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Are builders violating RESPA with using in house Lending?

Like most lenders out there, I feel short changed everytime I approve a borrower and they end up buying a new home and the builder will not give them proper incentives without using their preferred lender. Our office came across 3 different articles about this, but it does not seem to stop builders from offering these incentives. What ends up happening usually, is my client either goes with the builders lender to grab the incentives and save some in in the short run. They also usually end up with a worse loan. They then will have to spend money later to refinance out of this loan. Or, they end up using me but losing their upfront incentives.

My question out there is this really LEGAL?,

I always get conflicting answers.

Posted by Gary Miljour - Mortgage Lending for Tempe Arizona on 08/06/2007 04:10 PM

Comments (22)

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22 Comments on Are builders violating RESPA with using in house Lending?

AUG

2007

Check and see what your state say about that. The buyer should get the same incentive irrespective of whom the lender is. You might want to complain to the state department of banking. Better yet have your customer do it.

Christopher,

In Arizona, this abuse has been going on for years. I have been educating my realtor partners on this and sending them these articles, but again today I am dealing with a builder who does not want to offer the client the same incentives if they use my mortgage service. Thanks for your feedback

Hi Gary -- Thia is a universal problem and unfortunately is not a RESPA violation. Builders do it out here too and it does drive you nuts! Aloha

State law may vary, but it isn't a respa violation unless they charge more to use an outside lender. They can give a discount to use their lender. I know it is in effect the same thing, but you can always give a discount to use certain service providers you can never charge more for not using one

There is litigation ongoing in that very matter.

I can't fault the builders for wanting to control the loan process. I'll have to post a piece about that because it's too long for comments.

No one will like what I write.

It's a SHAME

The usual loser is...THE BUYER... or should I say the mark!

Everybody wants their cut, and a good portion of the time what results is not in the consumers interest. Everyone profess's advice, but its generally BS.

Okay, some good guys out there, but you dont have to look to far at the mess today and realize how much crapis out there.

SINCE NOBODY is actually on the buyers side, I have ALWAYS been a strong advocate for SIMPLE LOANS. Only the rich should be able to get crazy products---they can be assumed to be more financially savvy...

for the rest of us 30 yr fix, 10+% down and a simple disclosure on costs.

Too much smoke and mirrors and TOO MANY CROOKS!

Gary,

Thanks for the post. There's no RESPA violation. However, how about getting information from the buyer to meet or beat the in house lender's offer.

In Texas, it will be illegal for builders to do this after October 1st, however, you and I both know they will find a loophole somewhere in the law.

Thank you very much for the post, I think there are lenders that don't like it unless they are the lead lender getting the deals and then it is great...since it is common where I live, I guess it must be legal otherwise someone would have done something about it.

Thanks for all the great feedback. This helps me so much

Lots of legal theories here. From your buyer's perspective this contractual term is intentionally misleading, it is misrepresentation by omission (fraud), it is a bait and switch, a vertical anti-trust violation, and possibly a lot more. And for all those reasons from your perspective it is an unfair trade practice and anti-competitive.

Obviously the builder inflates the price and then "discounts" the price if the buyer selects their mortgage and title services. The Seller requiring the buyer to use their title company is a RESPA violation by the way: Section 9: Seller required title insurance Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.

And they are requiring the buyer to do exactly that. And going after this title RESPA violation may actually help you accomplish the same results. Think about it. Often these buyer incentives far exceed even the gross revenue produced by the title and lender services. If the incentives added up to a discount that was directly related to the actual money saved and efficiencies created (bad joke) by using their ABA, well it might be a different story. However, that's not what they do. They make it impossible for the buyer to even consider using another service by making the so-called discounts add up to way more than is feasible. This is not reasonable nor legal. In effect, they are penalizing the buyer for not using their in-house services.

I think you should sue them for unfair business practices and talk to some class action attorneys - I highly recommend Zimmerman Reed. I've watched them prosecute a lot of class actions in this area.

