country. Those studies were one basis for a report made to the Congress and this committee in January 1972. My interest in the protection of housing buyers and the efficiency of real property transactions has continued unabated since that time.

The CHAIRMAN. Your full statement will be made part of the record (see p. 201).

Mr. BURKE. I appear today to testify on S. 2288. Two versions of this legislation, both concerned with closing and settlement costs, have recently been introduced. In part, one proposes that the HUD Secretary be ordered to set maximum rates for various types of real estate closing cost charges, while the other would repeal existing statutory authority to do this.

Mr. Chairman, it is a poor time to deny HUD such authority. My reasons for this statement are several:

(1) Since 1962, closing and settlement costs have risen sharply. (2) Past Federal experience with title review shows that savings are possible.

(3) Since 1971, HUD has undertaken administrative review of the problem which should not be cut off in midstream.

(4) Currently, the States are considering new model regulations for title insurers; at such times, Federal controls should not be relaxed, but must be available in case of State inaction or permissiveness.

Expanding on this outline, let me take up the foregoing points in the order presented.

(1) On the matter of rising costs, it is important to note that legislation can help to control future rises in charges as much as to reduce present costs. A reduction in present costs is much harder to achieve than a reduction of future increases.

I have taken some examples of high costs and large increases from the Truth-In-Lending hearings of the 1960's and from the HUD studies done in 1971. For example, between 1961 and 1971 in Newark, average closing costs rose from $500 to $647. In Indianapolis, Ind., between 1961 and 1971, similar costs increased from $198 to $347. In St. Louis, Mo., in the same decade, costs rose from $330 to $389. The CHAIRMAN. Is there any way we can determine the validity of this increase. We had great inflation, expecially in the housing area during this period. Could you comment on that?

Mr. BURKE. Conveyancing cost studies are scarce, but a study done by Prof. Fairfax Leary showed that for title searches in Philadelphia, the average search cost $75 in 1950. In 1972, he found that it cost $207. In 1950 dollars, that figure should have been $170, using the available economic indicators for the region. So there is, in that one cost at least, some fat in the system. While I do not say that our conveyancing is hopelessly inefficient, I do believe a great deal of fat could be eliminated.

For example, some developers allow their layers to charge full title search charges for what is essentially a shorter bring down or update search. A survey fee is often charged, leaving no markers on the ground, and that survey is repeated upon each transfer. In some areas, $15 and $25 fees are being charged for preparation of standard form documents which shouldn't cost more than $2.50 to prepare. Application fees are being charged, Senator, that involve no more than a

telephone call in many instances. No more than a telephone referral is involved. Lawyers' fees in many areas are based on a percentage of the loan, and result in billing not based on the personal services that lawyers are supposed to render their clients.

So in a great many areas, for a great many charges, the cost is just too high.

Where the Government has stepped into the area, where local highway authorities, for example, have to get title searches, they generally sign contracts with law offices and abstract companies. Some of those contracts I have seen. They show that for search charges, the cost of the search can be reduced by as much as 30 percent if you are a local government, a highway authority, or an urban renewal authority.

There are other ways of showing, I think, Senator, that savings are possible.

For the last 2 years, HUD has had in process administrative actions which would set some maximum rates. Some regulations were promulgated by HUD last year, and died aborning within the Department. HUD received a great many comments on them, and the regulations were by and large, as far as I could tell, quite fair, and the levels quite adequate. Many attorneys have indicated to me that the cost maximums were indeed adequate.

My final point concerns the title insurance industry, which has promulgated a new, revised title insurance code for introduction in State legislatures around the country, and in some States that code is now being offered to the legislators. It is in many ways a great improvement, in that it does more strictly regulate the title insurance industry. Its greatest improvements, I think, lie in the area of loss reserves and other financial requirements of the State insurance commissioners, but it is not at all, I think, a consumers' legislative bill. It gives very little attention to rate regulation, and has very little regard for ways in which the buyer of title insurance might be given more protection and coverage in his contract.

So I think there is room for a great deal of improvement in this area, and it is an area over which the Federal Government should maintain continued oversight. This is another reason why HUD should not be denied the authority at this time to regulate closing

costs.

