og96022.txt

Office of the General Counsel
B-272303.1
June 28, 1996
The Honorable Alfonse M. D'Amato Chairman The Honorable Paul S.
Sarbanes Ranking Minority Member Committee on Banking, Housing, and
Urban Affairs United States Senate
The Honorable James A. Leach Chairman The Honorable Henry B.
Gonzalez Ranking Minority Member Committee on Banking and Financial
Services House of Representatives
Subject: Amendments to Regulation X, the Real Estate Settlement
Procedures Act: Withdrawal of Employer/Employee and Computer Loan
Origination Systems Exemptions (FR-3638); and Policy Statements
1996-1 (regarding computer loan origination systems); 1996-2
(regarding sham controlled business arrangements); and 1996-3
(rental of office space, lock-outs, and retaliation)
Pursuant to section 801(a)(2)(A) of title 5, United States Code,
this is our report on a major rule promulgated by the Department of
Housing and Urban Development (HUD) entitled "Amendments to
Regulation X, the Real Estate Settlement Procedures Act: Withdrawal
of Employer/Employee and Computer Loan Origination Systems
Exemptions (FR-3638); and Policy Statements 1996-1 (regarding
computer loan origination systems); 1996-2 (regarding sham
controlled business arrangements); and 1996-3 (rental of office
space, lock-outs, and retaliation)" (RIN: 2502-AG26). We received
the rule on June 14, 1996. It was published in the Federal Register
as a final rule on June 7, 1996. 61 Fed. Reg. 29238.
The final rule revises Regulation X, which implements the Real
Estate Settlement Procedures Act of 1974 (RESPA). RESPA generally
prohibits compensated referrals in connection with real estate
settlements involving federally related mortgage loans. 12 U.S.C. §
2607(a). However, it also authorizes HUD to exempt payments
GAO/OGC-96-22
or classes of payments from this prohibition. 12 U.S.C. §§
2607(c), 2617(a). A 1992 rule created exemptions for payments by
employers to employees and for payments by borrowers to computer
loan origination systems. See 57 Fed. Reg. 49600. The final rule
withdraws both exemptions and introduces three limited exemptions
for permissible payments by employers to bona fide employees. In
addition, the rule revises certain controlled business disclosure
requirements. Further, three statements of policy accompany the
final rule, one analyzing payments for computer loan origination
systems under the RESPA regulations and two others on issues raised
by comments on the proposed rule.
Enclosed is our assessment of HUD's compliance with the
procedural steps required by sections 801(a)(1)(B)(i) through (iv)
of title 5 with respect to the rule. Our review indicates that HUD
either has complied with or is in the process of complying with
applicable requirements.
If you have any questions about this report, please contact
Helen T. Desaulniers, Senior Attorney, at [phone]. The
official responsible for GAO evaluation work relating to HUD is
Judy England-Joseph, Director, Housing and Community Development
Issues. Ms. England-Joseph can be reached at [phone].
Robert P. Murphy General Counsel
Enclosure
cc: Nelson A. Diaz, Esq. General Counsel Department of Housing
and Urban Development
Page 2 GAO/OGC-96-22
ENCLOSURE
ANALYSIS UNDER 5 U.S.C. §§ 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE
ISSUED BY THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD)
ENTITLED "AMENDMENTS TO REGULATION X, THE REAL ESTATE SETTLEMENT
PROCEDURES ACT: WITHDRAWAL OF EMPLOYER/EMPLOYEE AND COMPUTER LOAN
ORIGINATION SYSTEMS EXEMPTIONS (FR-3638); AND POLICY STATEMENTS
1996-1 (REGARDING COMPUTER LOAN ORIGINATION SYSTEMS); 1996-2
(REGARDING SHAM CONTROLLED BUSINESS ARRANGEMENTS); AND 1996-3
(RENTAL OF OFFICE SPACE, LOCK-OUTS, AND RETALIATION)" (RIN:
2502-AG26)
(i) Cost-benefit analysis
As discussed below, the Department of Housing and Urban
Development (HUD) submitted the proposed Amendments to Regulation X
to the Office of Management and Budget (OMB) for review as a
"significant regulatory action" under Executive Order 12866. Since
the rule was determined to be potentially "economically
significant,"1 HUD prepared an Economic Analysis, which was also
reviewed by OMB. According to HUD staff, after the Economic
Analysis was submitted to OMB, HUD made changes in the Analysis to
maintain its consistency with the rule, to which minor changes had
been made as described below. These changes were also submitted to
OMB for approval.