Doug,

I appreciate your feedback. I also think mortgage companies are playing with a double edged sword because on one hand the mortgage company wants the loan originators to get our client the best deal, and want us to fight the builders and their practices and on the other hand they will encourage loan originators to forge relationships with the builders and offer incentives and aba relationships. I took a stance years ago that I did not want to work with builders directly based on how I see the way they build relationships and abuse their business vendors. I do close loans with builders and have had great experiences with my clients who have bought new homes. Some builders will give the incentives to the competing lender and I see this going on more in a down market, however, I feel this does not give them the right.

AUG

2007

It's completely legal. Personally, I think we need to look at it as a "if you can't beat'em, join'em" type of mentality. Get out there and put your own agreements in place with builders. These type of agreements can produce HUGE results for the preferred lender that is getting the business. And the lender that is getting the business had to work his tail off to get in with the builder, in most cases. It's only a bad thing when you don't deal with builders. Target these relationships, and you will think that these agreements are the best thing going.

Chad,

Thanks for your feedback,

I can agree to go after opportunities to grow business, however, my moral compass just does not sit well with how builders do business. I have had opportunties to work with builder business, and I just could not see eye to eye with their business plan. I just want what is fair for the consumer.

MAY

2008

naturally the loan officer from Wells Fargo likes being an in house lender because generally most real estate companies and builders are encouraged to use national companies. For example, Long and Foster Realtors use Prosperity Mortgage which is actually Wells fargo, others use National City etc... The best lender for the job should be the preferred lender. His or her ability to obtain and close a loan successfully should create a reputation for the individual lender and that is how he or she should acquire market share, not paying the real estate company or builder. I can't fault the realtors or builders it is the lender that allowed all of the fun to be taken out of the mortgage business. Seriously, if all of the agreements were terminated tommorrow the in house lenders would be the first to leave the business.

MAY

2008

Seriously, if all of the agreements were terminated tommorrow the in house lenders would be the first to leave the business.

George,

If we were all on a level playing field then the other plays would not want to compete. Funny how that works.

JUN

2008

Builders typically have their own lenders because they have been burned by outside mortgage companies.

I previously spent 10 years working for builder affiliated mortgage companies. I do not directly work for a builder mortgage company now so I feel the pain.

However, I have aligned myself with some pretty aggressive realtors who take the stance, "if you are going to FORCE us to use your lender then we will go to another builder and purchase from them". It is amazing how they will allow for the use of OSL's then.

When I was a builder loan officer, I did lose approximately 10% of my business to aggressive realtors as well.

As we know, we have no pull when it comes to builders....but your partners the REALTORS do.

Monica- Thanks for your comment on this post. Even though we can feel helpless, we can fight them. Please look at some other posts that I wrote on this subject.

I decided to try and take some action against Homebuilders and Abusive Practices

Homebuilders and Abusive Practices

Should I use the Home Builders Lender?

It is not fair!!! If your not the in house mortgage company... I have had more sucess with the builders by requesting referals from there turn downs!!!!!!!!!!!! I agree if you can't beat them join them!!

JUN

2008

Frank,

Thanks for the comments I appreciate all feedback, even though I disagree with your stance. This post is a very old one and since then I have learned so much more on how home builders operate. They walk a very thin line with RESPA. Their behavior at best is unethical, because it does not always have the clients best interest in mind. That is really the real issue I have with builders. They would rather have their in house lender offer the client a more expensive with fewer options types of loans then let real competition take place. At the end of the day, usually the consumer ends of losing.

APR

I am currently researching a potential class action lawsuit on this issue. It is interesting to look at the comments from the real estate and banking industries concerning this practice now that HUD has declared, unequivocally, that this sort of coercion via "preferred lenders" violates RESPA.

John W. Davis

Attorney at Law

APR

I now have run into this very situation with my buyer purchasing a REO property. The asset manager will only give my buyer the concessions he is asking for if he uses their lender. In essence they are trading loans. I wonder if this is in violation of RESPA. Anyone out there heard of that?

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