of Savings. Chapter 3 also disaggregates the sources of consumer 

savings into the following major categories: originators with a breakdown for brokers and 

lenders, and third-party providers with a breakdown for the title and settlement industry and 

other third-party providers.8

 In the base case, originators (brokers and lenders) contribute $5.88 

billion, or 70 percent of the $8.35 billion in consumer savings. This $5.88 billion in savings 

represents 14.0 percent of the total revenue of originators, which is projected to be $42.0 billion.9

 

The $5.88 billion is divided between brokers, which contribute $3.53 billion, and lenders (banks, 

thrifts, and mortgage banks), which contribute the remaining $2.35 billion. The shares for 

brokers (60 percent) and lenders (40 percent) represent their respective shares of mortgage 

originations. 

In the base case, third-party settlement service providers contribute $2.47 billion, or 30 

percent of the $8.35 billion in consumer savings. This $2.47 billion in savings represents 10.0 

percent of the total revenue of third-party providers, which is projected to be $24.738 billion.10 

The $2.47 billion is divided between title and settlement agents, which contribute $1.79 billion, 

and other third-party providers (appraisers, surveyors, pest inspectors, etc.), which contribute 

$0.68 billion. Title and settlement agents contribute a large share because they account for 72.5 

percent of the third-party services included in this analysis. In the title approach, title and 

settlement agents account for all third-party savings, which total $2.5 billion if per loan savings 

are $200 and $1.88 billion if per loan savings are $150. 

Table 6-1. Industry Breakdown of Consumer Savings 

Source of Savings Transfers 

(billions) 

Savings per loan 

(12.5 million loans) 

Percentage of Total 

Savings 

Loan Origination $5.88 $470 70%

 Lenders $2.35 $470 or 28% 

 Brokers $3.53 $470 42% 

Third-Party Services $2.47 $198 30% 

 Title/Settlement $1.79 $143 22% 

 Other $0.68 $54 8% 

Total* $8.35 $668 100% 

*Savings are 12.5% of $66.7 billion revenue in charges.

Section III.D of this executive summary presents the revenue impacts on small originators and 

small third-party providers. 

Sources of Savings: Lower Origination and Third-Party Fees. The Regulatory 

Impact Analysis presents evidence that some consumers are paying higher prices for origination 

and third-party services. The new GFE format in the final rule will improve consumer shopping 

 

8

 Readers are referred to Chapter 5 for a more detailed examination of the various component industries (e.g., title 

services, appraisal, etc.) as well as for the derivations of many of the estimates presented in this chapter. 

9

 This assumes a 1.75 percent origination fee for brokers and lenders, which, when applied to projected originations 

of $2.4 trillion, yields $42.0 billion in total revenues from origination fees (both direct and indirect). See Steps (3)-

(5) of Section VII.E.1 of Chapter 3 for the explanation of origination costs. Sensitivity analyses are conducted for 

smaller origination fees of 1.5 percent and larger fees of 2.0 percent; see Step (21) in Section VII.E.4 of Chapter 3. 

10 See Step (7) of Section VII.E.1 of Chapter 3 for the derivation of the $24.738 billion. 

 6-9 
 

for mortgages, which will result in better mortgage products, lower interest rates, and lower 

origination and third-party costs for borrowers. 

• The final rule simplifies the process of originating mortgages by consolidating costs into 

a few major cost categories. This is a substantial improvement over today’s GFE that is 

not standardized and can contain a long list of individual charges that encourages fee 

proliferation. This makes it easier for the consumer to become overwhelmed and 

confused. The consistent and simpler presentation of the GFE will improve the ability of 

the consumer to shop. 

• A GFE with a summary page, which includes the terms of the loan, will make it clear to 

the consumer whether they are comparing similar loans. 

• A GFE with a summary page will make it simpler for borrowers to shop. The higher 

reward for shopping, along with the increased ease with which borrowers can compare 

loans, should lead to more effective shopping, more competition, and lower prices for 

borrowers. 

• The GFE makes cost estimates more reliable by applying tolerances to the figures 

reported. This will reduce the all too frequent problem of borrowers being surprised by 

additional costs at settlement. With fees firmer under the GFE, shopping is more likely to 

result in borrowers saving money when they shop. 

• The new GFE will disclose yield spread premiums and discount points in brokered loans 

prominently, accurately, and in a way that should inform borrowers how they may be 

used to their advantage. Both values will have to be calculated as the difference between 

the wholesale price of the loan and its par value. Their placement in the calculations that 

lead to net settlement costs will make them very difficult to miss. That placement should 

also enhance borrower comprehension of how yield spread premiums can be used to 

reduce up-front settlement costs. Tests of the form indicate that consumers can determine 

the cheaper loan when comparing a broker loan with a lender loan. 

• The new GFE will better inform consumers about their financing choices by including a 

tradeoff table on page 3 where originators can present the different interest rate and 

closing cost options available to borrowers. For example, consumers will better 

understand the trade-offs between reducing their closing costs and increasing the interest 

rate on the mortgage.

• The final rule allows settlement service providers to use prices based on average charges 

for the third-party services they purchase.

• The above changes and the imposition of tolerances on fees will encourage originators to 

seek lower settlement service prices. The tolerances will lead to well-informed market 

professionals either arranging for the purchase of the settlement services or at least 

establishing a benchmark that borrowers can use to start their own search. Under either 

set of circumstances, this should lead to lower prices for borrowers than if the borrowers 

 6-10 
 

shopped on their own, since the typical borrower’s knowledge of the settlement service 

market is limited, at best. 

II.C.3. Savings and Transfers, Efficiencies, and Costs 

As explained above, it is estimated that borrowers would save $8.35 billion in origination 

and settlement charges. This $8.35 billion represents transfers to borrowers from high priced 

producers, with $5.88 billion coming from originators and $2.47 billion from third-party 

settlement service providers. In addition to the transfers, there are efficiencies associated with the 

rule as well as costs. 

Mortgage applicants and borrowers realize $1,169 million savings in time spent shopping 

for loans and third-party services. Loan originators save $975 million in time spent with shoppers 

and from average cost pricing. Third-party settlement service providers save $191 million in time 

spent with shoppers. Some or all of industry’s total of $1,166 million in efficiency gains have the 

potential to be passed through to borrowers through competition. There are additional social 

efficiencies such as the reduction of non-productive behavior and positive externalities of 

preventing foreclosures (see Section X.D.). 

The total one-time compliance costs to the lending and settlement industry of the GFE 

and HUD-1 are estimated to be $571 million, $407 million of which is borne by small business. 

These costs are summarized below. Total recurring costs are estimated to be $918 million 

annually or $73.40 per loan. The share of the recurring costs on small business is $471 million. 

This Chapter 6 examines in greater detail the compliance and other costs associated with the 

GFE and HUD-1 forms and its tolerances. 

The new GFE in the final rule has some features that would increase the cost of providing 

it and some that would decrease the cost. Practically all of the information required on the GFE 

is readily available to originators, suggesting no additional costs. The fact that there are fewer 

numbers and less itemization of individual fees suggests reduced costs. On the other hand, there 

could be a small amount of additional costs associated with the optional trade-off table but that is 

not clear. Thus, while it is difficult to estimate, it appears that there could be a net of zero 

additional costs. However, if the GFE added 10 minutes per application to the time it takes to 

handle the forms today; annual costs would rise by $255 million at 1.7 application per loan or 

($12 per application or $20 per loan) or $405 million at 2.7 applications per loan ($32 per loan). 

We assume the high-cost scenario for summary table 6-5 (See Section VII.C.1 of this chapter for 

further details.)

The presence of tolerances will lead to some additional costs to originators of making 

additional arrangements for third parties to provide settlement services. If the average loan 

originator incurs an average of 10 minutes per loan of effort making third-party arrangements to 

meet the tolerances, then the total cost to originators of making third-party arrangements to meet 

the tolerance requirements comes to $150 million ($12 per loan). (See Section VII.E.2 of this 

chapter.) 

 6-11 
 

There is the potential of additional underwriting costs if the number of applications 

requiring a credit check rise beyond the current ratio of 1.7 applications per loan. Thus, if this 

ratio remains constant, there will be no recurring compliance costs from additional underwriting. 

If, however, the demand for preliminary GFEs increases to 2.7 applications per loan, then the 

total costs for originators will be $138 million or $11 per loan (See Section VII.C.). 

In addition to the recurring costs of the GFE, there will be one-time adjustment costs of 

$383 million in switching to the new form. Loan originators will have to upgrade their software 

and train staff in its use in order to accommodate the requirements of the new rule. It is 

estimated that the software cost will be $33 million and the training cost will be $58 million, for 

a total of $91 million (see Section VII.B.1 of this chapter). We assume that, of the loan 

originators’ software and training costs, $73 million is attributable to the new GFE and $18 

million to the new HUD-1. Once the new software is functioning, the recurring costs of training 

new employees in its use and the costs associated with periodic upgrades simply replace those 

costs that would have been incurred doing the same thing with software for the old rule. They 

represent no additional costs of the new rule. 

Similarly, there will be a one-time adjustment cost for legal advice on how to deal with 

the changes related to the new GFE. The one-time adjustment cost for legal fees is estimated to 

be $116 million (see Section VII.B.2 of this chapter). Once the adjustment has been made, the 

ongoing legal costs are a substitute for the ongoing legal costs that would have been incurred 

under the old rule and do not represent any additional burden. 

Finally with respect to the GFE, employees will have to be trained in the new GFE 

beyond the software and legal training already mentioned. This one time adjustment cost is 

estimated to be $194 million (see section VII.B.3). Again, once the transition expenses have 

been incurred, any ongoing training costs are a substitute for the training costs that would have 

been incurred anyway and do not represent an additional burden. 

There are few recurring costs associated with the revised HUD-1. For originators the 

burden could be very small: loan originators will not have to collect additional data beyond what 

is required for the GFE. In certain cases, the burden may be noticeable so we assume that the 

average burden is ten minutes per loan for loan originators. Settlement agents may face a 

recurring cost, although this is not likely either since loan originators are responsible for 

providing the data. The settlement agent will have to add final charges not known by the 

originator, and may have to fill out the entire form if the lender does not transmit the information 

on an already completed HUD-1 page 3. The settlement agent may also want to check the 

information concerning settlement costs, tolerances, and loan terms to make sure they agree with 

the GFE. In some cases, the settlement agent will have to calculate the tolerances. We assume 

that it will add five minutes on average to the time it takes to prepare a settlement. The actual 

distribution of the total additional time burden will differ by transaction depending on how much 

of the work is done by the lender. Taking loan originators into account, the total time burden is 

15 minutes per loan, for a cost of $18 per loan. The recurring compliance cost to the industry 

would be $225 million annually, of which small business would bear $107 million annually. 

During a high-volume year (15.5 million loans annually), the annual recurring compliance cost 

of the HUD-1 would be $279 million annually (see Section VIII.C. of Chapter 6) 

 6-12 
 

There will be one-time adjustment costs of $188 million in switching to the new HUD-1 

form. Settlement firms will have to upgrade their software and train staff in its use in order to 

accommodate the requirements of the new rule. It is estimated that the software and training cost 

will be $80 million (see Section VIII.B. of Chapter 6). Once the new software is functioning, the 

recurring costs of training new employees in its use and the costs associated with periodic 

upgrades simply replace those costs that would have been incurred doing the same thing with 

software for the old rule. They represent no additional costs of the new rule. 

Table 6-2. Summary of One-Time Adjustment Costs (in millions) 

GFE HUD-1 Total 

Source of Cost All 

Firms 

Small 

Firms 

All 

Firms 

Small 

Firms 

All 

Firms 

Small 

Firms 

Software and training $73 $52 $80 $59 $153 $111 

Legal consultation $116 $70 $37 $18 $153 $88 

Training on rule $194 $146 $71 $62 $265 $208 

Total $383 $268 $188 $139 $571 $407 

 Similarly, there will be a one-time adjustment cost for legal advice on how to deal with 

the changes related to the new HUD-1. The one-time adjustment cost for legal fees is estimated 

to be $37 million (see Section VIII.B. of Chapter 6). Once the adjustment has been made, the 

ongoing legal costs are a substitute for the ongoing legal costs that would have been incurred 

under the old rule and do not represent any additional burden. 

Finally, employees will have to be trained in the new HUD-1 beyond the software and 

legal training already mentioned. This one time adjustment cost is estimated to be $71 million 

(see Section VIII.B. of Chapter 6). Again, once the transition expenses have been incurred, any 

ongoing training costs are a substitute for the training costs that would have been incurred 

anyway and do not represent an additional burden. 

The consumer savings, efficiencies and costs associated with the GFE are discussed 

further in Chapter 6 and in Chapters 3. A summary of the compliance costs for the base case of 

12.5 million loans annually is presented below in Table 6.1. 

Table 6-3. Compliance Costs of the Final Rule (if 12.5 million loans annually) 

One-time Compliance Costs 

incurred during the first year

Recurring Compliance Costs 

(in millions) (in millions annually)

All Firms Small Firms All Firms Small Firms 

$ cost per 

loan

GFE $383 $268 $693 $364 $55.40 

HUD-1 $188 $139 $225 $107 $18.00 

Total $571 $407 $918 $471 $73.40 

A natural question to raise is whether the costs of the rule will overwhelm the benefits of 

the rule. The assumption that consumers will benefit by a reduction of settlement costs of at 

least $668 per loan has not been forcefully challenged. Indeed, results from a recent statistical 

analysis of FHA data imply that the savings to consumers may be as much as $1,200 per loan. 

To accomplish this, however, industry will incur both adjustment and recurring costs. Suppose 

 6-13 
 

firms impose these additional costs on consumers by raising prices. It is likely that the 

adjustment costs will be spread out over many years, just as the cost of an investment would be. 

Suppose, for the sake of illustration, that all adjustment costs are all imposed on first-year 

borrowers only. In a normal year of 12.5 million loans, this cost would $46 per loan. The 

recurring compliance costs of the rule is $73.40 per loan regardless of the year. In such a 

scenario, the total compliance cost is $120 per loan in the first year as compared to $74 for later 

years. If all compliance costs were passed onto consumers then the net consumer savings is 

$548 the first year and $594 in subsequent years (see table 6-4 for a summary). Note that this 

assumes that all costs are borne by borrowers and not at all by the applicants who do not get a 

loan. It would be reasonable to assume that in the high-application scenario, where there is an 

increase in preliminary underwriting costs, that the cost of an initial credit report would be 

passed on to all applicants. 

Table 6-4. Predicted Reductions in the Cost of a Loan 

(if firms impose all first-year adjustment costs on first-year borrowers) 

Source of Gain or Loss First Year Afterwards

Average Consumer Savings $668 $668 

 One-time Adjustment Costs -$46 -$0 

 Recurring Compliance Costs -$74 -$74

Net Consumer Savings $548 $594 

 Firms' Efficiencies +$93 +$93 

 Borrowers' Efficiencies +$55 +$55

Net Benefits to Consumer $696 $742 

There are other potential benefits to the consumer besides savings on settlement costs. There are 

aspects of this rule that will save time for industry. The value of these efficiencies could be 

$1,166 million for loan originators and settlement agents, for a per loan efficiency of $93. In a 

competitive industry, firms would pass these gains along to borrowers in the form of lower costs, 

a consumer benefit. Borrowers themselves will save time through the new GFE. These time 

savings are estimated at $1,169 million but are derived from a time savings worth $55 per 

applicant (seventy-five minutes at $44 per hour). In the summary of net benefits, we only 

include the per applicant time savings for borrowers. We make the cautious assumption that 

successful borrowers have submitted only one application. A fraction of the additional 8.25 

million applications (in excess of 12.5 million loans) consist of: applications approved but not 

accepted; applications denied by the financial institution; and applications withdrawn by the 

applicant. Although these individuals also realize time savings, it would be misleading to 

include them in a “per loan” figure in that the time savings of rejected applicant would not 

benefit the borrower. Adding the firms’ and borrowers’ value of time efficiencies to the net of 

compliance cost consumer savings gives us an estimate of the potential consumer benefits per 

loan: $696 in the first year and $742 afterwards. 

II.C.4. Alternatives Considered to Make the GFE More Workable for Small and Other 

Businesses 

Chapter 3 discusses the many comments that HUD received on the GFE in the 2002 and 

2008 proposed rules and the 2005 RESPA Reform Roundtables. Chapter 4 discusses 

 6-14 
 

alternatives. The most basic alternative was to make no change in the current GFE. The final 

rule allows both the current GFE and the new GFE to be used for one year after the GFE is 

introduced, but requires the new GFE and HUD-1 to be used beginning January 1, 2010. This 

approximately one-year adjustment period responds to lenders’ comments that there would be 

significant implementation issues with switching to a new GFE. 

The main alternative concerning small businesses considered the brokers’ argument that 

they were disadvantaged by the reporting of yield spread premiums. The new GFE was designed 

to ensure that there will not be any anti-competitive impacts on the broker industry. A summary 

page is included that presents the key cost figures for borrower shopping, that does not report 

yield spread premiums, and that provides identical treatment for brokers and lenders. The final 

GFE includes language that clarifies how yield spread premiums reduce the upfront charge that 

borrowers pay. Section III.E of this Executive Summary discusses this in more detail. 

HUD designed the GFE to make it workable for small lenders and brokers. Some 

examples of the changes are the following: 

• In response to concerns expressed by lenders and brokers about their ability to control 

third-party costs and meet the specified tolerances in the 2008 proposed rule, HUD raised 

the tolerance on government recording charges from zero to ten percent. 

• Consistent with the above, the rule creates a new definition of “changed circumstances” 

that clarifies and expands on the definition of “changed circumstances” in the proposed 

rule. For example, material information that was either not known at the time the original 

GFE was provided or not relied on in providing the original GFE, or information that has 

changed in a material way since application, may be the basis for providing a modified 

GFE. For example, if the actual loan amount turns out to be higher than the loan amount 

indicated by the borrower at the time the GFE was provided, and certain settlement 

charges that are based on the loan amount increase as a result, the loan originator may 

provide a revised GFE reflecting those higher amounts. Compliance with the tolerance 

provisions would be evaluated by comparing the revised GFE with the actual amounts 

charged at settlement. 

• HUD has adopted a streamlined single application process for the final rule. The new 

definition will allow loan originators more flexibility in determining the information they 

need to underwrite a GFE. 

• The reading at settlement of a closing script is no longer required. Much of the same 

information will be transmitted to the borrower via a new page 3 of the HUD-1. 

Alternatives. This chapter and Chapter 4 and Chapter 6 discuss other major alternatives 

that HUD considered in developing the final rule from the 2008 proposed rule. These chapters 

discuss the pros and cons of these alternatives and why HUD decided not to include them in this 

final rule. 

 6-15 
 

II.C.5. Market and Competitive Impacts on Small Businesses from the Final Rule 

Transfers from Small Businesses. It is estimated that $4.13 billion, or 49.5 percent of 

the $8.35 billion in consumer savings comes from small businesses, with small originators 

contributing $3.01 billion and small third-party firms, $1.13 billion.11 Within the small 

originator group, most of the transfers to consumers come from small brokers ($2.47 billion, or 

82 percent of the $3.01 billion); this is because small firms account for most of broker revenues 

but a small percentage of lender revenues. Within the small third-party group, most of the 

transfers come from the title and closing industry ($0.68 billion, or 60 percent of the $1.13 

billion), mainly because this industry accounts for most third-party fees. In the title approach, 

small title and settlement closing companies account for $0.95 billion of the $2.5 billion in 

savings. Section VII.E.2 of Chapter 3 explains the steps in deriving these revenue impacts on 

small businesses, and Section VII.E.4 of Chapter 3 reports several sensitivity analyses around the 

estimates. In addition, Chapter 5 provides more detailed revenue impacts for the various 

component industries.12

The summary bullets in Section I.C highlight the mechanisms through which these 

transfers are expected to happen. Improved understanding of yield spread premiums, discount 

points, and the trade-off between interest rates and settlement costs; improved consumer 

shopping among originators; more aggressive competition by originators for settlement services; 

and increased competition associated with discounting -- all will lead to reductions in both 

originator and third-party fees. As noted earlier, there is substantial evidence of non-competitive 

prices charged to some in the origination and settlement of mortgages due to information 

asymmetry between originators and borrowers. Originators (both small and large) and 

settlement service providers (both small and large) that have been charging high prices will 

experience reductions in their revenues as a result of the new GFE. There is no evidence that 

small businesses have been disproportionately charging high prices; for this reason, there is no 

expectation of any disproportionate impact on small businesses from the new GFE. The revenue 

reductions will be distributed across firms based on their non-competitive price behavior. 

Small Brokers.13 The main issue raised by the brokers concerned the treatment in the 

2008 proposed rule of yield spread premiums on the proposed Good Faith Estimate. Mortgage 

Broker representatives asserted that the proposed mortgage broker disclosure would achieve the 

opposite result and would detract from the consumer’s ability to understand and comparison 

shop. They recommended that lenders should be treated similarly to facilitate shopping and 

promote consumer understanding. The current final rule addresses the concern expressed by 

 

11 In the more conservative scenario of $6.48 billion in consumer savings, small businesses would account for $3.21 

billion of the transfers to consumers, with small originators accounting for $2.36 billion, and small third-party 

providers, $0.84 billion. 

12 In Chapter 5, see Section II for brokers, Section III for the four lender groups (commercial banks, thrifts, 

mortgage banks, and credit unions), Section IV for the various title and settlement groups (large insurers, title and 

settlement agents, lawyers, and escrow firms), Section V.A for appraisers, Section V.B for surveyors, Section V.C 

for pest inspectors, and Section V.D for credit bureaus. 

13 Practically all (98.9%) of the 30,000-44,000 brokers qualify as a small business. The Bureau of Census reports 

that small brokers account for 70% of industry revenue. 

 6-16 
 

brokers that the reporting of yield spread premiums in the 2008 proposed rule would 

disadvantage them relative to lenders. 

The Department hired forms development specialists, the Kleimann Communication 

Group, to analyze, test, and improve the forms. Starting with the GFE form proposed in 2002, 

they reworked the language and presentation of the yield spread premium to emphasize that it 

offsets other charges to reduce settlement charges, the cash needed to close the loan. The 

subjects tested seemed to like the trade-off table that shows the trade-off between the interest rate 

and up-front charges. It illustrates how yield spread premiums can reduce upfront charges. 

There is the summary page designed to simplify the digestion of the information on the form by 

including only the total estimated settlement charges from page two. This is the first page any 

potential borrower would see. It contains only the essentials for comparison-shopping and is 

simple: a standard set of yes-no questions describing the loan and a very simple summary of 

costs and the bottom line. Yield spread premiums are never mentioned here. Lender and broker 

loans get identical treatment on page 1. A mortgage shopping chart is included on page 3 of the 

GFE, to help borrowers comparison shop. Arrows were added to focus the borrower on overall 

charges, rather than one component. All of these features work against the borrower 

misinterpreting the different presentation of loan fees required of brokers vis-à-vis lenders. 