The CHAIRMAN. I want to thank you for your statement, Mr. Cramer, your statement was extraordinarily straightforward.

I like the way, Mr. Burke, that you documented your case so well. You argue that future closing costs are likely to go up even more sharply. Is that correct, on the basis of the problems that we have, and then, No. 2, you argue that there is a lot of fat in this system, that there should be and could be means to prevent that.

Mr. BURKE. The problem is really a central city problem. In Los Angeles County, for example, some three-quarters of a million conveyancing documents are recorded annually.

Senator PROXMIRE. It is the low income and poor people who are especially hurt.

Mr. BURKE. I think so, because the closing costs in the low income area of a city could more than double the equity that one has to put out to achieve homeownership.

Senator PROXMIRE. It has been said that if we pass a law against kickbacks and require disclosure of costs, then rate regulation isn't necessary. Do you have any comments on that argument?

Mr. BURKE. I think that, Senator, merely to control existing abuses is not to improve the system, and for the future, we need to improve the system. So that when legislation is passed

Senator PROXMIRE. How does regulation necessarily improve the system?

Mr. BURKE. Excuse me?

Senator PROXMIRE. How does regulation improve the system? Mr. BURKE. It doesn't in the short run. It will in the long run, I think, because certain firms that can't maintain the sufficiently large abstract plant will not be in business after 10 years or so.

The Chairman. How do you service a small town?

Mr. BURKE. That is not a problem here, because in the bills that have been written so far, regulation would be confined to one particular housing market, so that it is possible to define a market in such a way that you could limit your regulation to an SMSA, for example.

Senator PROXMIRE. Should the law provide the exemption or something of that kind to take care of the situation?

Mr. BURKE. I think the law should specify which housing markets have problems; yes. It is going to be very difficult to enforce any one maximum rate statewide, for any cost in any State.

Senator PROXMIRE. Mr. Cramer, would you like to comment?
Mr. CRAMER. I would have to concur with that, Senator.

Senator PROXMIRE. One other question: I understand that you provide a plan, you have details for a plan for Government underwriting of title insurance and title registration systems. What is your recommendation for dealing with the points problem. Should they come under the same regulation?

Mr. BURKE. The problem of points is a problem that faces the buyer using FHA or VA mortgage loans. Whether or not the buyer or the seller pays the points, as is true in some States, the buyer can still be certain that he is going to pay in the end. He might be able to amortize or capitalize the cost of points, but it will eventually be the buyer that pays.

So the points should be controlled at the same time.

Senator PROXMIRE. Senator Brock?

Senator BROCK. I am sitting here listening to what you are saying. I am fascinated with your testimony, and I appreciate it. I think that last point illustrates one of the biggest problems we have, and I am particularly grateful, Professor Burke, for the last comment you make in your statement which I have read. You feel we have to go to market rates in order to get rid of the points problem.

There are situations in States where points are higher than the closing costs. It is something we just have to deal with.

Mr. BURKE. That is certainly correct, Senator.

Senator BROCK. I am not sure where to begin. I read your original statement, and I thought it was excellent. I read, of course, this statement. I am not sure I find very much to disagree with except on one question that Senator Proxmire just previously asked.

How does regulation improve the basic efficiency of the system? My approach has been to get rid of the kickbacks, the fraud, the socalled abuses. There you have the problem to deal with. I can be wrong, but it has been my experience that when Government steps in to regulate, rather than enhancing efficiency with reform and correction of the system, it tends to rigidify it. It tends to create a situation where people say, as you say in the statement, maximum rates tend to become minimum, and all of a sudden, you have a situation where there is no thrust for reform.

Throughout your entire statement, you call on certain actions by the Federal Government, action with regard to titles.

That sort of thing is worthy of very serious consideration. We have seen the situation where when the Federal Government enters a field and the local people withdraw they do not pursue remedial legislation at that level. It is a philosophical argument.

We all agree on where we want to end up. We want to eliminate the problem-the abuse, the kickbacks. That is true of you, of the Senator from Wisconsin, of Mr. Cramer as well as me. We are all in agreement.