The Economic Analysis indicates that it is difficult to quantify
the costs and benefits of the exemptions for certain
employer/employee payments. The Analysis also states that HUD lacks
"essential information" to estimate the economic consequences of
its action with respect to computer loan origination systems
(CLOs). However, in both areas, the Analysis includes a discussion
of cost- and benefit-related issues and the possible effects of the
changes to Regulation X.
With respect to HUD's Statement of Policy on CLOs, the Analysis
states that the guidance provided should enable CLOs to develop
with much greater certainty about RESPA consequences and with few
restrictions on reasonable pricing and compensation. It also states
that these actions should lead to faster development of
1In response to our inquiry, OMB staff advised that the rule
could be "economically significant," and "major," because it could
adversely affect competition. OMB also informed us that generally
Regulation X matters had been designated "major rules" under
Executive Order 12291.
GAO/OGC-96-22
CLOs, which should ultimately lead to greater consumer and
producer surplus. The Analysis summarizes the two other Statements
of Policy issued with the final rule.
In its submission, HUD states that its Analysis "reflects [its]
assessment that


(1)
changes in the rule's treatment of employer/employee
payments are desirable to prevent any abuse of the relationship of
trust between consumers and providers of settlement services; and
(2) the elimination of the exemption for payments by borrowers to
CLOs enhance[s] the ability of firms to develop CLOs."


(ii)
Actions relevant to the Regulatory Flexibility Act, 5
U.S.C. §§ 603-605, 607 and 609


In the preambles to the proposed and final rules, HUD states
without elaboration2 that "by approving [the rule the Secretary]
certifies that [it] does not have a significant economic impact on
a substantial number of small entities, other than those impacts
specifically required to be applied universally by the RESPA
statute."3 59 Fed. Reg. 37373; 61 Fed. Reg. at 29251. Accordingly,
under 5 U.S.C. § 605(b), HUD did not prepare initial or final
regulatory flexibility analyses. Sections 607 and 609 of title 5
were also inapplicable.
In the discussion of the Regulatory Flexibility Act, the
preamble to the final rule states that HUD's Economic Analysis
considers the impact of the rule on small entities. Id. In
connection with the employer/employee payments exemption, the
Analysis indicates only that large firms are likely to find the
practice of dedicating an individual to marketing affiliates'
products more attractive than small firms. In connection with CLOs,
the Analysis identifies potential concerns of small real estate
firms and lenders, but also sets forth potential advantages of CLOs
to those entities.
Section 605(b) states that the certification and explanatory
statement shall be provided to the Chief Counsel for Advocacy of
the Small Business Administration (SBA). In response to our
inquiry, HUD staff explained that its procedures do not include
providing a separate copy of the certification to SBA and that it
did not do so in this instance. An SBA official has confirmed that
some agencies follow this practice, and that SBA has not objected
to it.
2Section 605(b) provides that if the head of an agency makes a
certification under that section, the agency shall publish such
certification in the Federal Register along with a succinct
statement explaining the reasons for such certification.
3HUD staff explained that the exemptions at issue here would not
have a significant economic impact on a substantial number of small
entities, to the extent that such an impact could be
determined.
Page 2 GAO/OGC-96-22
(iii) Agency actions relevant to sections 202-205 of the
Unfunded Mandates Reform Act of 1995, 2 U.S.C. §§ 1532-1535
In its submission, HUD explains that the final rule is not
likely to result in annual expenditures of $100 million or more by
State, local, or tribal governments in the aggregate, or by the
private sector. Therefore, sections 202 and 205 of the Unfunded
Mandates Reform Act of 1994 are inapplicable.
In addition, the final rule does not affect small governments or
contain a significant intergovernmental mandate. Accordingly,
sections 203 and 204 of the act, which require agencies to consult
with small governments and solicit input from State, local, and
tribal governments, are also inapplicable.
(iv) Other relevant information or requirements under Acts and
Executive orders
Administrative Procedure Act, 5 U.S.C. §§ 551 et seq.
HUD promulgated the Amendments to Regulation X under the notice
and comment procedures of 5 U.S.C. § 553.
In 1993, HUD determined that a review of certain policies
embodied in the controversial 1992 rule would be useful prior to
promulgation of a proposed rule. 61 Fed. Reg. at 29239. Therefore,
on July 6, 1993, HUD published a "notice of written comment period
and informal public hearing." 58 Fed. Reg. 36176. On August 6,
1993, HUD conducted a public hearing, which produced testimony and
documents from 36 interested parties; in addition, HUD received
1,526 comments on the matters at issue. 61 Fed. Reg. at 29240.