HUD has designed the GFE form to focus borrowers on the right numbers so that 

competition is maintained between brokers and lenders. The forms adopted in the final rule were 

tested on hundreds of subjects. The tests indicate that borrowers who comparison shop will have 

little difficulty identifying the cheapest loan offered in the market whether from a broker or a 

lender. 

We do not believe that the customer outreach function that brokers perform for wholesale 

lenders is going to change with RESPA reform. Wholesale lending, which has fueled the rise in 

mortgage originations over the past ten years, will continue to depend on brokers reaching out to 

consumer customers and supplying them with loans. Brokers play the key role in the upfront 

part of the mortgage process and this will continue with the final GFE. 

RESPA reform is also not going to change the basic cost and efficiency advantages of 

brokers. Brokers have grown in market share and numbers because they can originate mortgages 

at lower costs than others. There is no indication that their cost competitiveness is going to 

change in the near future. Thus, brokers, as a group, will remain highly competitive actors in the 

mortgage market, as they have been in the past. 

While there is no evidence to suggest any anti-competitive impact, there will be an 

impact on those brokers who are charging non-competitive prices. And there is convincing 

evidence that some brokers (as well as some lenders) overcharge consumers (see studies 

reviewed in Chapter 2). As emphasized throughout the Regulatory Impact Analysis, the new 

GFE will lead to improved and more effective consumer shopping, for many reasons -- the new 

GFE is simple and easy to understand, it includes reliable cost estimates, it effectively discloses 

yield spread premiums and discounts in brokered loans without disadvantaging brokers, it 

provides a vehicle to show consumers options, and it explains the trade-off between closing costs 

and interests rates to aid in understanding of yield spread premiums. This increased shopping by 

consumers will reduce the revenues of those brokers who are charging non-competitive prices. 

 6-17 
 

Thus, the main impact on brokers (both small and large) of the final rule will be on those brokers 

(as well as other originators) who have been overcharging uninformed consumers, through the 

combination of high origination fees and yield spread premiums.14 As noted above, small 

brokers are expected to experience $2.47 billion in reduced fees. 

Small Lenders. Lenders include mortgage banks, commercial banks, credit unions, and 

thrift institutions.15 There are over 10,000 lenders that would be affected by the RESPA rule, as 

well as almost 4,000 credit unions that originate mortgages. While two-thirds of the lenders 

qualify as a small business (as do four-fifths of the credit unions), these small originators account 

for only 23 percent of industry revenues. Thus, small lenders (including credit unions) account 

for only $540 million of the projected $2.35 billion in transfers from lenders.16 

In general, there was less concern expressed by lenders (as compared with brokers) about 

potential anti-competitive impacts of the GFE on small businesses. Small lenders -- relative to 

both brokers and large lenders -- will remain highly competitive actors in the mortgage market, 

as they are today. Small mortgage banks, community banks and local savings institutions benefit 

from their knowledge of local settlement service providers and of the local mortgage market. 

Nothing in the final GFE rule changes that. Generally, lenders and their associations opposed 

the proposed GFE on the grounds that in their opinion the form is too lengthy and would only 

confuse borrowers. 

Lenders had numerous comments on most aspects of the 2008 proposed GFE form – 

some of them dealing with major issues such as the difficulty in predicting costs within a three 

day period and many dealing with practical and more technical issues. HUD responded to many 

of the issues and concerns raised by lenders; Sections V, VI, and VIII of Chapter 3 discuss 

lenders' comments and HUD's response. 

Some lenders were concerned about their ability to produce firm cost estimates (even of 

their own fees) within a three-day period, given the complexity of the mortgage process. 

Lenders wanted clarification on their ability to make cost adjustments as a result of information 

they gain during the full underwriting process. The tolerances in the final rule require that 

lenders play a more active role in controlling third-party costs than they have in the past. 

However, some lenders emphasized that they have little control over fees of third-party 

settlement providers, while others seem to not anticipate problems in this regard. As explained 

in I.B above, the final rule made several adjustments to the tolerance rules, which should make 

 

14 As explained throughout this chapter, it is anticipated that market competition, under this proposed GFE approach, 

will have a similar impact on those lenders (non-brokers) who have been overcharging consumers through a 

combination of high origination costs and yield spread premiums. 

15 While it is recognized that the business operations and objectives of these lender groups can differ – not only 

between the groups (a mortgage banker versus a portfolio lender) but even within a single group (a small community 

bank versus a large national bank) – they raised so many of the same issues that it is more useful to address them in 

one place. 

16 Section III of Chapter 5 describes the characteristics of these component industries (number of employees, size of 

firms, etc.), their mortgage origination activity, and the allocation of revenue impacts between large and small 

lenders. That section also explains that the small business share of revenue could vary from 20 percent to 26 percent 

 6-18 
 

them workable for lenders. In addition, the final rule allows average cost pricing, which should 

help lenders reduce their costs. Practically all lenders wanted clarification on the definition of 

application, and HUD did that. 

There will be an impact on those lenders (both large and small) who are charging noncompetitive prices. Improved consumer shopping with the new GFE will reduce the revenues of 

those lenders who are charging non-competitive prices. Thus, as with brokers, the main negative 

impact on lenders (both small and large) of the new GFE will be on those lenders who have been 

overcharging uninformed consumers.

Small Title and Settlement Firms. The title and settlement industry -- which consists of 

large title insurers, title agents, escrow firms, lawyers, and others involved in the settlement 

process -- is expected to account for $1.79 billion of the $2.47 billion in third-party transfers 

under the GFE in the final rule. Within the title and settlement group, small firms are expected 

to account for 38.1 percent ($0.68 billion) of the transfers, although there is some uncertainty 

with this estimate.17 Step (8) of Section VII.E of Chapter 3 conducts an analysis that projects all 

of the consumer savings in third-party costs coming from the title industry; evidence suggests 

there are more opportunities for price reductions in the title industry, as compared with other 

third-party industries. In this case, consumer savings in title costs ($150-$200 per loan) ranged 

from $1.88 billion to $2.50 billion. To a large extent, the title and closing industry is 

characterized by local firms providing services at constant returns to scale. The demand for the 

services of these local firms will continue under the final GFE. 

Section VIII.C of Chapter 3 summarizes the key competitive issues for this industry with 

respect to the final rule. As noted there, the overall competitiveness of the title and closing 

industry should be enhanced by the RESPA rule. Chapters 2 and 5 provide evidence that title 

and closing fees are too high and that there is much potential for price reductions in this industry. 

Increased shopping by consumers, as well as increased shopping by loan originators to stay 

within their tolerances, will reduce the revenues of those title and closing companies that have 

been charging non-competitive prices.18 Excess charges will be reduced and competition will 

ensure that reduced costs are passed through to consumers. 

The title industry argued that greater itemization was needed in order for consumers to be 

able to adequately comparison shop among estimates. HUD’s view is that the consolidated 

categories on the new GFE form provide consumers with the essential information needed for 

comparison-shopping. Itemization encourages long lists of fees that confuse borrowers. 

It is important to keep in mind the local nature of the title industry when considering the 

impacts of the final RESPA reform (new GFE, tolerances, etc.) on the title industry. The title 

industry demonstrates a high degree of geographic specialization. Although title insurance 

companies do not need to be close to the properties insured, until there is widespread use of 

 

17 Section IV of Chapter 5 describes the component industries and estimates the share of overall industry revenue 

going to small businesses. 

18 The reasons why the proposed GFE and its tolerances will lead to improved and more effective shopping for thirdparty services by consumers and loan originators has already been discussed, and need not be repeated here. 

 6-19 
 

standardized electronic land record keeping accessible by the Internet,19 the informationgathering service the industry provides will require proximity to land title records (or the 

establishment of “title plants,” i.e., duplicates of local records, the maintenance of which requires 

proximity to local government records). Even if a provider is efficient and charges low prices, it 

will not be able to compete against title and closing firms who are located sufficiently closer to 

the site in question. Thus, title and closing companies are by economic necessity provided by 

local firms. Reinforcing the local orientation are the value of local expertise and the importance 

of personal networks in receiving referrals. 

The local orientation of the title industry could change over time. However, it is unlikely 

that RESPA reform would be the catalyst. The advances in technology that would change 

business practices are independent of what HUD does about RESPA. The only change that the 

final rule will introduce is that title and closing services may occur at lower prices negotiated 

between providers and lender originators. There will be no significant change in the local 

provision of title and closing work. Nor will there be a reduction of the number of these services 

purchased since this reform will not result in a drop in the number of mortgages that require 

these services. Large lenders will have to deal with multiple settlement services providers in 

order to ensure complete geographic coverage, and large multi-jurisdictional title firms have no 

apparent cost advantages over smaller title firms. In fact, large multi-jurisdictional title firms 

may have location-related cost disadvantages. There is no reason to believe that small title firms 

charging competitive prices will be adversely impacted by the changes in this rule. The demand 

for the services of these local firms will continue under the final GFE. 

Appraisers. Like surveys and pest inspections, traditional appraisals are provided on-site 

at the mortgaged property. The transportation cost of visiting individual sites, especially the 

opportunity cost of the time spent in transit, adds substantially to the cost of providing the 

service. The transportation costs counterbalance, or overwhelm, any scale economies that may 

otherwise exist in the production of these services. The countervailing transportation cost 

pressures creates an effective constant returns to scale production function for this industry and 

can serve to explain the wide range of firm size as well as the continued success of small 

businesses in the appraisal industry. This explains why approximately 99.8 percent of traditional 

appraisal firms qualify as small businesses. 

Even if large appraisal firms are efficient and charges low prices, they will not have the 

same advantage as providers who are located sufficiently closer to the site in question. Thus, 

traditional appraisals are by economic necessity provided by local firms. Reinforcing the local 

orientation of the appraisal industry is the value of local expertise. A profound understanding of 

the characteristics of the local real estate market is essential for a successful appraisal. In 

addition, local appraisal firms maintain local networks of customers and clients, based on their 

established track records, which should give them a solid business advantage. 

The local orientation of the appraisal industry could change over time. There has been a 

trend towards the increasing use of automated valuation appraisals, particularly for appraising 

 

19 The proposed rule does nothing to advance or retard this fundamental change in the nature of the business. It is 

possible that governments responsible for maintaining title records could advance to the level demonstrated in 

British Columbia (Canada), where even title insurance is not part of real estate transactions. 

 6-20 
 

properties that are being refinanced and properties that are being used as collateral for home 

equity loans. The necessity for appraisers to visit all homes in need of an appraisal could be 

rendered less by the automated value model (AVM), but it is also the case that the databases used 

to create AVMs tend not to have data on whether or not there is water in the basement of the 

subject property. It is unlikely that RESPA reform would be the catalyst for increases in AMVs, 

as the technological advances are already taking place. While RESPA reform could accelerate 

the use of AVMs, it will not likely have an impact as to whether AVMs are eventually accepted 

more broadly by the lending industry. The adoption of AVMs will depend on the accuracy of 

these estimation models, their appropriateness for different types of properties, and their 

performance in mitigating the risk of default losses. 

III. Statement of Need for and Objectives of the Rule20

Acquiring a mortgage is one of the most complex transactions a family will ever 

undertake. The consumer requires a level of financial sensibility to fully understand the product. 

For example, consider the trade-off between the yield spread premium and interest rate 

payments. Borrowers do not have access to the rate sheets that describe this trade-off. Indeed, 

many consumers may not even understand that there is a trade-off. To further complicate 

matters, the mortgage industry is continuously evolving: the range and complexity of products 

expands every year. Because consumers borrow fairly infrequently, the average borrower will 

be at an extreme informational disadvantage compared to the lender. To exacerbate this 

situation, the typical homebuyer may be rushed and easily steered into a bad loan because they 

are under pressure to make an offer on a home. This is especially the case for first-time 

homebuyers who will not be as likely to challenge lenders, whom they may view as 

unquestionable experts. 

Closing costs (lender fees and title charges) add to the borrower’s confusion. They are 

not as significant as the loan itself and total on average approximately four percent of the loan 

amount. However, the direct lender fees and the title charges are perhaps just as perplexing to 

the consumer. First, the multiplicity of fees is confusing (see Exhibits 1-3 of Chapter 3 for a list 

of the different names of upfront lender fees and settlement charges). The purpose of every fee 

and title charge is likely to be neither understood nor questioned by the average first-time 

homebuyer, who may be intimidated by the formality of the transaction. Second, to add to the 

confusion and uncertainty, even once the charges have been agreed upon, they are subject to 

change until the day of closing. Such informational asymmetries between the buyer and seller 

impede the ability of the consumer to be an effective shopper and negotiator. 

Consumers have strong incentives to ensure that they are getting the best deal possible on 

a mortgage loan and the associated third-party settlement costs, but poorly-informed decisions 

have drastic consequences. First, the household itself will lose by paying more for housing and 

possibly by ruining their credit history in the event of default. Second, markets imperfections 

stemming from information asymmetries may stand in the way of achieving one of this 

administration’s domestic priorities: expansion of homeownership. There is a wide range of 

 

20 For a detailed discussion of problems with the current system, and thus the need for this proposed rule, see 

Sections IV and V of Chapter 2 and Sections I and VII of Chapter 3. 

 6-21 
 

positive economic externalities from homeownership that have been investigated in the empirical 

housing economics literature. These include household saving, wealth accumulation, property 

improvements, a more pleasing urban environment, an increase in political activity, a reduction 

of crime, better child outcomes, and a positive impact on the labor supply of women. The 

average loan amount is 3.5 times a household’s income: even minor inefficiencies in this market 

will have sizeable impacts on the U.S. economy. 

The current GFE format contains a long list of individual charges that can be 

overwhelming, often confuses consumers, and seems to provide little useful information for 

consumer shopping. Current RESPA regulations have led to a proliferation of charges that 

makes consumer shopping and the mortgage settlement process both difficult and confusing, 

even for the most informed shoppers. Long lists of charges certainly do not highlight the 

bottom-line costs so consumers can shop and compare mortgage offers among different 

originators. In addition, under today’s rules, the estimated costs on GFEs may be unreliable or 

incomplete, or both, and final charges at settlement may include significant increases in items 

that were estimated on the GFE, as well as additional unexpected fees, which can add 

substantially to the consumer’s ultimate closing costs. The process of shopping for a mortgage 

can also involve complicated financial trade-offs, which are not always clearly explained to 

borrowers. Today’s GFE is not an effective tool for facilitating borrower shopping nor for 

controlling origination and third-party settlement costs. 

The potential for cost reductions in today’s market is also indicated by studies showing 

relatively high and highly variable charges for third-party services, particularly for title and 

closing services that account for the major portion of third-party fees. There is not enough 

incentive for loan originators to control settlement costs by negotiating lower costs from thirdparty providers; rather, they too often simply pass through increases in third-party costs to 

consumers. Because of their lack of expertise, consumers may not be the best shoppers for thirdparty services providers, leaving them to rely on recommendations from real estate agents and 

lenders. Thus, a framework is needed that would encourage competitive negotiations and other 

arrangements that would lead to lower third-party settlement prices. 

Today's mortgage market is increasingly characterized by the introduction of efficiency 

enhancing improvements such as automated underwriting systems and, through competition, 

these improvements are leading to lower prices for consumers. But the one area where current 

RESPA regulations act as a major barrier to competition and lower settlement services is the 

production and pricing of settlement services. Under current law, average cost pricing (another 

cost reduction technique) is inhibited by existing RESPA regulations. 

The goal of HUD’s RESPA reform is to even the playing field. The rule will accomplish 

this by requiring lenders to provide consumers information that lenders already have in a format 

that is transparent. One of the major inefficiencies of imperfect information is the costs of 

acquiring information. RESPA reform will go a long way toward educating consumers. The 

first page of the new GFE presents a brief summary of the terms of the loan that would warn 

prospective borrowers of potentially expensive aspects of the loan including loan amount, 

maximum interest rate, prepayment penalties, and the total estimated settlement charges. The 

second page provides more detail on the charges for loan origination and other settlement 

services. The third page provides a trade-off table so that consumers will learn the relationship 

 6-22 
 

between the interest rate and the yield-spread premium. The third page also includes a table so 

that the consumer can take notes on alternative loan offers and thus comparison shop. 

Tolerances will limit how much settlement charges can vary once the GFE has been made and 

the comparison page of the HUD-1 will serve to double-check the GFE regarding settlement 

charges and provide a summary of the key terms of the borrower’s loan at settlement. The final 

rule also allows settlement service providers to use pricing based on average charges, making 

their business operations simpler and less costly. It is expected that the new GFE will encourage 

shopping, increase efficiency, lower housing costs, and promote the purchase of loans that are 

more suited to a households’ needs. 

Empirical Evidence of Price Discrimination 

Studies indicate that consumers are often charged relatively high fees and can face wide 

variations in settlement prices, both for origination and third-party settlement services. Chapter 

2 offers convincing evidence that not only do borrowers find it difficult to comparison shop in 

today's mortgage market, but that they are all too often charged excessive prices. The enormous 

potential for cost reductions in today’s market is indicated by studies showing that yield spread 

premiums do not always offset consumers’ origination costs. Studies show that consumers are, in 

effect, charged relatively high prices in some transactions involving yield-spread premiums, and 

that the mortgage market is characterized by “price dispersion.” In other words, some borrowers 

get market price deals, but other borrowers do not. Studies show that less informed and 

unsuspecting borrowers are particularly vulnerable in this market. But given the fact that a 

borrower may be more interested in the main transaction (the home purchase), even more 

sophisticated borrowers may not shop aggressively for the mortgage or may not monitor the 

lending transaction very closely. 

The Urban Institute (2008) collected data on 7,560 FHA loans. The mean total loan 

closing cost for all loans is $4,917 for an average loan amount of $108,237. Total charges are 

composed of loan charges $3,081, title charges $1,329, and other third party charges $507. It is 

apparent from the distribution presented below that there is significant variation in closing costs: 

the standard deviation is $2,381. For its statistical analysis, the Urban Institute focused on a 

subsample of 6,366 non-subsidized loans, for which the mean total charges are slightly higher at 

$5,245. Lender charges for non-subsidized loans are $3,390, of which $1,450 are direct fees and 

$1,940 is the average YSP. 

 6-23 
 

Table 6-5. Distribution of Categories of Closing Costs as a Percentage of Loan Amount 

(calculated by HUD from data provided by Urban Institute) 

Series 

5th

percentile 

25th

percentile 

50th

percentile 

(median) 

75th

percentile 

95th

percentile 

Total Closing Cost 2.9% 4.1% 5.1% 6.4% 8.9% 

Total Loan Charges 1.3% 2.4% 3.2% 4.2% 6.2% 

 Yield-spread premium 0.3% 1.3% 2.0% 2.7% 3.8% 

 Direct loan fees 0.0% 0.8 1.3% 1.8% 3.3% 

Total Title Charges 0.6% 0.9 1.2% 1.6% 2.3% 

Other Third-Party Charges 0.2% 0.4% 0.6% 0.8% 1.4% 

A great degree of variation appears in the lender fees. Since total loan charges are 

correlated with loan amount, it would be useful to examine the distribution of closing costs as a 

percentage of loan amounts to ascertain whether the variation in fees is still present. HUD 

calculated the distributed of these ratios for non-subsidized loans from a data set of closing cost 

provided by the Urban Institute. There is slightly less variation when measured as a percentage 

but it is still substantial: the ratio of what the 75th percentile pays as a percentage of the loan to 

what the 25th percentile pays is 1.8 for total loan charges, 2.1 for the yield spread premium 

(indirect loan fee), and 2.4 for direct loan fees. 

It is apparent that half of the borrowers pay loan charges equal or greater than 3.2% of 

their loan amount; one-quarter pay loan charges of at least 4.2% of their loan amount; and five 

percent pay loan charges of at least 6.2% of their loan amount. The variation is similar for title 

charges and other third-party charges. Half of the borrowers pay total closing costs equal or 

greater than 5.1% of their loan; one-quarter pay closing costs of at least 6.4% of their loan 

amount, and five percent pay closing costs of at least 8.9% of their loan amount. 

HUD believes that these data provides strong indications of large price dispersion and 

thus price discrimination. Price discrimination will always lead to a loss in consumer surplus 

and unless price discrimination is perfect, it will also lead to a loss in social welfare. It should 

also be noted that if the variation of fees and charges paid is greater than the actual costs of 

providing the services, then that constitutes evidence of a violation of RESPA, which explicitly 

prohibits mark-ups. 

First, in a competitive market the price of the good should depend on its quality and 

not to whom and how it is sold. If there is dispersion because the negotiations are face-to-face, 

this would suggest that the nature of the market exacerbates the consumer’s informational 

disadvantage. Indeed, there is strong evidence that individuals pay different prices for reasons 

other than how costly service provisions will be. The Urban Institute report (2008) finds that 

African Americans pay an additional $415 for their loans and that Latinos pay an additional $365

(after taking into account borrower differences such as credit score and loan amount). These 

loans are not subprime loans but standard FHA loans. Other researchers have found similar 

results: Jackson and Berry (2002, see the Regulatory Impact Analysis for reference) find that 

mortgage brokers charge African-Americans (by $474) and Hispanics (by $580) substantially 

 6-24 
 

more for settlement services than other borrowers. Discrimination by race or ethnicity is not 

economically efficient and would not survive in a perfectly competitive market. 

Second, reconsider the yield-spread premium. We mentioned that this is one of the 

elements of a mortgage that a consumer is not likely to understand. The yield-spread premium is 

compensation to the broker for selling a loan with a higher interest rate. Thus, as the interest rate 

rises so should the yield-spread premium. This relationship appears to hold in the data analyzed. 

The broker earns income from two sources: a yield-spread premium that is paid by the lender and 

fees that are paid by the consumer. However, the burden of the yield-spread premium is on the 

consumer, who pays a higher interest rate for loans with a higher yield-spread premium. If 

consumers were perfectly informed, there would be a negative one-to-one relationship between 

up-front fees and the yield-spread premium. They simply represent two different ways of 

compensating the broker for the effort required to originate a loan. 