I would like to point out one fact to you, Mr. Cramer. My proposal has never contained any section which would have, as you say, the effect of legalizing kickbacks. That was in the House, and I would by no means support that.

I should point out that I am interested in your comment, because I have an awful lot of good friends in your organization in my State. Mr. CRAMER. Yes; we know.

Senator BROCK. I do appreciate the statement.

I would point out that when you are talking about all of the problems that you list, it is important that we not overstate to people what we can accomplish in this kind of legislation. It is a very limited bill. Even the Senator from Wisconsin, even Senator Proxmire's bill, deals with a limit on no more than 15 percent of settlement costs, so we are not proposing a panacea to homebuyers, whatever we do. The reason I wanted to make a few remarks was to express my gratitude to you for having brought our attention to bear on specific points, and you have made specific recommendations, one of which I disagree with, but most of which you do support, and I very much appreciate that. Thank you.

Senator PROXMIRE. Let me just ask Mr. Burke if he would like to comment on the very able and eloquent and persuasive argument that Senator Brock made, with which I disagree, but I would like you to answer it.

That is, that regulation would rigidify the situation, and whereas we do have abuses in some areas with a settlement cost that we know is too high, and in other areas people are getting a pretty good bargain.

Wouldn't we lose that bargain in areas where settlement costs are low; and if not, why not?

Mr. BURKE. I don't think so, primarily because this is an area in which change is already underway. There are economic forces at work that are going to mean that in the next 15 years the system of transferring title to real property is going to be changed quite drastically. One is going to see as many changes in the law in this area in the next couple of decades as we have seen in the landlord-tenant area in the last couple of decades.

Senator PROXMIRE. Would regulation enable the change to be translated into lower costs?

Mr. BURKE. Regulation could, in effect, telescope history and force change somewhat faster. It is a problem that, as Senator Brock indicates, is extremely complex and varies from State to State, but I think that the underlying forces which are going to change our abstract system, our recording system, our title insurance system, are really at work in any case.

We are the only country in the world that still relies on a recording system. That uniqueness is of great concern to me, because it makes us a backward nation as far as conveyancing is concerned.

Senator BROCK. I don't argue with that at all. But let me pose to you—I think somewhere in your statement you mentioned the fact that you feel, and I think it is a legitimate request, that the rate that is paid by the home buyer should be the same as is paid by the lender for title insurance.

I think you made that general point, didn't you?

Mr. BURKE. I disagree with the argument that the risks are different, but I would say that when title insurance is offered, I would prefer to see it offered in one contract instead of two. Currently, it is offered to the homeowner in a separate policy and to the mortgagee in another separate policy. There is no reason why a comprehensive policy couldn't be written covering both of them. The risks would be no greater.

Senator BROCK. I agree, but I don't think you could say the two would carry the same rate, if the amount of insurance came down, whereas the value of the property went up. You have two different situations there.

Mr. BURKE. A comprehensive policy covering both the mortgagee and owner would, I think, tend to make rate regulation easier, in that the risk would be level across time. The lender's risk goes down, as the loan is paid; the homeowner's is going up, as he builds up equity in the property. The two balance out. If you have a comprehensive policy, you could set the rate over the whole course of the loan. The risk would be the same.

Senator BROCK. You see, that is something that can and should be effectuated within the marketplace today.

Mr. BURKE. I really don't think that will happen unless the insurance laws or HUD-VA requirements are changed to mandate that type of policy. I would say that a comprehensive policy would tend to make mortgages more liquid in the secondary market, and that is of great benefit to the economy as a whole.

Senator BROCK. Thank you.

Senator PROXMIRE. Could regulation be used to put pressure on the system so that there is no room for kickbacks and a lot less room for fat?

Mr. BURKE. Yes; over the long term, I think that would be the effect, that lawyers who search titles and certify titles would find that they have to maintain a given level of abstracts or a given number of abstract files in order to stay in business. So that it would tend to make title plants and lawyers' files more efficient.

Senator BROCK. It also would make it more concentrated.

Mr. BURKE. That would depend, Senator. In urban areas, it's concentrating anyway, for economic reasons. In rural areas, I don't