Small Business Committee Democratic Site

STATEMENT
of the
Honorable Nydia M. Velázquez
Impact on Small Businesses of Real Estate Settlement Rule Change
House Committee on Small Business
March 11, 2003

Thank you, Mr. Chairman.

Today individuals searching for the American dream find it when they purchase a home of their own. Even though buying a house is a big step forward for many Americans, the path to home ownership is often confusing, complicated, and time-consuming.

The U.S. Department of Housing and Urban Development created the Real Estate Settlement Procedures Act, or RESPA, to help consumers navigate the problems and pitfalls encountered in the settlement process. The residential real estate market was badly in need of regulation, clarity, simplification and consumer protection, and RESPA was designed to provide these things.

But RESPA's overall effectiveness has been regularly called into question by industry groups, Members of Congress, as well as Democrat and Republican administrations, even though homeownership rates are on the rise. One of RESPA's biggest problems has been its inability to create a system that allows consumers to comparison shop for identical products.

So HUD had good reason to overhaul RESPA, which it did last July. But many industry groups and others familiar with RESPA don't believe that HUD's proposal does what it was intended to do - make the settlement process more consumer-friendly while adding in safeguards and transparency for homebuyer protection.

Not only does this proposed rule not bring about the intended positive effect for consumers, but it also harms small businesses - the main driver of this nation's economy. Small enterprise makes up a large percentage of the $2.4 trillion residential real estate industry. Mortgage brokers, appraisers, land title and real estate agents are all predominantly small businesses.

And by providing incentives for volume discounting of settlement services, HUD is creating an environment that encourages big banks to contract with large service providers, driving small businesses onto the sidelines - and out of business. Once again, this scenario puts the interests of corporate America over those of Main Street.

Part of the problem is that federal agencies like HUD don't see the economic fallout their rules have on small businesses because they fail to comply with the Regulatory Flexibility Act.

The Reg Flex Act was passed into law in 1980 to battle federal agencies' one-size-fits-all approach to rulemaking. Federal rules can put small businesses at a competitive disadvantage with large businesses - or drive them out of the market altogether.

HUD's economic analysis of its proposal was insufficient because it broadly grouped together all small businesses instead of undertaking a more detailed sector-by-sector analysis. HUD also appears to have underestimated how heavily the burdens of this rule would weigh on small business.

In addition, HUD failed to examine alternatives that would minimize the impact on small businesses, estimated at $3.5 billion for compliance alone. If HUD were unable to come up with alternatives because none exist, that would be one thing. But virtually every industry player came up with alternatives that made the process easier for consumers, while not overburdening small businesses.

Everyone in this room agrees that RESPA is in need of an overhaul. And from what I've heard, everyone agrees that this rule is not the answer. HUD set out to improve customer protections and make the process of shopping for a mortgage simpler, yet consumer advocates would argue that this rule fails to do this. Even worse, this rule harms small businesses while introducing uncertainty into an already volatile market.

Given the weak state of the American economy, now is not the time to make such a sweeping change that would put small businesses at a disadvantage when we need their strength the most. We should be doing everything we can to encourage their growth - not threaten their very existence. It's time for HUD to go back to the drawing board and propose a new rule that takes small business into account.

Thank you.