The Urban Institute (2008) finds no strong trade-off between the yield-spread premium 

and upfront cash payments. Ideally, each dollar of YSP generated by a higher interest rate would 

result in a one dollar reduction in upfront fees. The reality is that this is not even close to being 

true. The Urban Institute finds that paying one dollar of YSP to a mortgage broker reduces 

upfront fees by only 7 cents.21 

This result is derived from a sample of nonsubsidized loans above with a rate above 7 

percent, which is appropriate for investigating YSPs. FHA borrowers appear to get no benefit 

from YSPSs on brokered loans with coupon rates above 7 percent. The result is not much better 

when using the larger data set of all nonsubsidized loans: 

The Urban Institute finds that broker loan-origination fees, instead of being lower by a 

dollar for each dollar of YSP, are higher by 16 cents. This result is stunningly bad for 

borrowers. Clearly, the average FHA borrower has no idea a higher interest rate can be used to 

reduce upfront charges. Such a relationship is contrary to what one would expect in a market 

where there were only minor imperfections. Further evidence is from Jackson and Berry (2002) 

who studies only brokered transactions, a description of which can be found in Section IV.D.2 of 

Chapter 2 of the Regulatory Impact Analysis. They find that the problem of price dispersion 

occurs when yield spread premiums are present, because in these situations there is no single 

price for broker services: “Most borrowers pay more than 1.5 percent of loan value; more than a 

third pay more than 2.0 percent of loan value; roughly ten percent pay more than 3.5 percent of 

loan value.” Jackson and Berry find this “price dispersion” troubling, as it suggests that brokers 

use yield spread premiums as a device “to extract unnecessary and excessive payments from 

unsuspecting borrowers” (page 9). 

Third, consider the confusion that the variety of loan products and permutations of 

those products can create. If informational asymmetries are significant, then lenders will be 

able to earn more when selling more complex products. Borrowers who simplify their mortgage 

 

21 In a sample, which is appropriate for investigating YSPs, of nonsubsidized loans with a rate above 7 percent, the 

Urban Institute finds that broker loan-origination fees, instead of being lower by a dollar for each dollar of YSP, are 

higher by 16 cents. This result is stunningly bad for borrowers. FHA borrowers appear to get no benefit from 

YSPSs on brokered loans with coupon rates above 7 percent. 

 6-25 
 

shopping by rolling all lender/broker fees into the interest rate (i.e., get “zero-cost” loans) pay 

$1,200 less for their loans than brokers who pay lender or broker fees as measured by implicit 

YSPs. Borrowers who pay points realize only $20 of benefits for every $100 of points paid, for a 

net loss of $80. It appears that the industry is able to take advantage of loan complexity, which 

is evidence of price discrimination not related to the cost of originating the loan. 

Fourth, consider other settlement charges. Title insurance is an industry with a strong 

potential for natural monopoly. The costs of title insurance are primarily related to research of 

property transactions. There is a large fixed cost of entry which is compiling a database of 

transaction and lending records. There should not be a great variation in settlement charges since 

the only component that does vary substantially is the insurance premium. The Urban Institute 

(2008) finds an average $1,329 title charge in their sample of all loans with a standard deviation 

of $564. They also find a significant variation by state with New York, Texas, California, and 

New Jersey all costing at least $1,000 more (holding property values constant) than North 

Carolina, the lowest-cost state. A reasonable question is what extra benefits people in the highcost states get relative to those in low cost states, or why costs are so high if there are no extra 

benefits. It is also useful to analyze total title costs on a state-by-state basis due to the different 

legal requirements that exist among the states and the different customs that might have evolved 

in them as well. HUD examined within state variation of settlement fees. One measure of 

variability that we calculated for each state was the difference between the median of the highest 

quartile of title charges and the median of the lowest quartile. This is a measure of the difference 

between the typical charge for the highest fourth of the borrowers and the lowest fourth of the 

borrowers within each state. This difference was over $1,000 for nine states. Due to the extent 

of price dispersion, we can expect significant savings from the final rule. 

The primary purpose of this discussion was to show that there is great variation in closing 

costs and thus room for price discrimination. HUD would like to emphasize that the goal was 

not to portray lenders, and especially mortgage brokers, as unscrupulous and harmful to 

economic welfare. On the contrary, HUD recognizes that mortgage brokers and other lenders 

have played a crucial role in recent trends in home ownership. It is also clear from the statistical 

evidence presented in this section that there are many ethical loan originators. One quarter of the 

borrowers in this sample paid no more than 2.4% in loan charges and 4.1% in total closing costs. 

Consider that if the entire market mirrored this more efficient segment, then RESPA reform 

would not be as urgent. 

IV. Issues Raised in Comments on the 2008 Initial Regulatory Flexibility Analysis 

Section IV.A presents a review of comments on the 2008 IRFA. Sections IV.B and IV.C 

serve as roadmaps to other issues regarding the rule. 

IV.A. Comments Concerning the Initial Regulatory Flexibility Analysis 

This section describes how HUD responded in this Final Regulatory Flexibility Analysis 

(FRFA) to comments received on the Initial Regulatory Flexibility Analysis of the 2008 

proposed rule. The primary comments on the 2008 IRFA included: a report from the National 

Association of Realtors, prepared by Ann Schnare, who claimed that HUD had underestimated 

 6-26 
 

the costs of the rule; criticisms from advocates of small business that HUD had not adequately 

analyzed the impacts of its rule on industry structure; and an assertion by Representative 

Manzullo that HUD used obsolete data in its analysis. 

IV.A.1. “HUD Underestimated the Compliance Costs” (National of Association of Realtors) 

Ann Schnare prepared alternative estimates22 for the National Association of Realtors 

(NAR) of the compliance costs of HUD’s 2008 proposed reform of the Real Estate Settlement 

Procedures Act (RESPA) to simplify the process and reduce the costs of obtaining a mortgage 

loan. Their report contains worthwhile suggestions, such as performing a sensitivity analysis 

with respect to the number of applications per loan. However, their cost estimates are inaccurate. 

In Sections IV, HUD discusses the NAR’s major comments that are applicable to the Regulatory 

Impact Analysis of the final rule. Below is a summary of the NAR’s comments and HUD’s 

responses. 

The NAR states that HUD ignored a major compliance cost of the rule incurred by loan 

originators: the hedging costs of guaranteeing the interest rate for the shopping period of ten 

days. Including hedging costs dramatically increases compliance costs by a factor of four. 

However, the NAR made an erroneous assumption about the proposed GFE: there is no 

requirement of an interest-rate guarantee. Thus, hedging costs will be zero (See Section 

VII.D.1.). 

A second criticism of the analysis of the compliance cost of the GFE is that HUD does 

not consider the possibility that the rule could increase the administrative costs to loan 

originators by generating a greater demand for GFEs. Although HUD believes that it is just as 

likely that applications do not increase, HUD has included a sensitivity analysis of compliance 

costs by the number of applications. (See Section VII.D.2.) 

The NAR points to another cost not included in the IRFA: the cost of preliminary 

underwriting. However, this would only be a factor if the application to loan ratio were to 

increase. HUD assumed in the IRFA that this ratio would be constant. HUD’s response was to 

include this cost in a high application-to-loan scenario. (See Section VII.D.3) 

HUD was criticized for using inconsistent estimates of the value of time in order to raise 

the value of the benefits of the rule relative to the costs. In fact, the reverse is true: HUD used a 

higher rate to estimate the costs and a lower one to estimate the benefits (See Section VII.D.4). 

The NAR questions the potential benefits of the GFE. For support, Schnare turned to a 

study that used a sample suffering from selection bias (See Section V.A.1.g of Chapter 2 for a 

description) and questioned whether the rule would solve the problem of “bait and switch” or 

any other misleading business practice. PD&R has recently received A Study of Closing Costs 

for FHA Mortgages (summarized above in Section III and at length in Chapter 2). The results 

strongly indicate that HUD’s RESPA reform efforts are aimed directly at very serious problems 

in the market for these loan origination and other settlement services. 

 

22 Ann E. Schnare, “The Estimated Costs of HUD’s Proposed RESPA Regulations,” prepared for the National 

Association of Realtors s (June 3, 2008). 

 6-27 
 

IV.A.2. Impact of the Rule on Industry Structure 

Many industry commenters stated that there were elements of the rule that disadvantaged 

small business. One of the primary concerns of small title firms is the potential adverse effect of 

volume discounting. The 2008 final rule set a clearer standard for compliance in the context of 

the new GFE. HUD merely clarified that volume discounting is legal as long as the savings are 

passed along to the consumer. ALTA, ICBA, NAMB, and NAR contend that volume discounts 

will favor large settlement service providers and loan originators/lenders at the expense of small 

businesses and place them at a disadvantage. The Office of Advocacy formally endorsed this 

position in their comment letter (June 11, 2008) and predicted that HUD’s proposed clarification 

“may cause small businesses to leave the market and result in higher prices for consumers in the 

long term.” 

ALTA stated that the ability to negotiate volume discounts on the local services that are 

incidental to the issuance of a title policy (such as a title search) will disadvantage the small title 

insurance agency that does not have the resources to guaranty a stream of business to a third 

party or discount its own services when the services are performed in house. In addition, ALTA 

expressed concern that mortgage lenders and brokers will add to the anticompetitive effects by 

favoring affiliated title companies or those companies that can provide title related services on a 

nationwide basis. 

Comment. Both the NAR and ALTA asserted that the Regulatory Impact Analysis of 

the proposed rule did not adequately address the anti-competitive issues of the proposed rule. 

Response. In its Regulatory Impact Analysis, HUD very meticulously outlined the 

proportional impacts of the rule on small business. HUD continues to believe that as long as a 

small businesses is not charging consumers excessive fees, then small business will not suffer 

disproportionately. 

To a large extent, the issue of unfavorable impacts on small business is mute. The 

greatest objection by small business was to volume discounts. In response to the numerous 

objections to HUD’s clarification, HUD will not address volume discounts in the rule. HUD 

wants to ensure that any change will adequately protect consumers while at the same time 

providing adequate flexibility and due consideration to small business concerns. It remains 

HUD’s position, however, that discounts negotiated between loan originators and other 

settlement service providers, or by an individual settlement service provider on behalf of a 

borrower, where the discount is ultimately passed on to the borrower, is not, depending upon the 

specific circumstances of a particular transaction, a violation of section 8 of RESPA. If the 

borrower fully benefits from the discount, these types of mechanisms that lower consumer costs 

are within RESPA’s principal purposes. 

There may be other facets of the rule, such as tolerances, that are thought to have a 

disproportionate impact on small business, even on those small firms that are not charging 

excessive prices. Instead, HUD believes that the rule will create opportunities for efficient firms 

to expand their operations. This opinion is based on our observations that a distinguishing 

characteristic of the real estate industry is that it is very locally oriented. The value of proximity 

and local expertise make small firms more efficient in providing services to consumers. RESPA 

 6-28 
 

reform will not change that essential characteristic of the real estate industry. (See Section 

II.C.5. for a discussion). 

IV.A.3. Timeliness of Data 

Comment. Some criticized HUD for using “old” data in its Regulatory Impact Analysis 

of the 2008 proposed rule. For example, Representative Don Manzullo wrote in his comment 

letter that the market has changed significantly since the data was obtained in 2002 and 2004; 

that these changes may impact how the rule is implemented; and that should wait until it has data 

on current market conditions before moving forward with the rule. 

Response. HUD’s initial regulatory flexibility analysis of the proposed RESPA rule, 

which was completed in late 2007, used the latest, at that time, officially available federal 

government data on small businesses provided by the Small Business Administration (SBA) as 

derived from two Census Bureau data sources: the 2002 Economic Census (business income or 

receipts), and the 2004 County Business Patterns data (number of businesses and firm 

employment size). These data are augmented, when possible, by highly regarded data from 

industry sources. For example, the SBA/Census data on mortgage brokers do not agree with 

estimates of the size of that industry made by the National Association of Mortgage Brokers and 

other observers. HUD ultimately based its analysis of the mortgage broker industry on these 

private sector data. 

Chapter 5 of the RIA provides extensive documentation of the characteristics of the 

industries directly affected by the rule, including various estimates of the numbers of small 

entities, reasons why various data elements are not reliable or unavailable, and descriptions of 

methodologies used to estimate (if possible) necessary data elements that were not readily 

available. The industries discussed in Chapter 5 of the RIA included the following (with Chapter 

5 section reference): mortgage brokers (Section II); lenders including commercial banks, thrifts, 

mortgage banks, credit unions (Section III); settlement and title services including direct title 

insurance carriers, title agents, escrow firms, and lawyers (Section IV); and other third-party 

settlement providers including appraisers, surveyors, pest inspectors, and credit bureaus (Section 

V); and real estate agents (Section VI). 

The SBA does not expect to have an update (from the 2007 Economic Census) of the 

2002 Economic Census data (business income or receipts) available until sometime in 2010, well 

beyond the time horizon for this rulemaking effort. Thus, the FRFA of the final RESPA rule will 

continue to rely in part on data from 2002. 

More importantly, HUD’s estimate of the annual regulatory burden depends primarily on 

our assumptions concerning the compliance cost per loan. HUD has used generous estimates of 

the costs of the rule but has received no hard data from industry that would allow us to refine our 

estimates. The aggregate impact of the rule depends on mortgage volume. Our approximation 

of the average year is 12.5 million transactions. It is probable that the level of originations in 

2008-2009 will be lower than this amount. However, the final rule requires a twelve-month 

implementation period. By the time the rule is in effect, the average mortgage volume is 

expected to return to that of the average year. 

 6-29 
 

IV.B. Alternatives Considered to Minimize Impact on Small Businesses 

Section VI of this chapter provides discussion of the alternatives considered by HUD in 

developing the final rule with a focus on those alternatives considered to minimize the impact on 

small business. Section VI includes a summary discussion of the following major alternatives: 

maintaining the status quo; not including the yield-spread premium calculation in the GFE; 

requiring the preparation and reading of a closing script; and clarification in the rule of the 

legality of volume discounting;. Section VI also includes a discussion of steps HUD took to 

make the new GFE easier to implement for small businesses. 

IV.C. Comments and Responses to Other Issues 

Chapters 1-5 of the Regulatory Impact Analysis include detailed summaries of the 

comments submitted by small businesses and other firms on various aspects of the 2008 

proposed rule and in response to the 2008 IRFA. Detailed discussion of comments received can 

be found in the preamble. Detailed analysis responding to comments received can be found in 

Sections VI and VIII of Chapter 3. Detailed discussion of comments related to the compliance 

burden of the rule can be found in Sections VII, VIII, and IX of this chapter. Analysis 

responding to some specific comments on the 2008 IRFA can be found in Chapter 3. Changes 

made to the 2008 proposed rule in response to comments received are summarized in Section VI 

of this chapter. 

V. Description and Estimate of the Number of Small Entities 

Chapter 5 provides extensive documentation of the characteristics of the industries 

affected by the rule, including estimates of the numbers of small entities. The industries 

discussed in Chapter 5 included the following (with industry code and Chapter V section 

reference): mortgage brokers (Section II); lenders including commercial banks, thrifts, mortgage 

banks, credit unions (Section III); settlement and title services including direct title insurance 

carriers, title agents, escrow firms, and lawyers (Section IV); and other third-party settlement 

providers including appraisers, surveyors, pest inspectors, and credit bureaus (Section V); and 

real estate agents (Section VI). The specific industry names and industry codes (North American 

Industry Classification System, or NAICS code) for the mortgage originators and third-party 

firms covered in Chapter V are as follows: 

Mortgage Origination Firms 

1. Mortgage Loan Brokers (522310) 

2. Commercial Banks (522110) 

3. Savings Institutions (522120) 

4. Real Estate Credit/Mortgage Bankers (522292) 

5. Credit Unions (522130) 

 6-30 
 

Third-Party Service Firms 

1. Direct Title Insurance Carriers (524127) 

2. Title Abstract and Settlement Offices (541191) 

3. Offices of Lawyers (541110) 

4. Other Activities Related to Real Estate (531390) 

5. Offices of Real Estate Appraisers (531320) 

6. Surveying and Mapping (except geophysical) Services (541370) 

7. Credit Bureaus (561450) 

8. Exterminating and Pest Control Services (561710) 

9. Offices of Real Estate Agents and Brokers (531210) 

Chapter 5 supports Chapters 3 and 6 by providing basic mortgage-related data on each 

industry and by explaining the various methodologies for estimating the share of industry 

revenue accounted by the different component industries and by small businesses within each 

component industry. Chapter 5 presents an overview of the industries involved in the origination 

and settlement of mortgage loans (see above list). Industry trends are briefly summarized and 

special issues related to RESPA are noted. There is also a description of the economic statistics 

for each industry, with an emphasis on each industry’s share of small business activity. Both the 

estimation of the revenue share for various industry sub-sectors (e.g., large title insurers’ share of 

total revenue in the title and settlement industry) and the estimation of the small business share 

of mortgage-related revenue within the industry, often involve several technical analyses that 

pull together data from a variety of sources, in addition to Census Bureau data. This leads to 

several sensitivity analyses to show the effects of alternative estimation methods and 

assumptions. This chapter also reports the revenue transfers from the RESPA rule for the 

specific industry sectors; these transfers are reported in dollar terms and, where possible, as a 

percentage of industry revenue. Finally, a number of technical issues and special topics, such as 

techniques for estimating the distribution of retail mortgage originations, are discussed. A 

technical appendix to Chapter 5 provides relevant definitions and explains the methodology 

associated with the economic data obtained from the Census Bureau. A data appendix in 

Chapter 5 includes tables with the economic data (number of firms, employment, revenue, etc.) 

for each industry sector. 

Thus, the Regulatory Impact Analysis pulls together substantial data from the Bureau of 

the Census and industry sources to provide estimates of revenue transfers for different industries 

and for small businesses within those industries. Chapter 5 provides a full technical review of the 

data used and the various methodologies for estimating the small business share of industry 

revenues. 

Drawing from the analysis in Chapters 3 and 5, Appendix A to this chapter provides 

estimates of the revenue impacts from the new GFE. These data are presented in aggregate form 

($ million) and on a per firm basis, covering all firms (both employer and non-employer), small 

firms (small employer firms plus non-employer firms), and very small firms (very small 

employer firms plus non-employer firms). Separate data for non-employer firms are also 

 6-31 
 

provided. In some cases, different projections are provided for some of the more important 

sensitivity analyses conducted in Chapters 3 and 5. The technical analyses presented in Chapter 

5 indicate some uncertainty around some of the numbers (such as the number of small mortgage 

banks, the split of revenue among different sectors of the broad title industry, etc.). Readers are 

referred to the technical discussion in Chapter 5 for various qualifications with the data and for 

various sensitivity analyses that illustrate the effects on the estimates of alternative assumptions. 

In addition, Chapter 5 explains the definitions of small and very small being used here. 

VI. Alternatives Which Minimize Impact on Small Businesses 

Under the Initial Regulatory Flexibility Analysis, HUD must discuss alternatives that 

minimize the economic impact on small entities consistent with the stated objectives of 

applicable statutes, including a statement of the factual, policy, and legal reasons for selecting 

the alternative adopted in the final rule and why each of the other significant alternatives to the 

rule considered by the agency was rejected. Many of the alternatives that HUD considered and 

implemented were directed at making the GFE less burdensome for small businesses. These 

changes are described below. A more detailed discussion of the changes to make the GFE easier 

to implement for small businesses are provided in Section VIII of Chapter 3. For a discussion of 

all of the major alternatives considered to the final GFE, see Chapter 4. 

This Regulatory Impact Analysis discusses several steps that HUD took that will assist 

small businesses involved in the mortgage origination and settlement process. Examples include 

simplifying the new GFE form (fewer numbers, etc.), designing the new GFE form so that there 

is a level playing field between lenders and brokers, and delaying the phase-out of today’s GFE 

for twelve months. HUD also made numerous other changes that were designed to make the 

GFE easier to use, particularly for small businesses. These changes are discussed throughout 

Chapter 3 and summarized in several places in the Regulatory Impact Analysis. This section will 

list them again, as it is useful to provide a record of the changes made to the 2008 proposed rule 

that should make the new GFE easier to implement for small businesses. Considered as a group, 

these changes are important. While many are designed to address a problem faced by large as 

well as small lenders, for the most part, they address problems that would place a greater burden 

on small than large businesses. Examples of the changes that HUD made are the following: 

• Volume-based discounts. Small businesses, especially closing attorneys and escrow 

companies stated that lenders seeking volume discounts would place them at a 

competitive disadvantage to larger entities and force them out of business. HUD 

responded by not addressing volume discounts in its final rule. 

• Tolerances. Some commented that large lenders would have an easier time meeting 

tolerances than small businesses by contracting with large third-party settlementservice providers, and thereby placing small settlement service providers at a 

competitive disadvantage. If exceeding the tolerance was an infrequent and 

unpredictable event, larger firms may be able to diversify the risk over a larger pool 

of loans. The final rule provides loan originators with an opportunity to cure any 

potential violation of the tolerance by reimbursing the borrower any amount by which 

the tolerances were exceeded. The opportunity to cure will permit loan originators to 

 6-32 
 

give an estimate of expected settlement charges in good faith, without subjecting 

them to harsh penalties if the estimate turns out to be lower than the actual charges at 

settlement. This change reduces the potential damages of exceeding the tolerances. 

VII. Compliance Costs and Regulatory Burden: New GFE 

This section focuses on the compliance, regulatory, and other costs associated with 

implementing the final rule. It examines compliance and regulatory impacts of the new GFE on 

originators. There are two types of compliance and regulatory costs – one-time start-up costs 

and recurring costs. Section VII.B discusses start-up costs, noting that HUD has lengthened the 

phase-in period for the new GFE in order to reduce any implementation burden on the industry, 

particularly small firms. Section VII.C discusses recurring costs that are related to implementing 

the new GFE. The simplicity of the new GFE, plus the changes that HUD has made to improve 

the new GFE, will limit these annual costs, as discussed in Section VII.D. Section VII.E 

discusses compliance issues related to tolerances on settlement party costs. Finally, Section VII.F 

outlines efficiencies associated with the new GFE. 

Before examining the specific regulatory and compliance costs, Section VII.A reviews 

the basic data used in estimating these costs. For a similar description of the costs on the 

settlement industry, see Section VIII. 

VII.A. Data Used in Compliance Cost Estimates 

The following tables provide a summary of the industry characteristics data used to 

develop compliance cost estimates for the GFE. Details on the derivation of these data are 

available in Chapter 5. The compliance costs of the GFE provisions of the rule apply mainly to 

retail loan originators. While wholesale lenders, for example, are involved in the mortgage 

origination process, they are not responsible for issuing the GFE – rather the originating lender 

or broker is responsible for the issuing the GFE to the borrower.23 Therefore, data are presented 

only for those brokers and lenders that do retail mortgage loan originations. Settlement agents 

do not generate GFEs and therefore they would not be subject to these GFE-related costs. 

Settlement agents will , however, be involved generating HUD-1s; since there are some changes 

to the HUD-1 form, there are compliance costs on settlement agents associated with that change. 

In most cases, HUD expects that loan originators will complete the comparison page of the 

HUD-1 form. However, a portion of the compliance cost will be the burden on settlement agents 

of completing the comparison page accurately in cases where there is additional information 

required from the settlement agent. Other third-party providers (e.g., appraisers) will face no 

compliance costs from the GFE provisions of the rule. 

