I have a rule of thumb: avoid any process that involves a loop hole in regulatory matters.

There are three things happening today in the wide open that I predict will be completely eliminated with or without federal prosecution of violators in the near public. In the mean time just because everyone else is doing it doesn't tempt me in the slightest. Surely some who read this will be either supplier or consumer of these services and I have no intention of personally offending you if you do. I do, however, call these practices into question and lobby for their cessation. They each are ethics violations from the get-go. And yes, thank you, I am qualified to be the ethics police.

Negative Number 1 - Approved FHA Lenders Paying Unapproved Brokers for "Referrals"

True, you can pay a broker who is licensed in the state where the property is located, an origination fee. However, there is a reason FHA wants their originators to be approved - and yes, they DO want their originators to be approved regardless of what that lender told you. My guess on this one is that it will end with one big bang and a fizzle. Chances are nobody will be hugely fined ... but they may. Currently I know of at least 5 mid-sized pass-through lenders using this tactic. One says, "Oh we have HUD's stamp of approval." That's not HUD's statement. HUD's statement is, "yes, we are aware of this and there are some loopholes that will be closed soon." Why would it be okay since it is fairly difficult to get approved with HUD to accept a loan application from an unapproved party - ever? The REASON there is an approval process is to make sure the ORIGINATOR is held accountable for what they say and do.

Negative Number 2 - You Only Pay For Leads on Loans That Close

This one I know for a fact will end up with fines, loss of license and criminal prosecution. It is a direct violation of RESPA and anyone who says it isn't doesn't know RESPA. Yes, I know what you do, there are a couple of ways to do it and neither one are ethical. So you create a "marketing account" and you get all the lead you want for free. However, when one lead closes then you deduct $200 or $350 (whatever the negotiated rate) from the marketing account but it's not tied to one specific closing. WRONG! It is very tied to one specific closing and you even indicate it in your emails and marketing material. You and the lead buyer will eventually meet the reaper on this one.

Negative Number 3 - Referral Rewards Paid Through Marketing Company

Someone very dear to me phoned the other day and said she wanted to check out an opportunity she had been approached with. It's a new type of title company that will allow the mortgage broker, who is also a partner with the company, to order and manipulate title on line. According to the people behind it this is new and no-one else does it - they indicated during her "interview". First they are not correct, there are other title companies already doing this and have been for some time. But they have a magic way of rewarding the loan officer for using there services that they say doesn't violat RESPA. They have a marketing company and that marketing company will pay the loan officer $100 directly for every referral. My advice to her? Act like you are walking on a thread across the top of a volcano because that one will not hold up in court.

Now, to those of you reading this and steaming out of your ears let me relate a little history to you. I have long taught real estate investors and consulted lenders in the methods of real estate investing and the use of the "subject-to" acquisition of a property. I have had heated exchanges of information with so-called (self-labeled) gurus who cite the Garn-St. Germain Act as a protective shield agains the lender accelerating the debt on a Quit Claimed property. I use this example just to say, "I'm always right when I type or talk." Here, from the supreme court, is the final word on Quit Claimed properties and the acceleration of the debt:

The right to cure a pre-petition mortgage pursuant to § 1322(b) does not grant a debtor rights which the debtor did not have pre-petition. The Garn-St. Germain Act’s prohibition of enforcement of a due-on-sale clause does not operate as a means to modify the rights of a creditor with respect to a debtor who was not a party to the mortgage. The Supreme Court’s holding in Johnson should not be extended to third parties attempting to cure mortgage defaults. Thus, § 1322 cannot be implemented to cure defaults of a mortgage to which the debtor was not a party. Therefore, cause exists to modify the automatic stay. Source: http://www.ilnb.uscourts.gov/opinions/JudgeBarbosa/Henderson.pdf

THE OPINIONS IN THIS COMMENTARY ARE STRICTLY KEN COOK's PERSONAL OPINION AND NOT REFLECTIVE ON ACTIVE RAIN, NOVATION MORTGAGE, or ANY SPONSOR OF THIS WEBSITE. 

EDUCATION BEATS LEGISLATION EVERY TIME. Get your clients, friends and family members to a LENDER RUN home mortgage seminar as soon as possible.

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