HUD published a proposed rule on July 21, 1994. 59 Fed. Reg. at
37360. In the preamble to the proposed rule, HUD discussed the
comments received in response to its July 6, 1993 solicitation and
invited further comments. See 59 Fed. Reg. at 37360, 37362-73. In
addition, following promulgation of the proposed rule, HUD
conducted an open house for operators of CLOs. The open house was
designed to allow operators to demonstrate their systems to HUD and
to the public. 61 Fed. Reg. at 29240. Further, in August and
September 1995, HUD convened two working group meetings of
interested industry, government, and public officials to obtain
their input and to further explore the status of CLOs. Id.
According to the preamble to the final rule, HUD received 354
comments on the proposed rule. Id. at 29241. Throughout the
preamble to the final rule, HUD discusses and responds to issues
raised during the comment period, as well as the information
gathered during the open house and subsequent working group
sessions. See 61 Fed. Reg. at 29241-51.
Page 3 GAO/OGC-96-22
Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520
The final rule continues a requirement that, in controlled
business situations, people making referrals of settlement services
make certain disclosures to those being referred. Under the
Paperwork Reduction Act, these disclosure requirements are to be
submitted by HUD to OMB for approval. HUD had believed that the
controlled business disclosure requirements were included in a
RESPA information collection submission last approved by OMB on May
6, 1994 (2502-0265). The final rule did not substantially modify
the requirements for the controlled business disclosure and,
therefore, HUD did not submit the disclosure requirements to OMB in
connection with this rulemaking.
HUD has discovered that the controlled business disclosures,
which are mandated in section 8(c)(4)(A) of RESPA, 12 U.S.C. §
2607(c)(4)(A), were omitted from the RESPA submission approved by
OMB in 1994. HUD has begun to take the steps necessary to rectify
this problem, including preparation and publication of a correction
to the final rule and proper submission of the controlled business
disclosure requirements for OMB review and public comment.
Statutory authorization for the rule
HUD promulgated these amendments to Regulation X and
accompanying Statements of Policy under the authority in section 19
of RESPA, 12 U.S.C. § 2617. Section 8(c)(5) of RESPA, 12 U.S.C. §
2607(c)(5), permits HUD to exempt "other payments or classes of
payments" from RESPA's prohibition on compensated referrals, after
consulting with specified Federal agencies. Section 19(a), 12
U.S.C. § 2617(a), authorizes HUD to grant "reasonable exemptions
for classes of transactions, as may be necessary to achieve the
purposes of [RESPA]." The preamble to the final rule states that
HUD consulted with other Federal agencies, as required by section
8(c)(5). 61 Fed. Reg. at 29245.
National Environmental Policy Act of 1969
The preambles to both the proposed and final rules reflect HUD's
finding that the rule will not have a significant impact on the
environment. 59 Fed. Reg. at 37373; 61 Fed. Reg. at 29251.
Accordingly, HUD did not prepare an environmental impact statement
in connection with this rule.
Executive Order 12866
OMB reviewed the Amendments to Regulation X and accompanying
Statements of Policy under Executive Order 12866 as a "significant
regulatory action." HUD staff advised that, after submission to
OMB, HUD made technical, editorial, and clarifying changes to the
rule, which OMB also approved.
Page 4 GAO/OGC-96-22
Other Executive Orders
In response to our inquiry, HUD staff advised that HUD reviewed
the rule under Executive Order 12988 (Civil Justice Reform). We
note that the final rule does clearly specify its affects on
existing regulations. In addition, the preambles to the proposed
and final rules address Executive Orders 12612 (Federalism) and
12606 (the Family). With respect to the Federalism Order, they
state that HUD has determined that the policies contained in the
rule will not have substantial direct effects on States or their
political subdivisions, or the relationship between the Federal
government and the States, or on the distribution of power and
responsibilities among the various levels of government. As a
result, the rule is not subject to review under that Order. With
respect to the Family Order, the preambles similarly state HUD's
determination that the rule does not have the potential for a
significant impact on family formation, maintenance, and general
well-being, and, thus, is not subject to review under the Order. 59
Fed. Reg. at 37373-4; 61 Fed. Reg. at 29251. Further, the Executive
Orders on property rights (12630), intergovernmental partnership
(12875), and environmental justice (12948) are similarly
inapplicable.
In its submission, HUD did not identify any other statute or
executive order imposing procedural requirements relevant to the
rule.
Page 5 GAO/OGC-96-22