Chapter 5 provides information on the total number of brokers and lenders that are likely 

to be affected by the new RESPA rule and its revised GFE form. Section II of that chapter 

explains that the number of brokers has grown substantially in recent years. In 2000, there were 

 

23 If the wholesale lender generates the GFE, then there would be a charge to the originator (either a direct charge or 

a reduction in fees, compared with the case where the originator issues the GFE). 

 6-33 
 

30,000 brokers, but with the increase in refinancing, the number of brokers rose to 33,000 in 

2001 and then jumped to 44,000 in 2002 and then to 53,000 in 2004. According to Census 

Bureau data, practically all brokers (99.1%) qualify as a small business. Thus, it is estimated that 

small broker firms have ranged from 32,703 to 52,523 over the past few years. As explained in 

Section III of Chapter 5, lenders that will be affected by the RESPA rule include: 7,402 

commercial banks (4,426 or 59.8% are small), 1,279 thrift institutions (641 or 50.1% are small), 

1,287 mortgage banks (1,077 or 83.7% are small), and 3,969 credit unions (3,097 or 78.0 % are 

small).24 Altogether, there are 13,937 lenders (including credit unions) affected by the RESPA 

rule, and 9,241 of these qualify as a small business. 

Table 6-6 provides the distribution of retail mortgage originations among the various 

industries and for small firms within each industry. Totals are estimated based on the number of 

mortgage originations (12,500,000 loans) that would occur in a “normal” year of mortgage 

originations (that is, not in a high-volume year with a refinancing boom). The data below 

assume that brokers account for 60% of mortgage originations and lenders, the remaining 40%.25 

(See below for alternative origination volume and broker share estimates.) 

Table 6-6 Volume of Retail Mortgage Originations

Industry All Originations Percent of 

Originations 

Originations by 

Small Firms 

Percent Industry 

Originations by Small 

Firms 

Mortgage Brokers 7,500,000 60.00% 5,250,000 70.00% 

Commercial Banks 2,053,150 16.43% 389,893 18.99% 

Thrifts 974,750 7.80% 120,089 12.32% 

Mortgage Banks 1,551,500 12.41% 644,803 41.56% 

Credit Unions 420,600 3.36% 122,563 29.14% 

TOTAL 12,500,000 100.00% 6,527,349 52.22% 

As shown in Table 6-6, it is estimated that 52% of mortgages are originated by small 

brokers and lenders. 

Table 6-7 provides the total number of workers and the number of workers in small firms 

engaged in retail mortgage origination by industry. It is based on the mortgage origination 

volumes depicted in Table 6-6 and productivity rates of 20 loans per worker per year for 

mortgage brokers and lenders. See Section II.B.2.c of Chapter 5 for the derivation of the 20 

loans per worker in the broker industry and see Section III.B.5.g of Chapter 5 for a discussion of 

the 20 loans per worker in the lender industry. Given the uncertainty around these estimates (and 

particularly the lender estimate which is obtained by simply assuming that lender workers are as 

productive as brokers), alternative estimates and sensitivity analyses are provided in Chapter 5. 

As noted in Chapter 5, one alternative would be to choose a lower productivity number for 

 

24 See Section III.B.5 of Chapter 5 for issues related to the number of small mortgage banks. As also explained in 

that section, the credit unions are the ones that report some mortgage origination activity. 

25 See Section III.B.5.d of Chapter 5 for the derivation of the distribution of retail originations among commercial 

banks, thrifts, and mortgage banks; the distribution used here is the “adjusted distribution” for the number of loans. 

See Chapter 5 for reasons why there is some uncertainty with the estimated distribution and for analysis of an 

alternative distribution. 

 6-34 
 

lenders, which would be consistent with the widely held belief that brokers are more productive 

than lenders; in addition, it may be more appropriate to overestimate the number of lender 

employees affected by the RESPA rule than to underestimate them.26 However, this analysis 

starts by assuming equal productivity for lenders and brokers.

Table 6-7 Workers Engaged In Retail Mortgage Loan Origination 

Industry Total Workers Workers in Small 

Firms 

Percent of Workers in Small 

Firms 

Mortgage Brokers 375,000 288,750 77.00% 

Commercial Banks 102,658 19,495 18.99% 

Thrifts 48,738 6,004 12.32% 

Mortgage Banks 77,575 32,240 41.56% 

Credit Unions 21,030 6,128 29.14% 

TOTAL 625,000 352,617 56.42% 

As shown in Table 6-7, it is estimated there are 625,000 workers engaged in mortgage 

origination, with 352,617 of these operating in small businesses. As noted above, the mortgage 

volume figure (12,500,000 loans based on $2.4 trillion in originations) reflects industry 

projections of mortgage originations for 2008. Chapters 3, 4, and 5 conduct sensitivity analyses 

with a higher level of originations. For example, one could consider an environment where 

15,500,000 loans were originated (compared with the 12,500,000 loans in the base case). In this 

case, the figures in Tables 6-6 and 6-7 would change. For example, the number of workers in the 

broker industry would increase to 438,038 (with 337,293 in small firms) and the number of 

workers in the combined lender group would increase to 271,250 (with 69,296 in small firms).27 

Below, sensitivity analyses cover these higher estimates of the number of workers affected by 

the RESPA rule. 

VII.B. Compliance and Regulatory Burden: One-Time Costs 

Several one-time compliance burdens can be identified that will result from the new rule. 

All involve the adjustment process from the old rule to the new rule. Although HUD received 

comments on the one-time compliance cost issues associated with the new GFE, commenters did 

not provide any useful data on the magnitude of these costs. 

 

26 A comment should be made about the small business share for brokers. Section II.B.1 in Chapter 5 reports that 

small brokers account for 70% of broker industry revenue. Table 6-6 assumes that small brokers account for the 

same percentage (70%) of the number of loans originated by all brokers; it is possible that this percentage could be 

too low, given that Section II.B.2.c of Chapter 5 derives an estimate of 77% for the share of industry workers in 

small broker firms. The 77% figure is used in Table 6-7 (288,750 divided by 375,000) for estimating the share of 

workers in small broker firms. The small business share of the number of workers in each of the four lender 

industries in Table 6-7 is assumed to be the same as in Table 6-6 for the number of loans. See Section III.B.5 of 

Chapter 5 for the derivation of the small lender shares of lender originations. 

27 As explained in Chapter 5, this scenario assumes that the increase in mortgage originations comes mainly from 

brokers; the loans-per-worker assumption is increased to 23 for brokers (consistent with that number increasing in 

Olson’s surveys during higher volume years) but kept at 20 for lenders since their volume does not increase much 

during this scenario. 

 6-35 
 

There are three major areas of expected one-time compliance costs of the new GFE. 

Those who generate the new GFE forms, loan originators, will need new software in order to 

produce the new forms.28 Their employees will need to be trained in the use of the new forms 

and software. Loan originators may seek legal advice to be certain that the arrangements they 

make to ensure that third-party service prices are accurate and within tolerances comply with the 

regulation. Loan originators may also seek legal advice regarding tolerances and average-cost 

pricing. In this section, it is estimated that these one-time compliance costs will total $383 

million, although it is recognized below that these costs could vary with several factors such as 

different levels of overall mortgage activity. Small brokers and small lenders firms will 

experience $268 million (or 70%) of these one-time compliance costs. 

VII.B.1. Software Modification and Training Costs 

Loan originators would need alterations to their software to accommodate the 

requirements of the new rule since they generate the new GFE. There would be one-time costs 

for production and installation of the new GFE (software development, etc.). Software 

modification, or new software, is needed because the GFE has been changed. The 

implementation of software varies with business size. Small originators are likely to use 

commercial off-the-shelf (COTS) software products while larger originators may produce their 

own software if in-house development is cheaper than buying from outside suppliers. HUD 

reviewed several software products for loan origination and closing advertised on the Internet.29 

Prices ranged from a flat $6930 for one license to undisclosed negotiated prices based on the 

number of users and feature sets purchased. Software is generally priced according to the 

number of users (e.g., one license per user, or enterprise licenses based on the expected number 

of users in the enterprise). 

One new requirement, implicit from the tolerances, is that originators will have to keep 

track of the costs listed on the GFE in order to ensure that the tolerances are not exceeded at 

settlement. Most of the software products HUD examined have the capability to access 

databases of information, including pricing information, of third-party service providers. 

Because these systems have the capability to access other databases, they would not need to be 

redesigned to carry forward prices from the GFE to the closing documents in order to determine 

if final settlement prices remain within tolerances. The GFE portion of the software would need 

 

28 This analysis assumes that the mortgage broker, not the wholesale lender, produces the GFE in transactions 

involving mortgage brokers. To the extent that the wholesale lender is involved in producing the GFE the use of the 

broker data will result in an overestimation of the impact on small businesses (since small businesses make up a 

much larger portion of broker businesses than they do of wholesale lender businesses). 

29 Examples are: Vantage ILM, http://www.vantageilm.com; Utopia Originator from Utopia Mortgage Software, 

http://www.callutopia.com/support.html; The Mortgage OfficeTM from Applied Business Software, 

http://www.themortgageoffice.com/main.asp; and MORvision Loan Manager from Dynatek, 

http://www.dynatek.com/products.asp. 

30 Good Faith Settlement Software by Law Firm Software; http://www.lawfirmsoftware.com/software/good-faithestimate.htm. Note that this is very basic software compared to other alternatives. More sophisticated software is 

more expensive. 

 6-36 
 

to be modified to display the consolidated expense categories mandated in the rule. Redesigning 

the form appears to constitute a minor alteration of the software. 

The new GFE also requires additional information. The first page summarizes worst case 

scenarios for the borrower: the maximum monthly interest rate, the maximum monthly mortgage 

payment, and maximum loan balance. Such information is obvious for most types of loans but 

could require more effort to calculate for more exotic loans such as a negative amortizing loan. 

Some loan origination software will already possess analytical capabilities. However, producers 

of less sophisticated programs will need to write a few additional lines of code to create the 

output for the first page of the new GFE. Nonetheless, the final rule will have no impact on the 

primary function of origination software and would require only minor changes. 

Changes to the HUD-1 will have implications for loan origination software. The 

comparison page, which features a summary of the loan terms, requires lenders to provide 

information on the loan and settlement costs for pa3 3 of the HUD-1. Indeed, it is possible that 

most producers of loan origination software will begin to feature an application that generates an 

almost complete HUD-1 for the settlement agents to finish. One could add this application to 

loan origination software fairly easily. It will be a minor change since lenders enter most of the 

information needed for the comparison page for the GFE. The task facing the programmer will 

be to set up an interface for entry of additional escrow information needed in the comparison 

page, populate page 3 of the HUD-1 form with settlement cost and loan term data and print out 

the HUD-1 form. The software would also perform the important task of calculating the 

difference between the figures on the initial GFE and the actual settlement costs and then check 

whether they are within the tolerances. 

Depending on the software that a firm has purchased there are three possibilities as to 

who pays the direct cost of developing new software. The first scenario is that a firm purchases 

an update of the program. This is a fairly standard option and is generally less than half the price 

of new software. Given that the changes required by the final rule are fairly minor, the price of 

an update should compensate software companies for the cost involved in altering their 

programs. 

The second possibility is that a firm purchases new software, in which case the cost of 

redesigning the forms to comply with the rule will be built into the purchase price. Firms that 

would purchase new software would include new entrants into the industry, pre-existing firms 

that would have bought new software for reasons unrelated to the final rule, and firms that use 

software for which updates are not offered. Many users routinely upgrade software as new 

versions are released and build the expected expenses into their business plans. To the extent 

that software is routinely upgraded, the extra costs of implementing the GFE changes will be 

reduced. In these cases, the software cost to the firm of the final rule is not the purchase price of 

the software but rather the increase in the purchase price as a result of the costs of redesigning 

software to meet RESPA guidelines. 

A third scenario is that software companies are obliged or volunteer to offer free updates, 

in which the case the software cost of the final rule falls directly on software developers. 

However, indirectly, the cost of the new software will be shared by real estate and software 

firms. Software companies that offer free updates will price the risk of changes into the purchase 

 6-37 
 

price of the software. If a large unexpected change occurs, then the software company will bear 

the burden. However, the change required by RESPA will not be unexpected because the final 

rule will be made public and will not be costly for reasons previously discussed. 

In all three scenarios, the cost of an update is a good approximation of the software cost 

of the rule. In the first scenario in which firms purchase an update, it would probably be an 

overestimate of the cost to a purchaser because an update may contain other useful 

improvements to the software. However, it is a reasonable estimate of the cost in that many 

firms would not purchase an update if not for the final rule. In the second scenario, in which a 

firm purchases new software, the price of an update could serve as an approximation of the cost 

of implementing the required changes and thus an estimate of the resulting increase in the price 

of new software. In the third scenario, where the software companies bear the direct cost of the 

change, the price of an update could serve as an estimate of the cost to software firms of 

producing free updates.31

In the first two scenarios, where firms bear the burden of the change in the software; the 

costs of new or updated software will depend upon the number of employees in the firm using 

the software. Virtually all software companies providing software to lenders for loan origination 

offer volume discounts. Such a pricing policy reduces the average cost for large firms. Second, 

in larger firms many employees will have specialized duties that do not include completing the 

new GFE form and so will not require updated software. Thus, it is likely that small firms will 

bear a greater per employee software cost from the final rule. 

Based upon the discussion above and an examination of software pricing schemes, it is 

reasonable to make three assumptions in order to estimate the software costs of the final rule: 1) 

the cost per user is the cost of an update; 2) updates cost less than half of the cost of new 

software; 3) the costs per user for a firm decline significantly with the number of users. An 

example of the type of software that a firm might purchase is Bytepro Standard (by Byte 

Software, Inc., http://www.bytesoftware.com). This software has many analytical features such 

as the ability to calculate maximum loan amounts, which would be required by the new GFE. 

The software costs $395 for a two user package and $400 for five additional users. The per user 

cost for the first two is $198. The cost per user for an additional five is $80. 

We can safely assume that the industry average of the cost of an update would be no 

more than $150 for the first user, $100 per user for the average small firm, and $50 for the 

average large firm.32 Second, we assume that the proportion of workers involved in origination 

that use the software declines with the size of the firm. For small firms, we assume that threequarters of all workers use the software and will need an update. For large firms, we assume that 

only half of the workers use origination software and need an update. Given these assumptions, 

 

31 Correctly estimating the cost to software firms is difficult given the nature of the output. Development is a onetime fixed cost, whereas the cost of delivering software to one user is very low. Given the decreasing average costs, 

the aggregate economic impact to the software industry would depend upon the number of firms. 

32 Byte Software, Inc. offers an annual support service, which would include updates, for up to ten users for $300 

per year. Every additional user over ten cost $30. 

 6-38 
 

the total cost to the industry of an update would be $33 million, of which $26 million is borne by 

small firms.33 This amounts to an average software update cost of $83 per user. 

In addition, each employee using the new software would require some time to adjust to 

the changes. The actual amount of time required to familiarize ones self with the new software is 

unknown. For this example it is assumed that 2 hours are required. If the opportunity cost of 

time is $72.12 per hour (based on a $150,000 fully-loaded annual salary), then the opportunity 

cost of software training would be $144 per worker using the new software. Software users 

often learn about new modifications without formal training by using them with very little loss of 

time or productivity. Thus the software training costs estimated below are likely an upper 

bound. Table 6-8 shows the distribution of these costs by industry and the amount borne by small 

businesses within each industry. The table uses worker distributions from Table 6-7 and 

assumes half of the workers in large firms and three-quarters of the workers in small firms use 

the software and will require upgrades and training. Given these assumptions the total software 

training cost is $58 million, of which $38 million is borne by small firms. The grand total for 

software upgrade and training cost is $91 million, of which $65 million is borne by small firms. 

Table 6-8 One-time Software Upgrade and Training Costs of the Rule to Loan originators 

Industry Total Software Upgrade 

and Training Cost Small Business Cost Percentage Small 

Mortgage Brokers $61,267,428 $52,891,226 86.3%

Commercial Banks $11,647,288 $3,570,897 30.7%

Thrifts $5,249,891 $1,099,855 21.0%

Mortgage Banks $10,308,241 $5,905,531 57.3%

Credit Unions $2,569,710 $1,122,511 43.7%

TOTAL $91,042,558 $64,590,020 70.9%

Alternative estimates could be made. If 4 hours (instead of 2 hours) of software training 

were required, then total costs would rise by $57 million to $148 million (with $103 million 

being the small business cost). Assuming that only two hours are required, but that the 

proportions of software users were raised to all of the workers in small firms and three-quarters 

of the workers in large firms, then the total software cost (including training) of the final rule 

would be $126 million, of which $86 million would be borne by small firms. If the proportions 

are increased (as in the latter scenario) and the hours are increased (as in the former scenario), 

then the total cost would be $206 (with $137 million being the small business cost). 

The estimates in Table 6-8 above are based on a “normal” level of mortgage origination 

activity and not that of a high volume year which might occur as a result of low interest rates. 

High volume years bring with them increases in productivity by existing firms and employees 

(higher rates of loans per employee), new employees, and new entrants. New employees and 

new entrants would require additional software licenses even if there were no new rule changing 

the GFE. For this reason, basing the software upgrade compliance burden on a high volume year 

would overstate the burden. Using the higher rates of productivity associated with refinancing 

 

33 To demonstrate that our estimate is a safe ceiling, suppose that there are one hundred software firms and that each 

one pays six programmers an average of $150,000 a year to upgrade the software to reflect the changes incurred by 

the proposed rule. The total cost to the software industry would be $90 million. 

 6-39 
 

booms to compute software upgrade costs would tend to understate them. Therefore, use of the 

normal business volume probably provides the most appropriate estimate of this cost. Still, 

assuming a higher level of origination activity (15,500,000 loans) and a 65% market share for 

brokers, estimated software costs would be $118 million, and $86 million would be accounted 

for by small businesses (with one-half of employees at large firms and three-quarters of workers 

at small firms using the software and requiring 2 hours of training). As noted earlier, the costs of 

software upgrades required to implement the new GFE apply only to retail loan originators. 

These costs do not apply to wholesale lenders. 

Another way of presenting the software and training costs to loan originators is to 

distinguish between the costs of the new GFE versus the HUD-1. This break-out is somewhat 

arbitrary but is useful for the discussion of the costs of the different components of the rule. 

Suppose the HUD-1 alterations constitute 20 percent of the software and training costs to loan 

originators, then of the $91,042,558 total costs to loan originators, $72,834,046 stem from the 

GFE and $18,208,512 from the HUD-1. The costs to small business would be distributed 

similarly: $52 million from the GFE and $13 million from the HUD-1. One could experiment 

with different ratios of HUD-1 to GFE costs but the total would not change. 

VII.B.2. Legal Consultation 

Using the new GFE will entail a change in business practices, including making 

arrangements with third-party settlement service providers to ensure that prices charged will 

remain within the tolerances of the prices quoted. Loan originators will want to ensure that these 

arrangements do not violate RESPA. It is highly likely that the trade associations for the 

mortgage loan origination industries will produce model agreements or other guidance for 

members to help them comply with the new rule. Loan originators may also want to better 

understand if there any legal implications of average-cost pricing. Some originators may feel no 

further need for additional legal advice so that they would have no legal consultation expenses as 

a result of the rule. Larger originators may wish to seek a greater amount of legal advice, as they 

perceive themselves to be at greater risk of class action RESPA litigation. 

The actual amount and cost of legal services that will be incurred because of the new 

GFE are unknown. While it is recognized that all firms might not seek legal advice, it would 

seem that many firms engaged in retail mortgage origination would want some minimal legal 

advice, so that they understand the new rules and regulations. If all 57,937 firms sought two 

hours of legal advice at $200 per hour, the fixed legal consultation expense would amount to $23 

million. In addition, firms will seek further legal advice based on their volume of transactions; in 

this analysis, the total volume-based legal expense amounts to 4 times the fixed expense or $93 

million. To show that this is a reasonable estimate, suppose a large originator, operating in all 50 

states and the District of Columbia, required state-by-state legal reviews averaging 1-personweek (40 hours) per state. At $200 per hour, this would amount to $408,000. If all of the 100 

largest originators acquired a similar amount of legal advice, the cost would come to $40.8 

million, which leaves approximately $52 million for variable legal costs for other originators.34

 

34 If the per hour cost of legal consultation were greater than $200 per hour, then these estimates would rise 

proportionately with the increase in hourly legal costs. 

 6-40 
 

Under these estimates, total legal consultation expenses associated with the new GFE are 

expected to total $116 million and are distributed among industries and small businesses, which 

bear 60.3% of the legal cost, as depicted in Table 6-9, which uses information on the distribution 

of firms and originations. 

Table 6-9 One-time Legal Consultation Costs of the New GFE 

Industry Total Legal 

Consultation Cost Small Business Cost Percentage Cost to Small Business 

Mortgage Brokers $73,219,520 $56,375,264 77.0% 

Commercial Banks $18,186,829 $4,934,375 27.1% 

Thrifts $7,740,284 $1,182,697 15.3% 

Mortgage Banks $12,020,625 $5,212,708 43.4% 

Credit Unions $4,706,743 $2,147,722 45.6% 

TOTAL $115,874,000 $69,852,767 60.3% 

The costs of legal consultation required to implement the new GFE apply only to retail loan 

originators. Wholesale lenders and settlement agents and other third-party settlement service 

providers do not provide GFEs and therefore they would not be subject to these costs. 

VII.B.3. Employee Training on the New GFE 

Loan originators must fill out the new GFE and be familiar with its requirements so that 

they can fill out the form correctly and respond to the borrower’s questions about it. So, there 

would be a one-time expense of training loan originators’ employees in the requirements of the 

new rule in a range of issues such as the new forms and average-cost pricing. While the actual 

extent of the required training is unknown, a reasonable starting point would be that one quarter 

of the workers in large firms and one half of the workers in small firms would require training 

concerning the implications of the final rule. We assume that small firms pay tuition of $250 per 

worker but that large firms receive a discount and pay only $125 per trainee. If the training lasts 

an entire day, then the opportunity cost of the time, at $72.12 an hour (based on a $150,000 fullyloaded annual salary) would be $577 per trainee. The total tuition cost to the industry would be 

$53 million and the opportunity cost of lost time would be $141 million, amounting to a total 

training cost of $194 million. The total one-time cost for RESPA training for originator staff in 

the new rule would come to $194 million or $310 per worker (averaged across all workers). The 

one-time cost for small businesses is $146 million. Table 6-10 depicts the distribution of training 

costs among the retail mortgage origination industries and for small businesses in each industry. 

It uses data on workers from Table 6-7.35

 

35 Sensitivity analysis shows the effects of changing the number of workers participating in the training. If one half 

(rather than one-quarter) of workers at large firms and three-fourths (rather than one-half) of the workers at small 

firms attended training, then the total costs would be $314 million (with the small business share being $219 

million); the average cost per employee would be $503. However, as noted in the text, there may be other, less 

costly ways in which the knowledge necessary to comply with the GFE provisions of the final rule can be imparted 

to workers, which will reduce the number of workers that need formal training. 

 6-41 
 

Table 6-10 One-time Worker Training Costs of the New GFE 

Industry Total Training Cost Small Business Cost Percentage Small 

Business Cost 

Mortgage Brokers $134,522,236 $119,387,019 88.7%

Commercial banks $22,653,771 $8,060,292 35.6%

Thrifts $9,981,440 $2,482,613 24.9%

Mortgage Banks $21,285,461 $13,330,070 62.6%

Credit Unions $5,148,741 $2,533,751 49.2%

TOTAL $193,591,648 $145,793,746 75.3%

As explained earlier, the costs of training are probably best estimated using the more 

normal mortgage environment, since many of the additional employees during a refinance wave 

are temporary employees who may either do only general office work that does not require any 

GFE-specific training or who may be trained on-the-job by existing permanent employees. Still, 

the higher figures are reported for those who believe they are the relevant figures. 

The data and table presented above depict what is likely to be an upper bound for training 

costs. There are other, less costly ways in which the knowledge necessary to comply with the 

provisions of the final RESPA rule can be imparted to workers. Small firms, in particular, are 

likely to take advantage of information on complying with the final rule provided by trade 

associations and their business partners (such as wholesale lenders), and these firms may find the 

time and expense of formal training unnecessary. To the extent that this is the case, the estimates 

reported above will over state the impact on small businesses. 

We assume that no training specific to the HUD-1 will be required. Any training in the 

rule concerning the GFE will cover the HUD-1 as well for the loan origination industry. Almost 

all of the information required for the HUD-1 is from the GFE. Training concerning tolerances 

is a GFE issue, even though the calculation is presented on the HUD-1. 

VII.B.4. Comments Concerning One-Time Adjustment Costs 

Comments. Lenders and their trade associations opposed a 12-month implementation 

period on the basis that 12 months is insufficient time to prepare for compliance with the new 

requirements. According to one major lender, a 12-month period is far too short given the 

extensive nature of the changes. This lender estimated that an 18-24 month period will be 

required for implementation of the proposal as published on March 14, 2008. According to other 

major lenders, the proposed rule would require significant systems and operational changes well 

beyond the complex forms changes, and would take a minimum of two years to implement. 

Response. HUD has determined to adopt a 12-month implementation period. HUD 

recognizes that operational changes will be required in order to implement the new rule, in 

addition to training staff on the new requirements. However, the need for a standardized GFE 

with relevant information about the loan and settlement charges is critical in light of the 

problems in the current market and further delay is not warranted. HUD believes that a 12-

month implementation period will provide sufficient time for systems changes and training to 

occur. In order to ensure a level playing field, during the transition period, settlement service 

providers will be required to comply with the current RESPA requirements. The requirements 

 6-42 
 

set forth in the rule will apply to all settlement service providers 12 months after the effective 

date of the rule. 

VII.C. Compliance and Regulatory Burden: Recurring Costs of the GFE 

This section discusses recurring costs associated with the new GFE. Several topics are 

addressed, some of which have already been discussed in previous sections. We expect that the 

new GFE will probably be neutral (see the conclusion of Section VII.C.1) but that it may impose 

a burden of ten minutes per application. Assuming that to be the case and that the ratio of 

applications per loan remain at 1.7, then the annual recurring compliance cost of the GFE from 

completing applications would be $20.40 per loan, $255 million on all firms, of which $134 is 

borne by small business. If the loan to application ratio increases to 2.7, then the annual 

recurring compliance cost of completing applications will be $32.40 per loan, $405 million in 

total, of which $213 million is imposed on small business (see Table 6-11 below and section 

VII.D.2). Costs of the additional time spent to arrange the pricing that protects the originator 

from the costs of the tolerances being exceeded is estimated to be $12 per loan or $150 million 

annually, of which $79 million is paid by small business. This additional cost of arranging 

tolerances does not vary by the number of applications per loan. 

Table 6-11 Recurring Compliance Costs of the New GFE by the Number of Application per Loan 

Per Loan Cost Total Cost: All Firms 

(Millions) 

Total Cost: Small Firms 

(Millions) 

Source of Additional Cost 1.7 2.7 1.7 2.7 1.7 2.7 

Processing Applications $20.40 $32.40 $255 $405 $134 $213 

Arranging Tolerances $12.00 $12.00 $150 $150 $79 $79 

Initial Underwriting $0.00 $11.00 $0 $138 $0 $72 

Total Cost of GFE $32.40 $55.40 $405 $693 $213 $364 

A third source of recurring compliance costs is that of underwriting additional applications. If 

there is no change in the application per loan ratio as a result of the rule, then the compliance 

costs of underwriting additional applications will be zero. If the application per loan ratio 

increases to 2.7, then the recurring compliance cost from preliminary underwriting will be $11 

per loan, $138 million across all firms, of which $72 million is from small business (see Section 

VI.D.3). The total recurring compliance cost on loan originators of the rule at 1.7 applications 

per loan is estimated to be $32.40 per loan or a total of $405 million ($213 million from small 

business). At 2.7 applications per loan, the annual recurring compliance cost of the GFE is 

$55.40 per loan or a total of $693 million ($364 million from small business). 

VII.C.1. Cost of Implementing the New GFE Form 

This section examines the various costs associated with filling out and processing the 

new GFE. In their comments on the 2008 proposed rule, loan originators commented that the 

proposed GFE was longer than today’s GFE and that it would take more time to fill out. In 

addition to settlement charges, the proposed GFE contained loan terms, a trade-off table, a 

breakout of lender and broker fees, and a breakout of title agent and insurance fees. 

 6-43 
 

There are several aspects of the new GFE that must be considered when estimating the 

overall additional costs of implementing it. The following discusses the various factors that will 

reduce costs and possibly add costs to the GFE process. As is made clear by the discussion, 

there should not be much, if any, additional cost with implementing the new GFE (as compared 

with implementing today’s GFE). 

(1) Disclosure of YSP. Under the existing scheme, mortgage brokers are required to 

report yield spread premiums as “paid outside of closing” (POC) on today’s GFE and HUD-1. 

Page 2 of the new GFE has a separate block for yield spread premiums (as well as for discount 

points). In order to fill out a GFE under the final rule, the mortgage broker must have a loan in 

mind for which the borrower qualifies from the information available to the originator. Pricing 

information is readily available to mortgage brokers, so there is no additional cost incurred in 

determining the yield spread premium or discount points since they have to look and see if there 

is a yield spread premium under the current regime anyway. Since it is reasonable to assume that 

all brokers consult their rate sheets prior to making offers to borrowers, it is reasonable to 

assume that they know the difference between the wholesale price and par. It does not appear 

that disclosing the yield spread premium or discount points adds any new burden. 

(2) Itemization of Fees. The reduction in the itemization of fees will lead to fewer 

unrecognizable terms on the new GFE.36 That should lead to fewer questions about them and 

less time spent answering those questions. Of course, to the extent that the originator is 

precluded from including junk fees on the GFE, he or she will not have to spend any time trying 

to explain what they are. The confusion avoided may lead the borrower to better understand 

what is being presented so that questions on useful topics are more likely to come up and the 

originator can spend his time giving useful answers (or more time will be spent explaining useful 

things). In all, the simpler GFE produces a savings in time for originators and borrowers.37

(3) Summary Page. A summary page has been added to the new GFE in the final rule. 

But it should be noted that the summary page of the new GFE asks for basic information (e.g., 

note rate, loan amount) that is readily available to the originator and thus do not involve 

additional costs. The summary page simply moves items around or repeats items rather than 

requiring new work.

(4) Trade-Off Table. There is a burden to producing and explaining the worksheet in 

Section IV (on page 3 of the GFE) showing the alternative interest rate and upfront fee 

combinations (the so-called “trade-off” table or worksheet). Many commenters said customizing 

the trade-off table with the individual applicant’s actual loan information would be difficult; 

these commenters recommended a generic example, possibly placing it in the HUD Settlement 

Booklet, rather than providing it with the GFE. However, it is important to remember that the 

 

36 The fees in the lender-required and selected services section will still be itemized (e.g., appraisal, credit report, 

flood certificate, or tax service) as will those in the lender-required and borrower selected section (e.g., survey or 

pest inspection). There will, however, be no itemization or long lists of various sub-tasks of lender fees or title fees, 

often referred to as junk fees. 

37 Several items were dropped from the new GFE, as compared with the proposed GFE: the APR, the breakout of 

the origination fee into its broker and lender components, and the breakout of the title services fee were dropped. 

These were considered unnecessary for comparison shopping. 

 6-44 
 

information in the worksheet is likely to be a reflection of a worksheet the originator already uses 

to explain the interest rate/upfront fee trade-off. While there may be a burden to explaining how 

the interest rate-point trade-off works, this explanation is something all conscientious originators 

are already doing in the origination process. In today’s market, most lenders and brokers likely 

go over alternative interest-rate-point combinations with potential borrowers. For these 

originators, there is no additional explanation burden arising from the production of this 

worksheet. To the extent that some lenders only explain one option to a particular borrower 

(even though they offer others), there would be some additional costs for those lenders. Today, 

most originators present to borrowers much more complicated sets of alternative products than 

captured by the worksheet. It is important to remember that the main purpose of the worksheet is 

simply to sensitize the borrower to the fact that alternative combinations of interest rates and 

closing costs are available. 

With respect to customizing the worksheet to the applicant’s actual offer, the information 

on the applicant’s loan is already on the new GFE, so that would not appear to be a significant 

problem, as that applicant information can be linked directly into the worksheet. Then, there is 

the issue of the two alternative combinations, one with a lower interest rate and one with a higher 

interest rate. Most originators offer loans with several interest rate and point combinations from 

which the borrower chooses. As noted above, they probably have already discussed these 

alternative combinations with the applicant. The originator would pick two alternatives from 

among the options available but not chosen by the borrower when he picked the interest rate and 

point combination for which his GFE is filled out. The originator would have to punch these 

other two combinations into his GFE software (two interest rate and point combinations) in order 

for the software to fill out the form. In the event that the originator does not use software to 

make these calculations, they would have to be done by hand. 

(5) Documentation Costs. Loan originators are required to document the reasons for 

changes in any GFE when a borrower is rejected or when there are changed circumstances that 

result in cost increases. Once a GFE has been given, there are several potential outcomes. One is 

that the loan goes through to closing with tolerances and other requirements met. Another is the 

borrower terminates the application. Borrowers could also request changes, such as an increase 

in the loan amount. There could also be a rejection, a counteroffer, or unforeseen circumstances. 

The March 2008 proposed rule provided that a borrower could be rejected at the GFE 

application stage if the loan originator determined that the borrower was not credit worthy. The 

borrower could not be rejected at the mortgage application stage unless the originator determined 

there was a change in the borrower’s eligibility based on final underwriting, as compared to 

information developed for such application prior to the time the borrower chose the particular 

originator. Under the proposed rule, the originator would have been required to document the 

basis for such a determination and maintain the records for no less than three years after 

settlement. 

One lender commented that under HUD’s March 2008 proposed rule, lenders would be 

required to retain the GFE application for three years which is different from the 25 month 

retention requirement by TILA or ECOA. The lender commented that this difference presents 

additional expense without a substantive benefit to the consumer. 

 6-45 
 

The first two require no special treatment. Borrower requested changes do not require 

documentation but do require a new GFE, as explained in (5) above. The case of borrower 

rejection (which assumes there is no counteroffer accepted by the borrower) requires 

documentation today under the Equal Credit Opportunity Act (ECOA). Under ECOA, the 

originator must document the reason for a rejection and retain the records for 25 months, which 

is also the requirement in the final rule. Therefore, there is no additional documentation required 

in case of a rejection. There is no documentation requirement for a counteroffer, but the lender 

must issue a new GFE to the borrower; the minimal burden associated with issuing an additional 

GFE. 

Documentation for changed circumstances adds a new requirement. The additional 

burden associated with changed circumstances comes from having to document the reasons for 

the increase in costs and from determining that the amounts of the increases in charges to the 

borrower are no more than the increases in costs incurred by the changed circumstances. The 

Department does not require that a justification document be prepared. Since there are no special 

reporting requirements when changed circumstances occur, compliance could be met by simply 

retaining the documentation in a case binder, as any other relevant loan information might be 

retained in a case binder today. For example, itemized receipts for the increased charges would 

simply be put in the loan case binder (as they probably are today). Case binders are stored now. 

The additional cost of identifying and storing the documentation in that binder would be de 

minimus. This would represent little burden on the originator, particularly since unforeseen 

circumstances will not be the norm. 

There may be some record retention issues with small originators, such as brokers. If 

small originators retain case binders today, then their situation would be similar to other 

originators. If they do not retain the case binder today, then they may choose to do so, or they 

may rely on their wholesalers for record retention. It might well become a selling point for 

wholesalers. Relative costs of storage, reliability, and accessibility would determine who could 

best perform this function. 

(6) Crosswalk from New GFE to New HUD-1. The HUD-1 in the final rule has been 

changed so that it matches up with the categories on the new GFE – making it simple for the 

borrower to compare his or her new GFE with the final HUD-1 at closing. In addition, a 

comparison page has been added to the HUD-1 to clarify any changes in settlement fees. The 

simplification of the GFE does not add any burden for the borrower to the comparison of the 

figures on the two forms – rather it will be reduced since it will now be easier for the borrower to 

match the numbers from the GFE (issued at time of shopping) with those on the HUD-1 (issued 

at closing). Compared with today, it also eliminates the step of adding a pointless list of 

component originator charges to get the relevant figure, the total origination charge. In addition, 

the elimination of extra itemized fees on the GFE may lead to the elimination of them on the 

HUD-1 since they may have been on the GFE only to overwhelm the comparison shopper. Even 

without the new comparison page, the settlement would have been more transparent for the 

borrower. However, requiring that an additional page be completed will impose some costs on 

the industry. Compliance costs of the this change are discussed in detail below. 

(7) Mortgage Comparison Chart (“Shopping Chart”). The shopping chart is on the 

third page of the GFE. It is delivered to the borrower as a blank form. The borrower is free to 

 6-46 
 

fill it out and use it to compare different loan offers. The loan originator is only required to hand 

it out, but has the option of answering borrower questions about it. The short, simple, and selfexplanatory nature of the form leads the Department to believe that the additional costs per form, 

if any, borne by an originator would approach zero. 

Summary. To summarize, the discussion of the above factors identifies offsetting costs 

and suggests that there will be little if any additional annual costs associated with the new GFE. 

Practically all of the information required on the new GFE is readily available to originators, 

suggesting no additional costs. The fact that there are fewer numbers and less itemization of 

individual fees suggests reduced costs. The fact that the GFE figures are displayed on the HUD1 will substantially simply the closing process. In addition, Section VII.D below lists further 

changes that HUD made to the form that are likely to reduce costs. On the other hand, there 

could be some small amount of additional costs associated with the optional trade-off table and 

documentation requirements. If there were additional costs of, for example, 10 minutes per GFE, 

the dollar costs would total $255 million per year (if the number of applications did not increase 

as a result of the result).38 39 But given the above discussion of offsetting effects and the 

improvements made to the form, there are likely to be no additional net costs with implementing 

the new GFE. Note, however, that there is the potential for recurring costs from changes to the 

HUD-1 . This issue is summarized in Section VIII.C. 

VII.D. Detailed Response to the NAR’s Analysis of the 2008 IRFA 

The National Association of Realtors provided an alternative estimate of compliance 

costs prepared by Ann Schnare (2008). The main thrust of their report was that HUD had 

grossly underestimated the compliance costs of the 2008 proposed rule. The following four 

sections summarize major comments relevant to estimates of the compliance costs of the new 

GFE. 

 

38 This calculation assumes a $150,000 fully-loaded annual salary; dividing by 2,080 hours yields $72 per hour, or 

$12 for ten minutes. Assuming 21,250,000 applications, produces a cost figure of $255 million. At 15 minutes, the 

cost estimate would rise to about $382.5 million. In the higher volume environment (26,350,000 applications), the 

overall cost figure would be $316.2 million if the per application cost was $12 for ten minutes. 

39 We have used a fully-loaded hourly opportunity cost of $72.12 for highly-skilled professional labor throughout 

the Economic Analysis. For many functions as well as locations this amount is probably an overestimate of the 

hourly opportunity cost. However, our goal in the Economic Analysis is to accurately measure the upper bound of 

the costs of the rule. An alternative method would be to generate an estimate of the average variable cost from 

industry-specific data. For example, in Tucson, Arizona, the average unit labor cost (salary, bonuses, time off, 

social-security, disability, healthcare, 401(k), and other benefits) is $30.73 per hour for loan officers ($23.97 for a 

Loan Officer/Counselor; $28.48 for a Consumer Loan Officer I; and $39.75 for a Consumer Loan Officer II). 

Additional costs to be considered are rent ($2812.50 per month for 1500 square feet) and computer equipment ($560 

per month). Summing this gives us an hourly cost of $31.14. An additional ten minutes per application from 

handling the forms and ten minutes arranging tolerances leads to an additional twenty-seven minutes per closing and 

would increase costs by $$14 per loan. The estimate of the recurring annual burden of the new GFE could 

reasonably be assumed to be $175 million, much less than the $405 million used throughout this analysis. 

 6-47 
 

VII.D.1. Hedging Costs of the New GFE 

Comment. The NAR’s primary objection to HUD’s estimates of the compliance costs of 

the proposed GFE was that HUD does not account for the hedging costs that an interest rate 

guarantee would require (Schnare 2008). Indeed, the majority of the NAR's cost estimate for the 

GFE consists of so-called "hedging" expenses. They claim that the rule would require issuers of 

GFEs to insure against interest rate movements to keep GFE offers open for the required 10 

business days. According to the NAR report, the hedging costs could range from $136 to $272 

per loan. Making this assumption dramatically increases the cost estimate for the GFE. The 

NAR’s addition of hedging costs quadruples HUD’s baseline estimate of the compliance cost of 

the proposed rule from $45 to $181. 

Response. The NAR made an erroneous assumption about the proposed Good Faith 

Estimate (GFE) that lead them to overstate the compliance costs. A more accurate estimate of 

the hedging costs would be zero. Neither the proposed rule nor the final rule requires lenders to 

guarantee an interest rate quoted on a GFE for a period of ten days. Interest-dependent items on 

the GFE (interest rate, monthly payment, YSP/discount points, adjusted origination fees, and 

daily interest charges) can have a separate availability period that can be as short as the time until 

a new rate sheet is issued. Only the prices on non-interest-dependent items on the GFE (total 

origination fees, appraisal fees, title fees, etc.) must remain available for 10 days. These interestrate-dependent items only become fixed, for purposes of comparison to the HUD-1 at closing, 

when the borrower locks the interest rate. 

Indeed, the NAR study acknowledges that there is no such requirement. Ann Schnare 

writes: "HUD’s revised GFE has multiple dates for the offer: one for the origination fee and third 

party settlement costs; one for the quoted interest rate; one for the settlement date; and one for 

the number of days that the loan must lock before closing (NAR, fn. 6, p. 10)." HUD let these 

dates differ because HUD is aware that the hedging costs of an interest guarantee for a period as 

long as ten days would be very costly. 

The loan originator will probably choose a shorter guarantee period for the interest rate 

because of the hedging costs. Ann Schnare admits this to be a possibility: “the originator could 

choose a lock-in40 period that is considerably shorter than the 10 business days required for other 

components of the GFE in order to minimize its hedging costs (NAR, p. 9).” Choosing the 

guarantee period of the interests rate is a profit maximizing decision made by the originator. The 

originator will balance the benefits of attracting more customers by extending the guarantee 

period with the hedging costs of doing so. The current practice of loan originators is to quote an 

interest rate and other interest-rate-dependent rates with the caveat that the offer would change if 

market interest rates change. Since there is no reason to believe that hedging behavior will be 

affected by the rule, hedging costs should not be included as a compliance cost. Once this 

understanding of the proposed rule is introduced into the NAR’s cost estimate of the proposed 

rule, the NAR’s estimate falls from $181 to $45 (identical to HUD’s estimate of the cost of the 

proposed rule) in their low-cost scenario; from $316 to $101 in their intermediate-cost scenario; 

and from $413 to $141 in their high-cost scenario. 

 

40 HUD’s understanding is that by “lock-in” period, the NAR meant “guarantee” period. 

 6-48 
 

VII.D.2. Administrative Costs of More GFE Applications 

Comment. A second major criticism by the National Association of Realtors of HUD’s 

regulatory impact analysis of the 2008 proposed rule is that HUD underestimated the 

administrative costs of the proposed rule by not raising the number of loan applications per GFE. 

HUD’s estimate of the ratio of applications to loans after the rule is implemented is equal to its 

estimate of the observed ratio of 1.7 in HMDA data. The NAR argues that the number of 

applications would rise because of increased shopping. Thus, the administrative costs of 

applications should rise. 

Response. It is reasonable to expect that given the improvements to the GFE and the 

greater rewards from shopping, that the demand for applications would increase. Note, however, 

that maintaining a ratio of 1.7 loans per application is not inconsistent with more shopping for 

loan products. First, consumers may shop around and ask a variety of lenders for informal 

quotes to compare with their GFE. Every inquiry will not necessitate a new GFE. Second, the 

rule is likely to lead to lower rejection and withdrawal rates of applications because consumers 

will be more informed going into the loan. HUD expects applications from increased shopping 

behavior to replace some mortgage applications that may have otherwise resulted in rejections. 

However, in response to this comment, HUD provides a sensitivity analysis of the effects on 

administrative costs of increasing applications per loan. 

For reasons explained in the above paragraph, the number of applications per loan may 

remain at 1.7 applications per loan. If the additional administrative burden of an application 

imposed by the rule is ten minutes per application (as discussed in Section VII.C.1), then the 

additional burden of the rule translates to 17 minutes per loan (1.7 applications per loan X ten 

minutes). To derive the opportunity cost of the rule, we multiply 17 minutes by $1.20 per minute 

(equivalent to the $72 per hour fully-loaded opportunity cost of time, which comes from our 

$150,000 annual figure), to per loan cost of additional applications of $20.40 per loan. The 

aggregate impact on the loan origination industry of the administrative burden of completing 

applications is calculated using the per loan figure: the annual recurring compliance cost is $255 

million (12.5 million loans annually X $20.40 per loan). The small business share of the total 

recurring compliance cost of this administrative burden is $134 million (52.2 percent of $255 

million). 

Suppose that the number of applications per loans increased by one from 1.7 to 2.7. This 

was one of the scenarios considered in the NAR’s analysis. The NAR hypothesized that this is 

likely given that consumers may have a greater demand for a GFE once HUD’s new GFE, which 

provides useful and transparent information, is introduced. Calculating the compliance costs due 

to the additional burden of completing GFEs is straightforward. The additional time spent per 

loan would be 27 minutes (2.7 application per loan X 10 minutes) and the opportunity cost of 

that time would be $32.40 per loan (27 minutes X $1.20 per minute). The total recurring 

compliance cost to the origination industry from applications would be $405 million (12.5 

millions loan per year X $32.40 per loan), of which $213 million is borne by small business 

(52.2 percent of $405 million). 

 6-49 
 

VII.D.3. Multiple Preliminary Underwritings 

Comment. Every application under the new rule requires preliminary underwriting. 

Since borrowers who shop may seek out multiple GFEs, there will be multiple underwritings. 

Commenters said this will add to the underwriting burden firms incur today. The National 

Association of Realtors calculated an additional cost of multiple underwriting at $30 per loan for 

an application per loan ratio of 2.7. 

Response. Every application under the final rule that generates a GFE will require 

preliminary underwriting in order to come up with an early offer for the borrower. Originators 

can charge a fee for issuing a new GFE limited to the cost of a credit report. It is hoped that the 

charge for this, if any, would be small enough so that it is not a significant deterrent to effective 

shopping. But whether or not there is a charge, there are real resource costs associated with 

preliminary underwriting. The additional cost generated depends on the number of applicants 

and the number of GFEs they receive. Since every completed loan eventually gets underwritten 

in full, the additional cost of preliminary underwriting depends mainly on the number of 

additional times that preliminary underwriting occurs beyond the one associated with the full 

underwriting that would have occurred under the existing scheme. 

It cannot be determined how many additional GFEs the average borrower would get 

under the new rule. Borrowers might continue the informal shopping method that many use 

today – gathering information and making inquiries to lenders and brokers about their products 

and their rates, even before deciding to proceed with the request for a more formal quote using 

the GFE. In other words, they may formally apply only after deciding who offers the best terms. 

The simple format and clarity of the new GFE form will enhance this informal information 

gathering process; in fact, the increased efficiency of informal shopping (calling around, 

checking web sites, etc.) could be an important benefit of the new GFE. Since shoppers as well 

as originators will be familiar with the GFE, these forms will likely serve as a guide for 

practically any conversation between a shopper and an originator, or for any initial request by a 

shopper for preliminary information about rates, points, and fees. For these borrowers, the new 

GFE simply pins down the numbers. Others, on the other hand, may obtain multiple GFEs and 

use them to shop. 

Under the final rule, preliminary underwriting should decrease the number of applications 

that go to full underwriting (e.g., an applicant may be denied during the preliminary without 

having been charged for an appraisal); that is, some of the 8.75 million that are not originated 

may be disapproved at the preliminary stage rather than going through full underwriting (as they 

might today). This savings in appraisal, verification, and other incremental underwriting costs 

that are avoided would tend to offset the increase in cost resulting from the extra preliminary 

underwriting noted in the above paragraph. However, it is difficult to estimate these effects. 

An implication of a higher ratio of applications per loan is that the total underwriting 

costs would increase. Others, on the other hand, may obtain multiple GFEs and use them to 

shop. The National Association of Realtors estimates that the cost of a preliminary underwriting 

is $30 ($25 credit report and $5 labor cost). There are currently 1.7 times as many applications 

as loans originated. Thus, the additional cost per loan for the scenario of 2.7 applications per 

loan is $30 ((2.7-1.7) X $30) and for 3.4 applications per loan, the additional cost is $52 ((3.4-

 6-50 
 

1.7) X $30). HUD uses different parameters to estimate the cost of increased applications. 

Instead of a preliminary credit report cost of $25, HUD would use $5. This lower number is not 

inconsistent with HUD’s estimated cost of $25 for a full credit report. A preliminary credit 

report involves only the FICO score from one credit bureau and so will be much cheaper. Our 

assumption of an inexpensive preliminary credit report is consistent with what representatives of 

credit bureaus, in discussions of the effects of the proposed rule, told HUD is likely to happen. 

Instead of labor costs of $5 (ten minutes at $31.14 an hour); HUD uses $6 (five minutes at $72 

an hour). HUD’s estimated total cost of a preliminary underwriting would be $11, reducing the 

additional costs from $30 to $11 at 2.7 applications per loan. 

The aggregate impact on the loan origination industry of multiple preliminary 

underwriting is calculated using the per loan figure: the annual recurring compliance cost is $138 

million (12.5 million loans annually X $11 per loan) at 2.7 loans per application. The small 

business share of the total recurring compliance cost from additional underwriting is $72 million 

(52.2 percent of $138 million). If the ratio of applications per loan does not change (remains at 

1.7), then there will be no additional compliance cost from multiple preliminary underwriting. 

Finally, it should be emphasized that, under the final rule, preliminary underwriting 

should decrease the number of applications that go to full underwriting (e.g., an applicant may be 

denied during the preliminary without having been charged for an appraisal). Some of the 

assumed 8.75 million applications41 that are not originated may be disapproved at the 

preliminary stage rather than going through full underwriting (as they might today). We expect 

an increase in the ratio of accepted applications per loan. This savings in appraisal, verification, 

and other incremental underwriting costs that are avoided would tend to offset the increase in 

cost resulting from the extra preliminary underwriting noted above. 

VII.D.4. Estimate of the Opportunity Cost of Time 

Comment. The National Association of Realtors states (see NAR 2008, fn. 10, p. 11) 

that HUD used one estimate of the value of an employee’s time ($31.14 per hour) to calculate the 

burden of the proposed rule but a higher estimate ($72 per hour) of the opportunity cost of time 

to calculate the benefits of the time savings of the proposed rule. 

Response. HUD uses the estimate of $72 per hour as the opportunity cost of time 

consistently throughout the regulatory impact analysis to calculate the value of the costs and the 

benefits of the rule to industry. It is true that HUD includes a discussion of alternative estimates 

of labor costs in a footnote of Chapter 6 (see below)37 on page 6-6 of the Regulatory Flexibility 

Analysis. There, HUD explains that our estimate of $72 per hour may be far above other 

estimates of labor costs. HUD provides an example of an estimate based on industry data from 

Tucson, Arizona, where the hourly-wage weighted by industry is $31.14. However, this figure 

was only presented for illustrative purposes and was not used in the body of the analysis. Note 

 

41 There are currently 1.7 times as many applications as loans originated; therefore, if originations are 12.5 million, 

full underwriting is started (and probably completed) for about 21.25 million applications, including 8.75 million 

(21.25 million minus 12.5 million originations) that are not originated. 

 6-51 
 

also that HUD uses a lower value of $44 per hour as the opportunity cost of time to consumers 

(see HUD, 3-120) 

The NAR uses the $31.14 hourly wage as a measure of the opportunity cost of an 

employee’s time in their cost estimates of additional underwriting. However, they do not apply 

this figure consistently throughout their analysis and do not explain why. Because $31 is only 

43% of $72, a uniform application of the NAR labor cost estimate would lower the burden of the 

rule significantly. For example, the recurring costs of the GFE would fall from $32 per loan to 

$14 in the case of 1.7 applications per loan. Although HUD will consider the NAR’s preference 

for a lower estimate of labor costs, HUD believes that its fully-loaded and upper-bound estimate 

of $72 is more appropriate for a regulatory impact analysis. 

VII.E. Tolerances on Third-Party Fees 

Under the March 2008 proposed rule, loan originators would have been prohibited from 

exceeding at settlement the amount listed as “our service charge” on the on the GFE, absent 

changed circumstances (“zero tolerance”). The proposed rule also would have prohibited the 

amount listed as the charge or credit to the borrower for the interest rate chosen, if the interest 

rate was locked, absent unforeseeable circumstances, from being exceeded at settlement. In 

addition, the proposed rule would have prohibited Item A on the GFE, “Your Adjusted 

Origination Charges” from increasing at settlement once the interest rate was locked. The 

proposed rule also would have prohibited government and recording fees from increasing at 

settlement, absent changed circumstances. 

Under the March 2008 proposed rule, the sum of all the other services subject to a 

tolerance (originator-required services where the originator selects the third party provider, 

originator-required services where the borrower selects from a list of third party providers 

identified by the originator, and optional owner’s title insurance, if the borrower uses a provider 

identified by the originator) would have been prohibited from increasing at settlement by more 

than 10 percent of the sum for services presented on the GFE, absent changed circumstances. 

Thus, a specific charge would have been able to increase by more than 10 percent, so long as the 

sum of all the services subject to the 10 percent tolerance did not increase by more than 10 

percent. 

The rational for the zero tolerance was that a loan originator should know the price of a 

service if it required the use of its chosen provider. In the case of making referrals, the loan 

originator could be expected to have some knowledge of the market. In fact, it should have some 

knowledge if it is to meet even the weakest concept of “good faith.” The 10 percent tolerance 

seemed like a reasonable limit for price dispersion for services obtained in a market that could be 

competitive if the buyers had good information. It is also simple for borrowers quickly to 

compute 10 percent of the total fee and determine if final charges are within the tolerance. In 

order to protect themselves from charges in excess of the limits set by the tolerances, originators 

would have to gather price information in the market and possibly set up agreements with some 

third-party providers to perform settlement services at prearranged prices. Those originators 

who would have gathered more information than they do today or made more pricing 

 6-52 
 

arrangements than they do today would have incurred an increase in regulatory burden resulting 

from the new rule. 

Comment. Loan originators wrote that they should not be required to pay the bills for 

third–party fees in excess of the tolerances since they do not control those fees. They argued that 

their expertise is as originators, not as appraisers or title companies. They claimed that they do 

not know who will perform all these services at application, so the price is indeterminate. In 

addition, there are occasions when services beyond the normal minimum will be required, but 

that cannot be known at application. For example, additional appraisal work may be required or 

some work may have to be done to clear up a title problem. So prices and even some services 

that end up as being required are unknown at application. 

Trade groups representing settlement service providers, especially realtors and title 

companies, focused on the potential anticompetitive effects of the tolerance provisions. These 

groups suggested that large lenders would seek to manage the risks associated with tolerances by 

contracting with large third party settlement service providers, and thereby placing small 

settlement service providers at a competitive disadvantage. 

In addition to their general objections to the tolerance provisions, lenders and trade 

groups representing lenders and other settlement service providers strongly supported removing 

government recording and transfer charges from the tolerances. They stated that these charges 

are outside of the control of the loan originator and cannot be known with any certainty at the 

time the GFE is provided. 

If the loan originator solves its problem by using only those third-parties that agree to 

fixed prices, that shifts the burden to the third-party. Small third-party providers made the same 

argument that small originators made. They then will be disadvantaged relative to large thirdparty providers by having to bear the risk of the unpredictable cost that cannot be averaged out 

over a large number of transactions. 

Response. Based on the comments received in response to the proposed rule, HUD has 

revised a number of provisions dealing with the tolerances, and in particular has clarified the 

situations where the loan originator would no longer be bound by the tolerances. However, 

HUD has determined that only limited changes are necessary in the tolerances themselves. 

Through all of these provisions, the final rule seeks to balance the borrower’s interest in 

receiving an accurate GFE early in the application process to enable the borrower to shop 

around, with the lender’s interest in maintaining flexibility to address the many issues that can 

arise in a complex process such as loan origination. 

Many commenters recommended changes to the size of the tolerances for different 

categories of settlement costs, especially the zero tolerance for loan originator charges. With one 

exception (government recording and transfer charges), the final rule does not change the 

amounts of the tolerances permitted for the different categories of settlement costs. As noted in 

the rule, HUD considered the best available data on the variation in the costs of settlement 

services, in particular title services, in determining that a 10 percent tolerance is reasonable. No 

commenters submitted or identified any alternative data sources that would support expanding 

the tolerances beyond 10 percent. 

 6-53 
 

With respect to the zero tolerance for a loan originator’s own charges, HUD recognizes 

the comments characterizing the tolerance as a settlement cost guarantee. However, the final 

rule provides substantial flexibility to loan originators in providing a revised GFE when 

circumstances, unforeseeable or otherwise, necessitate changes. Section 19(a) provides explicit 

authority for the Secretary to make such interpretations as may be necessary to achieve the 

purposes of RESPA. Providing a clear, objective standard for what constitutes “good faith” 

under section 5 of RESPA is necessary to provide more effective advance disclosure to home 

buyers and sellers of settlement costs, and as such, falls directly within the Secretary’s 

interpretive authority under section 19(a). 

The one exception to the amounts of the tolerances remaining the same as in the proposed 

rule is the tolerance for the government recording and transfer charges. HUD has adjusted how 

these charges are treated under the tolerances, based on the numerous comments received on this 

issue. The final rule splits the government recording and transfer charges into two categories: 

government recording charges, and transfer taxes. Recording charges will be subject to a 10 

percent tolerance instead. 

The opportunity to cure potential violations of the tolerances is an important tool for loan 

originators to manage compliance with the tolerance requirements. Many lenders and groups 

representing lenders and other settlement service providers objected to the imposition of 

tolerances because of the difficulty of providing accurate estimates to prospective borrowers 

early in the application process. The opportunity to cure will permit loan originators to give an 

estimate of expected settlement charges in good faith, without subjecting them to harsh penalties 

if the estimate turns out to be lower than the actual charges at settlement. 

HUD understands that tolerances will impose some burden on originators. Since the 

protection of tolerances kicks in only if the originator requires the use of a particular provider or 

if the borrower comes to the originator and asks where the services may be purchased within the 

tolerances, the originator must have reliable third-party settlement service provider pricing 

information. Some originators might simply check out the market prices for third-party services 

from time to time, formulate estimates such that several of the prices charged by the third parties 

fall within the tolerance, and trust that nobody to whom they refer the borrower charges a price 

in excess of the tolerance42. Other originators might want more protection and have contracts or 

business arrangements in place that have set prices for services that are not in excess of the 

tolerances. 

Either case requires the originator to do more than today, although even today originators 

fill out GFEs with estimates for third-party settlement services. In the first case, the liability in 

the event a tolerance is exceeded would lead to at least a little more work gathering information 

prior to filling out the GFE. In the second case, more work would be involved in formalizing an 

agreement to commit the third-party to a fixed price. But as noted above, originators today have 

to have a working knowledge of third-party settlement service prices to fill out a GFE. 

Therefore, it is only the increase in burden that would need to be accounted for here. 

 

42 Other originators may rely on vendor management companies (or vendor management departments within their 

own company) for pricing information about third-party services. 

 6-54 
 

It is difficult to estimate these incremental costs. But to provide an order of magnitude, it 

is estimated that it takes an average of 10 additional minutes per loan for the originator to 

arrange the pricing that protects the originator from the costs of the tolerances being exceeded.43 

For a brokerage firm originating 250 loans per year, 10 minutes per loan would come to 42 hours 

or about one week’s worth of one employee’s time per year. Thus, this seems to be a reasonable 

starting point for estimation. For the estimated 12,500,000 loans, that comes to 125,000,000 

minutes or 2,083,333 hours. At $72 per hour, which translates to $12 per loan, this comes to a 

total of $150 million for all firms and $78 million for small firms. If it takes 20 extra minutes 

per loan instead of 10, these costs come to $300 million and $156 million respectively and would 

be two weeks of one employee’s time per year for a brokerage firm making 250 loans per year. 

Table 6-12 details the distribution of these costs among the retail mortgage originating industries 

for the per loan burden of ten minutes. With a larger number of loans (15,500,000), total costs 

are $186 million for all firms (at 10 minutes per loan) and $97 million for small firms. 

Table 6-12 Incremental Costs of Third-party Pricing Arrangements for the New GFE 

Industry Total Third-party Pricing 

Arrangement Cost Small Business Cost 

Mortgage Brokers $90,000,000 $63,000,000 

Commercial Banks $24,637,800 $4,678,718 

Thrifts $11,697,000 $1,441,070 

Mortgage Banks $18,618,000 $7,737,641 

Credit Unions $5,047,200 $1,470,754 

TOTAL $150,000,000 $78,328,183 

One wholesale lender, ABN-AMRO, offers a One-fee program to brokers. In it, the 

borrower gets a fixed price for many services, including many third-party services. Under the 

new GFE, arrangements like this would solve the broker’s tolerance compliance requirements 

with the wholesaler making the arrangements for many of the third-party services and 

negotiating the prices for them. So it may be that (mostly large) wholesalers offer (mostly small) 

brokers a lower cost alternative to complying with the tolerance requirements of the new rule. If 

so, then the small business burden above would be an overestimate. Vendor management 

companies are increasingly appearing in the market, not only providing third-party pricing 

information, but also offering monitoring and quality control services for originators. 

VII.F. Changes in the Final Rule to Reduce the Regulatory Burden of the GFE44

The final rule contains several changes from the 2008 proposed rule that are designed to 

reduce regulatory burden of the new GFE. Several items that commenters were concerned about 

have been changed from the 2008 proposed to the final GFE: 

• Length of form. Many industry groups complained that the four-page proposed GFE 

was too long. HUD reduced the form in the final rule to three pages by consolidating 

 

43 These 10 minutes would be beyond what the originator spends today to seek out good choices for his borrowers. 

44 See Chapter 3 for or a treatment of changes listed in this section. 

 6-55 
 

the third and fourth pages but still retaining the essential trade-off table and shopping 

chart. 

• Concept of “GFE application” Commenters objected to the bifurcated application 

process (a preliminary “GFE application” followed by the final “mortgage 

application”), which was designed to promote shopping. There was a fear of 

commitment by lenders to loan terms based on a preliminary underwriting, as well as 

fear that that the preliminary underwriting would be based on information that was 

too limited (borrower’s name, social security number, gross monthly income, 

property address; an estimate of the value of the property; and the amount of the 

mortgage loan sought). In response, HUD has adopted a single application process 

for the final rule. Under this approach, at the time of application, the loan originator 

will decide what application information it needs to collect from a borrower, and 

which of that collected application information it will use, in order to issue a 

meaningful GFE. HUD strongly urges loan originators to develop consistent policies 

or procedures concerning what information it will require to minimize delays in 

issuing GFEs. 

• Volume-based discounts. Small businesses, especially closing attorneys and escrow 

companies stated that lenders seeking volume discounts would place them at a 

competitive disadvantage to larger entities and force them out of business. HUD 

responded by not addressing volume discounts in its final rule. 

• Difficulty of meeting tolerances. Many lenders and groups representing lenders and 

other settlement service providers objected to the imposition of tolerances because of 

the difficulty of providing accurate estimates to prospective borrowers early in the 

application process. The final rule provides loan originators with an opportunity to 

cure any potential violation of the tolerance by reimbursing the borrower any amount 

by which the tolerances were exceeded. The opportunity to cure will permit loan 

originators to give an estimate of expected settlement charges in good faith, without 

subjecting them to harsh penalties if the estimate turns out to be lower than the actual 

charges at settlement. 

VIII. Costs Associated with Changes to the HUD-1 

This section discusses costs on closing agents associated with the new HUD-1. Section 

VIII.A explains the data and VIII.B the analysis of costs. 

VIII.A. Data on Settlement Service Providers 

Section VII.A reproduced background data on the retail mortgage origination industries. 

Since the GFE affects settlement service providers as well as retail mortgage originators, this 

section recapitulates data from Chapter 5 on the settlement services industries. Readers are 

referred to Section IV of Chapter 5 for a more detailed treatment of the data. 

 6-56 
 

Table 6-13 provides the total number of firms, the number of small employer firms, the 

number of nonemployer firms, and the percent of small firms (employer and nonemployer) in 

industries that provide settlement services (see Chapter 5 for details on the classification of small 

employer firms in these industries). These constitute all of the firms in these industries in 2004, 

according to the Census Bureau. As discussed below, for Offices of Lawyers, Other Activities 

Related to Real Estate (Escrow), Surveying & Mapping Services, Extermination & Pest Control 

Services, and Credit Bureaus, the figures in Table 6-13 almost certainly overstate the number of 

firms actually participating in residential real estate settlements.45

Table 6-13. Firms in Industries Providing Settlement Services

Industry Total Firms 

Small 

Employer 

Firms 

Nonemployer 

Firms 

Percent Small 

Firms 

Direct Title Insurance Carriers 2,094 1,865 135 95.5% 

Title Abstract and Settlement Offices 14,211 7,889 6,203 99.2% 

Offices of Lawyers 401,553 165,127 234,849 99.6% 

Other Activities Related to Real Estate 

(Escrow) 463,545 15,119 448,409 99.996% 

Offices of Real Estate Appraisers 65,491 15,656 49,802 99.9% 

Surveying & Mapping Services 18,224 8,990 9,196 99.8% 

Extermination & Pest Control Services 18,000 10,018 7,935 99.7% 

Credit Bureaus 1,285 710 545 97.7% 

TOTAL 984,403 225,374 757,074 99.8% 

SOURCE: Census Bureau 

Table 6-14 provides the total number of employees in employer firms, and the number 

and percent of employees in small employer firms for each of the settlement services 

industries.46 The Census Bureau does not count owners of employer and non-employer firms as 

employees. The number of “workers” in these industries is understated by the number of 

employees as defined by the Census Bureau because in a nonemployer firm the owner is a 

production worker as is likely also true for the owner of a small employer firm. Using the 

Census Bureau’s count of employees for computing the compliance burden of a rule may tend to 

understate the burden.47 Thus in computing the number of workers in these industries, one 

 

45 As shown by the fourth column, practically all firms qualify as small businesses. This is partially due to the large 

number of non-employer firms (which automatically qualify as a small business) included in the Bureau of Census 

data. See Chapter 5 for further discussion of this issue and for small business percentages for employer firms only. 

Also note that while the number of firms is drawn from year 2004 data, the small business percentages are based on 

2002 data from the Bureau of Census; while they are estimates, they are probably highly accurate ones. Also see 

Chapter 5 for the source of the small business percentages and for alternative, year-2002-based small business 

percentages based on firms with less than 100 employees. 

46 The “Total Employees” data in Table 6-10 are for the year 2004. The “Employees in Small Employer Firms” data 

are obtained by multiplying the total employee data for 2004 by the percentage of employees in SBA-defined small 

firms obtained from 2002 Bureau of Census data; thus, the small employee data are estimates but probably highly 

accurate ones. See Chapter 5 for discussion of the 2002 small business percentages. 

47 For example, if worker training were required by the rule, and burden estimates were based on Census Bureau 

employee statistics, the compliance burden for nonemployer firms would be estimated at zero, while clearly at least 

one “worker,” the owner, would require the training. 

 6-57 
 

worker is added for each small employer firm and each nonemployer firm to the total number of 

employees (see Table 6-16 below for these results). 

Table 6-14. Employees In Industries Providing Settlement Services

Industry 

Total 

Employees 

in 

Employer 

Firms 

Employees 

in Small 

Employer 

Firms 

Percent 

Employed 

by Small 

Firms 

Direct Title Insurance Carriers 75,702 7,144 9.4% 

Title Abstract and Settlement Offices 79,819 47,913 60.0% 

Offices of Lawyers 1,122,723 657,749 58.6% 

Other Activities Related to Real Estate (Escrow) 67,274 40,074 59.6% 

Offices of Real Estate Appraisers 45,021 37,300 82.8% 

Surveying & Mapping Services 61,623 53,610 87.0% 

Extermination & Pest Control Services 95,437 55,565 58.2% 

Credit Bureaus 25,555 5,135 20.1% 

TOTAL 1,573,154 904,490 57.5% 

SOURCE: Census Bureau (note: non-employer firms not included)

 Table 6-15 provides information on the volume of settlements for various industries that 

participate in the settlement process and the number and percent handled by small firms within 

each industry.48 Note that while the distribution among Direct Title Insurance Carriers, Title 

Abstract and Settlement Offices, Offices of Lawyers, Lawyers and Escrow, Offices of Real 

Estate Appraisers, and Credit Bureaus is based on all settlements, the numbers and percentages 

for the other industries (Surveying & Mapping Services and Extermination & Pest Control 

Services) represent the proportion of settlements in which they are involved.49 The allocation is 

 

48 The small business percentages in Table 6-12 are the shares of revenue accounted for by small business, as 

reported and explained in Chapter 5 – in other words, the small business share of revenues is being used here as a 

proxy for the small business share of settlements (or mortgage loans). There are two other points that should be 

made about these data. (1) Figures for Offices of Lawyers and Other Activities Related to Real Estate (Escrow) are 

combined into the new “Lawyers and Escrow” category. This is because there is insufficient information to allocate 

volumes of settlements between these two industries (see Section IV.B.5 of Chapter 5 for further explanation). As 

explained in Chapter 5, the small business revenue share for the combined “Lawyers and Escrow” category is raised 

to 90% (versus 47.8% for all lawyers and 86.9% for escrow firms based on 2002 Census Bureau revenue data) under 

the assumption that lawyer and escrow firms engaged in real estate activity are likely to be the smaller firms 

operating in these industries. Note that in Table 6-13 below, the 90% figure is also used for the share of employees 

in small firms in this combined industry. (2) As explained in Section IV.B.4 of Chapter 5, there are probably no 

small businesses in the Direct Title Insurance Carriers (DTIC) industry, which includes the large title insurance 

firms. The 4.8% figure in Table 6-12 (as well as the 9.4% figure in Table 6-10) is reported to remain consistent with 

the Bureau of Census data – including it or excluding it does not affect the results in any significant way. 

49 See Step (9) in VII.E.1 of Chapter 3 for the calculation of the proportion of settlements for Surveying & Mapping 

Services and Extermination & Pest Control Services. Because of their relatively small shares of the overall 

mortgage business, different shares for these industries would not materially affect the overall small business shares 

of revenue. While it is recognized that the other industries may not be involved in every mortgage origination and 

settlement transactions (e.g., an appraisal may not be required for some mortgage originations), they are certainly 

involved in most such transactions and, therefore, it is assumed here that they are involved in all transactions. 

 6-58 
 

based upon estimated dollar revenues from settlements for these industries.50 Totals are 

estimated based on the number of mortgage originations, 12,500,000 that would occur in a 

“normal” year of mortgage originations (i.e., not in a year with a refinancing boom). 

Table 6-15. Volume of Settlement Service Activity

Industry 

All 

Settlements 

Percent of 

Settlements 

Settlements 

by Small 

Firms 

Percent Industry 

Settlements by 

Small Firms 

Direct Title Insurance Carriers 5,375,000 43.00% 258,000 4.80% 

Title Abstract and Settlement Offices 4,749,953 38.00% 2,365,476 49.80% 

Lawyers and Escrow 2,375,048 19.00% 2,137,543 90.00% 

TOTAL SETTLEMENTS 12,500,000 100.00% 4,761,019 38.09% 

Offices of Real Estate Appraisers 12,500,000 100.00% 10,387,500 83.10% 

Surveying & Mapping Services 3,600,000 28.80% 2,926,800 81.30% 

Extermination & Pest Control Services 5,500,000 44.00% 2,964,500 53.90% 

Credit Bureaus 12,500,000 100.00% 1,312,500 10.50% 

A larger volume of mortgage activity can also be examined, for example, to reflect a 

“refinance environment”.51 In this case, the volume of settlement activity would be distributed 

as follows: 6,665,000 for Direct Title Insurance Carriers, 5,889,941 for Title Abstract and 

Settlement Offices, 2,945,059 for Lawyers and Escrow, 4,464,000 for Surveying & Mapping 

Services, 6,820,000 for Extermination & Pest Control Services, and 15,500,000 for both Offices 

of Real Estate Appraisers and Credit Bureaus.52 

The employee figures reported in Table 6-14 misstate the number of workers actually 

participating in residential real estate settlements. This section offers some estimates of that 

figure, although it is recognized that they are subject to some uncertainty given the limited 

information that is available. Table 6-16 provides one estimate of the total number of workers 

and the number and percent of workers in small firms engaged in performing settlements by 

 

50 As explained in Chapter 5, there is also some uncertainty about the distribution of mortgage-related business and 

revenues among the various title-related industries. Table 6-12 assumes the following distribution: Direct Title 

Insurance Carriers (43.0%), Title Abstract and Settlement Offices (38.0%), and Lawyer and Escrow (19.0%). 

Section IV.B.5 of Chapter 5 considers other distributions and suggests the following ranges for the specific industry 

shares: Direct Title Insurance Carriers (35%-50%), Title Abstract and Settlement Offices (29%-43%), and Lawyer 

and Escrow (17%-29%). Given limited available information, it is difficult to determine a precise estimate, which is 

why Chapter 5 includes several sensitivity analyses. But obviously, reducing the relative weight of the DTIC or 

increasing the relative weight of the lawyer-escrow industry would increase the small business share of settlements. 

Readers are referred to Section IV of Chapter 5 for a more complete analysis of the relative importance of each titlerelated industry, particularly as it affects the overall small business percentage for title- and settlement-related work. 

51 In the projection given in the text, home purchase loans were assumed to stay the same (7.5 million, or 60% of the 

12.5 million in mortgages), while refinances increased from 5 million (or 40% of the 12.5 million mortgages) to 8 

million of the 15.5 million total (home purchases remain at 7.5 million). 

52 The settlement volume for small businesses during a high volume year can be obtained using the small business 

percentages from Table 6-12, giving: 319,920 for Direct Title Insurance Carriers, 2,933,191 for Title Abstract and 

Settlement Offices, 2,650,553 for Lawyers and Escrow, 3,629,232 for Surveying & Mapping Services, 3,675,980 for 

Extermination & Pest Control Services, 12,880,500 for Offices of Real Estate Appraisers, and 1,627,500 for Credit 

Bureaus. 

 6-59 
 

industry. For Title Abstract and Settlement Offices and the combined Lawyers and Escrow 

industry, it is based on the volumes of settlement activity depicted in Table 6-15 and the 

productivity level of Title Abstract and Settlement Offices (i.e., settlements per worker). 

The figure for total workers in Title Abstract and Settlement Offices is the sum of: all 

employees (79,819), small firms (7,889), and nonemployer firms (6,203), or 93,911. (Small 

firms and nonemployer firms are added to count the owners of those firms as production workers 

as discussed in the description of Table 6-14 above). The corresponding figure for workers in 

small firms is the sum of: employees of small firms (47,913), small firms (7,889), and 

nonemployer firms (6,203), or 62,005 workers (representing 66% of all workers in Title Abstract 

and Settlement Offices). These figures are reported in Table 6-16 below. In this industry, there 

are 50.6 settlements per worker (obtained by dividing the 4,749,953 settlements from Table 6-15 

by the 93,911 workers).53

In the combined Lawyers and Escrow industry group, worker productivity is assumed to 

be half of that in Title Abstract and Settlement Offices on the grounds that these workers may 

not do settlements full time and because of the general lack of information on the degree of 

settlement activity in these broadly defined industries. Thus, the number of workers in this 

category (93,914) is computed by dividing the number of settlements handled by the industry 

from Table 6-15 divided by one-half the settlements per worker in the Title Abstract and 

Settlement Offices industry. 

For Direct Title Insurance Carriers, many workers are not engaged in actual settlements, 

but rather in the title insurance function itself. Direct Title Insurance Carriers provide title 

insurance through agents as well as both direct sales of title insurance and associated settlement 

services to consumers through branch offices. They also, of course, perform the title insurance 

function itself. HUD examined the annual reports of the large direct title insurance carrier 

companies to attempt to estimate the proportion of employees of these companies engaged in 

providing settlement services. It is estimated that approximately 70 percent of workers in this 

industry, or 54,391 workers, are engaged in providing settlement services. (See Table 6-16).54

 

53 There are two caveats with this estimate. First, the estimate depends on the number of settlements in the Title 

Abstract and Settlement industry, which, as discussed in an earlier footnote, could differ from the number reported 

in Table 6-12 (see Section IV.B.5 of Chapter 5 as well as the earlier footnote for possible ranges of estimates). 

Second, not all workers in the Title Abstract and Settlement industry are engaged in single-family real estate 

transactions, which means that the number of workers is overstated and therefore the number of settlements per 

worker is understated. (Unfortunately, there is no information on the proportion of Title and Abstract workers 

engaged in single-family mortgage activity, although it is likely that most are.) If the number of settlements per 

worker is too low, the projection will overstate the number of workers needed. 

54 In 2004, the DTIC industry employed 77,702 workers (based on the definition of worker used in the text). HUD 

estimates that approximately 70 percent, or 54,391, are engaged in providing settlement services. HUD computed 

an estimate of the proportion of salaries that large title insurance companies paid to workers engaged in settlement 

services as follows: (1) the amount of revenue required to carry out the insurance function for policies written by 

agents was computed as the difference between agent-generated revenue and agent commissions (or agent retention 

expenses); (2) two percentages were then calculated, (a) the percentage of agent-generated revenue required for the 

insurance function in agent-written policies as (1) divided by total agent-generated revenue, (b) the percent of all 

insurance revenue required for the insurance function for agent-written policies as (1) divided by total insurance 

revenue; (3) the salaries for employees providing the insurance function for agent-written policies was computed by 

 6-60 
 

Table 6-16. Workers Engaged Performing Settlements

Industry Total Workers 

Workers in 

Small Firms 

Percent of Workers in 

Small Firms 

Direct Title Insurance Carriers 54,391 6,401 11.77% 

Title Abstract and Settlement Offices 93,911 62,005 66.03% 

Lawyers and Escrow 93,914 84,523 90.00% 

TOTAL 242,217 152,929 63.14% 

The estimated numbers of title and settlement workers would be larger under market 

conditions producing a larger volume of mortgage activity. The estimated distribution of 

settlements when overall mortgage volume is 115,500,000 was given earlier. To adjust the 

worker estimates in Table 6-16 to reflect the higher mortgage volume requires information about 

the increase in productivity (i.e., loans per worker) during the higher volume (or heavy 

refinance) environment. It is not correct to simply adjust the number of workers up by the 

percentage increase in mortgage loans because the number of loans per worker increases during 

refinance booms. The earlier analysis of brokers and lenders provided estimates of additional 

workers in a higher volume market. That analysis was based heavily on trend data through 2002 

for the number of workers in the broker industry, as reported by David Olson and his firm, 

Wholesale Access. The number of loans per broker increased between low and high volume 

years. Similar trend data do not exist showing the number of title and settlement workers during 

recent refinance booms. Thus, any adjustment would be somewhat speculative. But it is also 

important to emphasize that workers hired during high-volume years, for example, are more 

likely to be temporary or part-time workers. Temporary workers will likely rely on permanent 

workers for training or information about new rules and regulations. Thus, the numbers in Table 

6-16 providing estimates of workers in the title and settlement industry serve as a reasonable 

basis for analyzing the effects of the new regulation among the various settlement and title 

industries, recognizing that the numbers could vary somewhat depending on the volume of 

mortgages considered in the analysis. 

Estimates of the number of single-family-mortgage-related workers in Surveying & 

Mapping Services, Extermination & Pest Control Services, and Credit Bureaus are not included 

because there are insufficient data upon which to base an estimate. Mortgage-related work 

accounts for a relatively small portion of the overall activity of these industries, and information 

is not available to separate single-family-mortgage-related business from other activity. In 

addition, data on workers for these industries are not needed for the analysis of cost savings 

below. While this information is also not needed below for the appraisal industry, it is possible 

 multiplying (2)(b) by total salary expenses; (4) the total salaries for employees engaged in direct sales of insurance 

(including other settlement services) and providing the insurance function for direct-sales policies was computed by 

subtracting (3) from total salary expenses; (5) the salaries of employees providing the insurance function for directsales policies was computed by multiplying (2)(a) by (4); (6) the salaries of employees selling title insurance directly 

(and providing other settlement services) was computed by subtracting (5) from (4); finally (7) the percent of 

salaries paid to employees selling title insurance directly (and providing other settlement services) was computed by 

dividing (6) by total salary expenses. This analysis was carried out using 2005 data from the annual reports of four 

title insurance companies (First America, Land America, Fidelity National, and Stewart). The percentage computed 

in (7) ranged from 67.7 percent to 72.8 percent. Based on these results, HUD assumes that 70 percent of DTIC 

workers are engaged in providing direct title insurance sales and other settlement services. 

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to produce reasonable estimates of workers for this industry because single-family-mortgagerelated work likely accounts for most of the activity in this industry. Using the methodology 

described above (adding employees of employer firms, non-employer firms, and owners of small 

firms to arrive at the number of workers), the appraisal industry in the projection year would 

include 110,479 workers, and 102,758 of these work in small firms.55 While some of these 

appraisers focus on multifamily and commercial properties and/or conduct appraisals for local 

governments (e.g., estimating the value of properties for tax purposes), most are likely involved 

in single-family mortgage-related activities.56 

VIII.B. One-Time Costs of the New HUD-1 

VIII.B.1. Introduction 

The new HUD-1 is simpler than the existing HUD-1. Nevertheless, there will be change 

in the form, including the introduction of the comparison page, and the settlement industry will 

need to learn how the new form works. The primary focus will be on how to put the numbers in 

the right place. The major changes in the HUD-1 itself are to make it more comparable to the 

GFE. Accordingly, to facilitate comparison between the HUD-1 and the GFE, each designated 

line in Section L on the final HUD-1 includes a reference to the relevant line from the GFE. 

Borrowers will be able to easily compare the designated line on the HUD-1 with the appropriate 

category on the GFE. Terminology on the HUD-1 has been modified as necessary to conform to 

the terminology of the GFE. For example, since Block 2 on the GFE is designated as “your 

credit or charge for the specific interest rate chosen”, Line 802 on the HUD-1 is also designated 

“your credit or charge for the specific interest rate chosen.” 

The comparison page of the HUD-1, which is an additional page, will represent a more 

significant change for the industry than the slight revisions of the current pages. Although some 

training may be required, it is not likely to be substantial since settlement agents are already very 

familiar with what information to provide at a closing. The comparison page displays any 

differences between the settlement charges on the GFE and the HUD-1 on the top half. On the 

bottom half of the comparison page, there is a summary of loan, in a manner similar to the GFE. 

The burden of the comparison page of the HUD-1 is most likely to be felt as a one-time 

adjustment cost imposed on software developers. In response to the March 2008 proposed rule, 

many lenders expressed the concern that the way the new HUD-1 forms are to be completed 

 

55 The total number of workers is derived as follows: 45,021 employees in employer firms (from Table 6-14) plus

49,802 non-employer firms (from Table 6-13) plus 15,656 owners of small firms (from Table 6-13), which yields 

110,479 workers. The number of workers in small businesses is derived as follows: 37,300 employees in small 

employer firms (from Table 6-14) plus 49,802 non-employer firms (from Table 6-13) plus 15,656 owners of small 

firms (from Table 6-13), which yields 102,758 workers in small businesses. 

56 One would think that practically all of the owners of the 49,802 non-employed firms appraised single-family 

properties, as well as most of the 37,300 employees in small employer firms. One could argue that the number of 

workers for the entire industry in 2004 is a upper bound since mortgage activity in that year was higher than in the 

projection year. Additionally, automated valuation models (AVMs) may have reduced the demand for appraisers; 

particularly on refinance loans (see Section V.A of Chapter 5 for a discussion of AVMs). 

 6-62 
 

would require numerous changes with significant operational and technology impacts. These 

costs can be categorized similarly as for the new GFE: software costs (including training), legal 

consultation costs, and training costs. The total one-time compliance cost to the industry is $188 

million, of which $139 million is borne by small business. 

VIII.B.2. Settlement Software Costs 

Developers of settlement software and settlement agents will be subject to software costs. 

They will face the following two changes: a reorganization of the HUD-1 form and the 

requirement of the HUD-1 comparison page explaining the crosswalk between the GFE and the 

final HUD-1. The changes to the HUD-1 form would not require much work from programmers. 

The only programming to be done is changing the manner in which information is displayed on 

the HUD-1 form. First, there will be fewer fees. Second, references to the corresponding figures 

in the GFE would need to be inserted by the software developers. 

Including the comparison page would require more effort because it is completely new. 

The programming itself would not be challenging since the new page only contrasts data from 

the HUD-1 and the GFE, shows whether the tolerances are met, and displays data concerning 

loan terms. The more complex calculations concerning the loan terms are not required to be 

done by the settlement agent but by the lender. Loan originators must transmit settlement cost 

and loan term data to the settlement agents for page 3 (the comparison page) of the HUD-1 form. 

As discussed previously, lenders will provide most, if not all, of the data for the comparison page 

of the HUD-1. Settlement agents will need new software for the simple reason that the form will 

change. There will also be a strong demand by settlement agents for new software that checks 

the tolerance calculations given the importance of the comparison page as a means to double 

check the final figures. 

We will assume that the costs of software updates and software training to the settlement 

industry are the same as for the new GFE. Given the number of workers and the distribution by 

firm size, the total cost of new software and training is $62 million, of which $46 million is 

borne by small business. The cost of the changes to software is $14 million (of which $11 

million is borne by small business) and the opportunity cost of the time spent learning the new 

software is $48 million (of which $34 million is borne by small business). 

To arrive at a total one-time cost for the HUD-1, we add the additional cost of $18 

million of new loan origination software as a result of the HUD-1 to the $62 million for the 

settlement industry’s new software, which yields a total one-time software cost of $80 million to 

the entire industry. Adding the $13 million of HUD-1 related software costs from small loan 

originators to the $46 million imposed on small settlement firms yields a total of small business 

one-time compliance costs of $59 million. 

VIII.B.3. Legal Consultation Costs 

Legal consultation will be less involved for the HUD-1 form than for the new GFE. 

However, settlement firms may require additional legal consultation to inform on a diverse set of 

issues, such as average cost-pricing, to be on the safe side. We make the same assumptions as 

 6-63 
 

for the GFE: all firms purchase a minimum of two hours of legal consultation at a cost of $200 

an hour and that additional legal service are demanded on the basis of the volume of business. 

We estimate that the total legal costs to the settlement industry will be $37 million of which $18 

million is borne by small business. The cost of legal fees is lower for the HUD-1 form than for 

the GFE because there are less firms involved in settlement than in mortgage origination. 

VIII.B.4. Training Costs 

Workers who perform settlements will need to learn how to fill out the new HUD-1 form 

and in some cases, calculate whether the change in settlement fees is within the tolerance. The 

quantities are provided to settlement agents by the GFE, so training will be much less involved. 

Assuming four hours of training at an opportunity cost of $72.12 per hour (based on a $150,000 

fully-loaded annual salary); tuition of $250 per worker for small firms and a discounted tuition of 

$125 per worker for large firms; and that half of the workers in small firms and one quarter of 

the workers in large firms require training; then the total cost of training is $71 million, of which 

$62 million is borne by small business. 

VIII.C. Recurring Costs of the New HUD-1 

There are few recurring costs associated with the revised HUD-1. The revised HUD-1 

will very likely have fewer entries than the existing HUD-1 which will require fewer 

explanations of figures than is true with the existing forms. This is because of the combined 

subtotals presented in many sections in the new GFE in lieu of the frequently numerous broken 

out individual fees that we see on the GFE. The same is true when comparing the revised HUD1 to the existing HUD-1. Comparing the new GFE to the revised HUD-1 should be simpler than 

in the past because it will be much easier to find entries on the new HUD-1 that correspond to 

the new GFE because they have the exact same description. And, of course, there are fewer 

entries to deal with. It is hard to imagine how simpler forms could be more costly to explain to 

borrowers. 

There may be recurring costs from the addition of the comparison page (page 3) of the 

HUD-1. This new page will serve two purposes: 1) as a crosswalk between the HUD-1 form and 

page 2 of the GFE and 2) presenting a summary of the loan terms similar to page 1 of the GFE. 

The costs of completing this page are minor. For originators it could be close to zero. Although 

the lender has to provide the settlement agent with information on the loan terms and some of the 

loan settlement charges, it should not constitute an additional burden. First, if the loan originator 

used a software program to generate the GFE, he or she would already have entered those data. 

A typical software program would print a HUD-1 for an originator that would contain all of the 

required data concerning loan terms and settlement costs. The only information that is not 

already there is information concerning the escrow account. Second, transmitting the 

information on page 3 to the settlement agent will not constitute an additional burden either: 

lenders and brokers already send documents to settlement agents, the cost of an additional page 

will not be noticeable. However, there may be a small burden in certain cases, and so we assume 

that the average burden is ten minutes per loan. 

 6-64 
 

Settlement agents may also face an additional burden, although this is not likely either 

since the lenders are responsible for providing the data. The settlement agent may have to fill 

out the form if the lender does not transmit it on a completed HUD-1 page 3. The settlement 

agent may also want to check the information concerning settlement costs, tolerances, and loan 

terms to make sure they agree with the GFE. In some cases, the settlement agent will have to 

calculate the tolerances. Preparing page 3 of the HUD-1 may also alert the settlement agent to 

inconsistencies that would not have to be resolved before closing. Thus, although the addition of 

this page may have a very small impact, we assume that it will add five minutes on average to 

the time it takes to prepare a settlement. Taking loan originators into account, the total time 

burden is fifteen minutes per loan. The compliance cost of the change to the HUD-1 for the 

industry as a whole is thus $18 per loan (fifteen minutes at $72 per hour57). The recurring 

compliance cost to the industry would be $225 million annually ($18 per loan X 12.5 million 

loans annually), of which small business would bear $107 million annually. During a highvolume year (15.5 million loans annually), the annual recurring compliance cost of the HUD-1 

would be $279 million annually. 

The benefits of the comparison page of the HUD-1 are not estimated separately from the 

benefits of the new GFE ($6.48-$8.38 billion, see Section I.B of Chapter 3). It is assumed that 

page 3, which displays tolerances and loan terms, reinforces the consumer savings of the new 

GFE by compelling settlement agents and borrower to check the compliance with the tolerances. 

The comparison page is a vital part of the reform. Requiring it is expected to increase the 

number of consumers who realize the full benefits of the final rule. The benefit of the 

comparison page is to double-check the final figures. 

VIII.D. Changes in the Final Rule to Reduce the Regulatory Barrier of the HUD-1 

VIII.D.1. Recurring Costs of the HUD-1 Addendum 

Comment. Many comments were opposed to the proposed HUD-1 Addendum or 

“script” of the 2008 proposed rule. The purpose of requiring settlement agents to complete and 

read this form document was to have them describe, at settlement, the terms of the loan and to 

compare the settlement charges on the GFE to those on the HUD-1. 

The primary objection to the script was the time costs. HUD estimated the worst case 

scenario of the added time required of a non-conscientious agent dealing with a very complicated 

loan product to be an additional 45 minutes. We assumed that the script would lead to an 

additional thirty minutes preparing the script, and an additional fifteen minutes to the actual 

closing procedure consisting of five minutes reading the script, and ten minutes answering 

questions. To be cautious, we applied this estimate to establish the outer bound of the 

 

57 As for the GFE, an alternative method could be used to generate an estimate of the opportunity cost of time spent 

on a script. Instead of assuming a $72.12 opportunity cost (from a $150,000 fully-loaded salary), one could 

construct a cost estimate from industry-specific data. For example in Tucson, Arizona, the cost of labor 

(compensation and benefits) of a Real Estate Clerk is $16.66 per hour and $74.61 per hour for a Real Estate 

Attorney. 

 6-65 
 

opportunity cost of the closing script to the settlement firm at $54 per settlement. The total cost 

of the script in a normal year (12.5 million originations) could be $676 million. Settlement 

industry groups were concerned about the potential additional costs of preparing and reading the 

script. 

A second objection is that the script could place a settlement agent in the position of 

committing the unauthorized practice of law. This would occur if they were required to answer 

questions concerning issues such as the loan terms for which they had no responsibility. 

Response. At recent roundtables, representatives of the settlement industry have assured 

HUD that their primary goal is transparency and customer service. HUD assumed that without 

the script settlement agents would neither take any time to explain the HUD-1 to borrowers nor 

take any time to answer questions. Thus, HUD’s cost estimate of the script may be exaggerated. 

In the world of the conscientious settlement agent, the additional burden of the script at closing 

would be closer to zero. However, because of the concern expressed concerning the implications 

of the potential cost and legal implications of the script, HUD will not require a script in its final 

rule. 

To replace the script, HUD has added a page to the HUD-1 form. This will contain much 

of the same information but will much easier to fill out and will not have to be read the 

settlement agent. The top half will contain a table that compares settlement charges with those 

on the GFE and shows the amount and percentage by which the charges have changed (in order 

to check whether the change is within the tolerance). The bottom half of the page consists of a 

summary of the loan terms, very similar to the first page of the GFE. 

The impact of this change is to reduce the maximum additional time imposed, which is 

expected to be imposed by the rule, from 45 minutes to 15 minutes per loan. At an opportunity 

cost of time of $72 an hour for industry, this translates to a decrease in the regulatory burden of 

$36 per loan, or $450 million over an expected 12.5 million loans. 

VIII.D.2. Difficulty Comparing the New GFE and HUD-1 

Under the March 2008 proposed rule, the current HUD-1/1A Settlement Statements 

would have been modified to allow the borrower to easily compare specific charges at closing 

with the estimated charges listed on the GFE. The proposed changes would have facilitated 

comparison of the two documents by inserting, on the relevant lines of the HUD-1/1A, a 

reference to the corresponding block on the GFE, thereby replacing the existing line descriptions 

on the current HUD-1/1A. The proposed instructions for completing the HUD-1/1A would have 

clarified the extent to which charges for individual services must be itemized. The script was 

proposed to facilitate the comparison. 

Many commented that borrowers would require more help in comparing the new GFE to 

their HUD-1. Lenders, mortgage brokers and title and closing industry representatives generally 

stated that the HUD-1 should be in the same format as the GFE to enable comparisons of 

estimated and actual charges. A lender association stated that the proposed changes to the HUD1 fall short of making the GFE and HUD-1 correspond. Lenders also stated that the proposed 

HUD-1 is not consistent with the disclosures mandated by TILA. 

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A consumer group stated that while referencing the GFE lines on the settlement statement 

is an important step, HUD should mandate a summary settlement sheet that corresponds exactly 

to the summary sheet of the GFE. According to this group, this would obviate the need for a 

crosswalk between the GFE and the settlement statement. The consumer group stated that the 

HUD-1 should be easily comparable to the GFE and should facilitate, rather than hinder TILA 

and HOEPA compliance. 

One broker suggested that HUD had created three different documents--the GFE, the 

HUD-1 and the Closing Script—that present the same information in completely different 

formats, and this will add to costs and confusion. 

HUD agrees with the many commenters who pointed out the importance of comparability 

between the GFE and the HUD-1. The main strategy for facilitating comparability between the 

GFE and HUD-1 will be by inclusion of a new third page comparison chart with the HUD-1. 

This will clearly present whether settlement fees are within the tolerances on the top half of the 

page and will present a description of the loan in a similar fashion to the GFE on the bottom half. 

The final rule provisions for describing some loan terms in the page 1 of the GFE and 

page 3 of the HUD-1 are similar to the Truth in Lending Act (TILA) regulations, however the 

differences in approach between the TILA regulations and HUD’s RESPA rule make them more 

complementary than duplicative. The TILA and RESPA approaches to mortgage loan terms 

disclosure are most similar when the loans are very simple, e.g., fixed interest rate, fixed 

payment loans. The approach differs for more complex loan products with variable terms. In 

general, TILA describes how variable terms can vary (e.g., the interest rate or index to which 

variable interest rates are tied, how frequently they can adjust, and what are the maximum 

adjustment amounts, if any), but forecasts the “likely” outcome based on an indefinite 

continuation of current market conditions (e.g., the note rate will be x in the future based in the 

index value y as of today). The RESPA disclosures in the GFE and HUD-1 comparison page 

focus the borrower on the “worst case scenario” for the loan product to ensure borrowers are 

fully cognizant of the potential risks they face in agreeing to the loan terms. The disclosures on 

the GFE are meant to be as simple and direct as possible to communicate differences among loan 

products. HUD’s approach to these disclosures thus supports consumers ability to shop for loans 

among different originators. For a given set of front-end loan terms (initial interest rate, initial 

monthly payment, and up-front fees), originators have an incentive to offer borrowers loans with 

worse back-end terms (e.g., higher maximum interest rate, higher prepayment penalty) to the 

extent capital markets are willing to pay more for loans with such terms. While brokers are 

required to disclose such differentials on the GFE and HUD-1, lenders are not. HUD’s GFE will 

help consumers to quickly and easily identify and distinguish loan offers with similar front-end 

terms, but worse back-end terms, while shopping for the best loan. Requiring a comparison page 

will act to double-check the HUD-1 and thus enhance the realization of the benefits of the 

simpler GFE. 

IX. Efficiencies and Reductions in Regulatory and Compliance Burden 

Efficiencies come from time saved by both borrowers and originators as a result of forms 

that are easier to use, competitive impacts in the market, the decrease in the profitability of 

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searching for victims, and the decrease in discouraged potential homeowners. All these are 

ongoing as opposed to one-time costs. The value of time saved for borrowers is $1,169 million 

and for industry $1,166 million (the sum of time saved answering borrowers’ questions and from 

the simplicity of average-cost pricing). 

There are also positive spillovers of increasing consumers’ level of awareness. First, 

consumers will be less susceptible to predatory lenders and therefore this type of wasteful 

activity will be discouraged, freeing up resources for more productive purposes. Second, by 

better understanding the loan product, there will be a decrease in the probability of default 

leading to foreclosure, which can dramatic social costs. 

IX.A. Shopping Time Saved by Borrowers 

Consumers will save time in shopping for both third-party services and mortgage loans as 

a result of the new GFE. HUD expects that the time savings for consumers will counterbalance 

some of the costs imposed on industry. The increased burden on originators of arranging thirdparty settlement services is likely to be much more than offset by a reduction in the aggregate 

shopping burden for third-party providers incurred by borrowers. Originators will be highly 

motivated to find low third-party prices. Originators could pass the savings on and make it 

easier to appeal to borrowers, or alternatively, could raise their origination fee by the savings in 

third-party fees and earn more profit per loan. Or the final result could fall somewhere in 

between the two. Regardless of which path any originator chooses, the lower third-party prices 

work to his or her advantage; originators will probably be aggressive in seeking out lower prices. 

The borrower benefits to the extent that, upon receipt of the GFE, he or she immediately 

has good pricing information on third-party services. The borrower could immediately decide to 

use the originator’s third parties, in which case his or her search is over. Or, the borrower could 

search further with the originator’s prices as a good starting point and available as a fall-back, in 

which case the borrower’s search efforts are likely to be greatly reduced. In both cases the 

borrower searches less, but spending less time searching does not imply less benefits from the 

search. 

The final GFE also creates time efficiencies by making mortgage loan details more 

transparent to consumers. Shopping will be encouraged because consumers will have an easier 

time understanding and comparing loans with a standard and comprehensible GFE. The final 

rule increases the amount of information processed by consumers; shopping accomplished; and 

the benefits realized from doing so. 

It is possible that under the final rule that some consumers will want to spend more time 

searching. Although additional time spent searching reduces the time spent on other activities 

such as leisure, the reward of search is an increase in consumer savings. Assuming that the GFE 

increases the productivity of every hour of search, it therefore also increases the relative 

opportunity cost of leisure. Consumers will spend more time shopping to receive additional 

income. Under these circumstances an increase in the time spent shopping does not constitute a 

burden imposed by the rule since the increase in time is voluntary. Consumers are free to remain 

at previous lower levels of shopping and enjoy a lower increase in saving from the rule. 

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We do not expect the average consumer to spend more time searching because there are 

other effects that should dominate the incentive described above. First, the higher productivity in 

search of the new GFE increases a consumer’s savings at all levels of search: consumers will be 

able to reduce their level of effort and retain the same level of saving previous to the rule.58 

Second, we expect that a large portion of the increase in savings will be independent of an 

individual’s shopping behavior. As the market becomes more competitive, shoppers who are 

less sophisticated or less diligent may still benefit from the competitive pressure of others’ 

shopping. This additional saving will allow consumers to spend less time searching. The time 

that they do spend searching, however, will be more effective and lead to greater savings. The 

new GFE will allow consumers to spend more time comparing and evaluating offers and less 

time trying to decipher the loan details. 

Given that consumers will reduce the time spent searching as a result of this rule, then we 

would be underestimating the benefits to consumers by only counting the gain in income from 

reduced fees and not the gain in time saved. Considering the number of loans the average 

originator closes per year, the aggregate decrease in search efforts by borrowers is very likely to 

exceed the increase in aggregate search effort by the originators. For example, if each borrower 

saves an average of 15 minutes in shopping for third-party services, then the total savings to 

borrowers would be $234 million.59 As discussed Sections VII.E.1 and VII.E.2 on tolerances, 

the new form and the tolerances will enable borrowers to save time shopping for loans and for 

third-party settlement service providers. If the new forms save the average applicant one hour in 

evaluating offers and asking originators follow-up questions, borrowers save $935 million.60 

The total value of borrower time saved shopping for a loan and third-party services comes to 

$1,169 million.61

 

58 These effects are equivalent to the income and substitution effects of consumer theory to understand the effect of a 

price change on the consumption of a good. In this case, the increase in productivity of shopping should be 

considered as reduction in the price of savings in terms of leisure. The income and substitution effect move in the 

same direction for the normal good whose price has changed but the opposite directions for the substitute. 

59 Calculated as follows: 21,250,000 projected mortgage applications (see Chapter 2) times $44 per hour times 0.25 

hour (or 15 minutes) gives $233.750 million. The $44 per hour figure is based on the average income ($92,000) of 

mortgage borrowers, as reported by HMDA; the $92,000 income figure is divided by 2,080 hours to arrive at the 

hourly rate of $44.23 or $44. If the borrower saved 30 minutes in shopping time, then the total savings would be 

$468 million. 

60 Calculated as follows: 12,500,000 loans times 1.7 applications per loan times 1 hour per application times $44 per 

hour, the average hourly income of loan applicants ($92,000 per year/2080 hours per year). See earlier footnote. 

61 The benefits are calculate using the ratio of 1.7 applications per loan, which is a measure of the current state of 

affairs. Although we calculate administrative costs for firms at different ratios (1.7 and 2.7), it would be misleading 

to calculate consumer benefits at higher ratios. Going from an average of 1.7 to 2.7 applications per loan does not 

save the average consumer more time. It is clear that the consumer will not be harmed because the increase in 

applications is voluntary but should not be counted as an efficiency. As argued in the text, we believe that the net 

change in time spent searching will be negative. 

 6-69 
 

IX.B. Time Saved by Originators and Third-Party Service Providers 

Originators and third-party settlement service providers will save time as well. If half the 

borrower time saved in (1) above comes from less time spent with originators and third-party 

settlement service providers, then originators spend half an hour less per loan originated 

answering borrowers’ follow-up questions and third-party settlement service providers spend 7.5 

minutes less with borrowers for a saving of $765 million62 and $191 million, respectively, for a 

total of $956 million.63

IX.C. Time Saved from Average Cost Pricing 

As discussed in Chapter 3, the final rule allows pricing based on average charges. This 

reduces costs because firms do not have to keep up with an itemized, customized cost accounting 

for each borrower. This not only saves costs when generating the GFE, it is also saves quality 

control and other costs afterwards. Industry sources have told HUD that this could be the source 

of significant cost savings. 

As explained above, there will be reductions in compliance costs from average cost 

pricing. It is estimated that the benefits of average cost pricing (e.g., reduction in the number of 

fees whose reported values must be those specifically incurred in each transaction) will lead to a 

reduction in originator costs of 0.5 percent, or $210 million. No breakdown of fees is needed. 

No knowledge of an exact fee for each specific service needed for the loan is required for the 

GFE. In addition, no exact figure for the amount actually paid needs to be recorded for each loan 

and transmitted to the settlement agent for recording on the HUD-1. The originator only needs 

to know his or her approximate average cost when coming up with a package price that is 

acceptable. The cost of tracking the details for each item for each loan is gone. 

IX.D. Social Efficiencies 

In this section, we discuss two social efficiencies of the rule: the reduction of nonproductive behavior and positive externalities of preventing foreclosures. 

IX.D.1. Reduction in Non-Productive Behavior 

By reducing the profitability of searching for less-informed borrowers, the rule will lead 

to a more efficient allocation of resources. 

 

62 Calculated as follows: 12,500,000 loans times 1.7 applications per loan times 0.5 hours per application times $72 

per hour, the average hourly income of loan originators ($150,000 per year/2,080 hours per year). 

63 Just as we do for consumers, we estimate the value of time efficiencies using the 1.7 application per loan ratio 

even when comparing it to costs generated using the higher 2.7 ratio. It would not be logical to claim that we are 

saving a firm any time by requiring them to process additional applications. However, it may be sensible to reduce 

the recurring compliance costs from assuming a higher number of applications because the additional application 

will not be as much of a burden as it was before. 

 6-70 
 

The primary benefit to consumers is the transfer of surplus from firms that charge 

significant markups. Much of the excess fees earned by loan originators and settlement firms is 

extracted costlessly. Price-discriminating firms are able to assess the information asymmetry 

between themselves and potential borrowers and estimate the consumers’ willingness to pay a 

markup beyond the costs of originating a loan. Most loan originators base their estimates of a 

consumer’s level of information on signals form the consumer. They do not need to expend 

additional time or resources to do so. However, there is a minority of loan originators that 

devote significant resources to advertising to borrowers with a lower expected level of financial 

sophistication. If the rule leads to a reduction in predatory behavior, there will be a gain in social 

welfare equal to the costs of actively searching for less informed borrowers. 

The loan originator acts to maximize his or her expected profit. By raising the requested 

settlement charges above the settlement costs, a loan originator increases his or her mark-up but 

increases the probability that the consumer will reject the offer. The extent of a consumer’s 

knowledge of the market will also raise the probability of rejecting a markup. The optimal 

markup is the one at which the net revenues from offering loans at higher prices and a higher 

rejection rate equals the net revenues from offering loans at lower competitive prices and a lower 

rejection rate. It is expected that the rule will increase the average individual’s information; 

increase the likelihood that they would reject excessive fees; and thus reduce the prevalence of 

high markups. This reduction is what constitutes the transfer to borrowers of $668 per loan. 

An aggressive seeker of fees may choose to actively search for less informed borrowers 

who are more likely to accept loans with excessive fees. The optimal level of search effort is the 

one at which the marginal cost of searching is equal to the change in probability of acceptance 

from finding less informed clients times the markup (marginal benefit of search). By increasing 

the level of information among consumers, the rule will raise the marginal cost of searching for 

vulnerable borrowers and thus will lead to a lower optimal level of searching by loan originators. 

Whenever producers expend substantial effort to extract consumer surplus, there is a 

deadweight loss. The predatory lender diverts resources from producing output to producing 

markups (consumer loss). By creating transparency and enhancing consumer’s understanding, 

the rule will not only lead to transfers of excess fees to consumers but will inhibit costly 

predatory behavior. Reducing this activity will lead to a net gain in social welfare equal to the 

sum of the marginal costs of extracting the markup. 

The total transfer to consumers of $5.88 billion represents 14 percent of the total revenue 

of originators, which is projected to be $42.0 billion. As explained above, this gain in surplus is 

greater than the loss to producers when firms are engaged in wasteful predatory behavior. If the 

decline in this activity represented one percent of current originator effort, this would result in 

$420 million in social surplus. In the absence of this activity, these resources could be devoted 

elsewhere making society richer. The transfer to consumers is composed of both the lost excess 

profits from markups and the deadweight loss from the inhibited predatory activity to achieve 

those markups. Thus, the gain to consumers will outweigh the loss in profits of predatory firms. 

 6-71 
 

IX.D.2. External Benefits of Preventing Foreclosures 

Another social benefit of the rule is its contribution to sustainable homeownership. It is 

more likely that consumers who understand the details of their loans will avoid default and thus 

foreclosure. There are two ways in which this rule will contribute to sustainable 

homeownership. The first is to encourage shopping by providing a transparent disclosure of 

settlement costs and other loan details. Such competitive market behavior should reduce 

settlement costs and provide a small cushion for borrowers in the eventuality of financial 

distress. The second is by educating consumers and helping them choose the loan that is most 

appropriate. A better understanding of the loan details should lead to a better understanding of 

the risks inherent in assuming a large financial obligation, and thus a better decision by the 

borrower as to the best loan or even whether homeownership is the optimal choice. 

Factors that precipitate default are downward trends in property values, a loss of income 

of the borrower, and an increase in interest rates for borrowers with adjustable-rate mortgages 

(ARMs). None of these events can be predicted with certainty and understanding the loan itself 

cannot eliminate the uncertainty. However, a full appreciation of the potential risks of the loan 

should lead to a careful decision as to whether the loan vehicle is the best one given the 

uncertainty. For example, knowing how high your interest rate and monthly payments can go 

should make the loan applicant hesitant to accept an ARM unless the borrower has the income 

security to do so. Given the same information, different borrowers may choose different loans 

depending on their risk and time preferences. However, it is important that they make an 

informed decision. 

There is strong evidence that borrowers underestimate the costs of adjustable rate loans. 

Buck and Pence (2008) assessed whether borrowers know their mortgage terms by comparing 

the distributions of these variables in the household-reported Survey of Consumer Finances 

(SCF) to the distributions in lender-reported data. The authors find that although most borrowers 

seem to know basic mortgage terms, borrowers with adjustable-rate mortgages appear likely to 

underestimate or to not know how much their interest rates could change. Borrowers who could 

experience large payment changes if interest rates rose are more likely to report not knowing 

these contract terms. Difficulties with gathering and processing information appear to be a factor 

in borrowers’ lack of knowledge. The final GFE would present critical loan terms such as the 

maximum monthly payment on the first page in order to better inform borrowers. 

The least desirable consequence of an uninformed decision is foreclosure. The Joint 

Economic Committee of the U.S. Congress estimates the total costs to society at close to $80,000 

per foreclosure. The foreclosed upon household pays moving costs, legal fees, and 

administrative charges of $7,200. A study from the Federal Reserve Bank of Chicago reported 

that lenders alone can lose as much as $50,000 per foreclosure. Standard and Poor’s describes 

these costs as consisting of loss on loan and property value, property maintenance, appraisal, 

legal fees, lost revenue, insurance, marketing, and clean-up. Of these costs, the primary cost to 

lenders is the cash loss on property. 

The lender and borrower are not the only parties to suffer from a foreclosure. It is often 

argued that there are negative impacts to the value of neighboring properties from a foreclosure. 

There are many reasons for these externalities. There is an amenity value to having an up kept 

 6-72 
 

 6-73 

property next door; foreclosed properties if vacant can attract crime; and there may also be a 

depressing effect on the local economy. A reasonable estimate of the negative externality of a 

foreclosure on nearby properties is $1,508. In addition, the local government loses $19,227 

through diminished taxes and fees and a shrinking tax base as home prices decrease. The total 

benefits of preventing a foreclosure is $77,935 in averted costs. It is difficult to estimate how 

many foreclosures a uniform and transparent GFE with settlement fee tolerances would prevent. 

However, preventing 1,300 foreclosures nationwide would yield $100 million of benefits. 

IX.D.3. Other Efficiencies 

There are other potential efficiencies that are anticipated from the new GFE approach but 

would be difficult to estimate. For example, studies indicate that one impediment to low-income 

and minority homeownership may be uncertainty and fear about the home buying and lending 

process. The new GFE approach should increase the certainty of the lending process and, over 

time, should reduce the fears and uncertainties expressed by low-income and minority families 

about purchasing a home (see Section VII.F of Chapter 3). As discussed in Section IV.D.4 of 

Chapter 2, improvements in lender information (e.g. interest and settlement costs) should also 

lend to a general increase in consumer satisfaction with the process of taking out a mortgage (see 

CFI Group, 2003). 
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