Government Says Home Builders Cannot Require you use their lender to receive incentives

By
Mortgage and Lending with The Federal Savings Bank
https://activerain.com/droplet/4xjM

Federal Real Estate Settlement (RESPA) rules require that incentives not be built into the cost of the homes they build. 

According to the Federal Trade Comissions website (www.ftc.gov) "tie in sales" may violate federal anti-trust laws because they harm competition.

Tie in sales are defined as the sale of one product on the condition the consumer purchase a 2nd product which the consumer may not want or could buy elswhere at a lower price.

When a builder links an upgrade or closing cost rebate to the required use of an affiliated lender that can be considered a tie in.  When the tie in mortgage is at a higher cost or includes restrictions like prepay penalties not required with loans available elswhere they are effectively preventing their customer from choosing a lower cost alternative & harming competition.

If you have a complaint about builder tieing incentives to their lender call the RESPA enforcement staff at 202-708-0502 or visit www.hud.gov

I will be happy to provide you with a no obligation analysis of your builders proposed mortgage loan.

www.MortgageAdvisor.info & www.GregZaccagni.com

Related Articles:

FBI Probes Builder Incentives

Builders tie in's likely to"cost" you?

Washington Post Article on dealing with Builder Tie In's

Examples of Government Intervening for Consumers with Builders

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Rainmaker
601,272
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Greg - as always, a very informative post.  We don't have much new construction around her in Ventura County so I don't run into this problem but I am really getting annoyed with all the REO listings demanding that all prospective buyers be pre-approved with their Countrywide rep. or else they can't submit an offer.

Ventura County is a military county with two large naval bases and with so many returning vets, I'm starting to get a lot of VA/Cal-Vet clients.  CW is not approved to do Cal-Vet so my Cal-Vet clients are automatically ineligible to submit offers on these REO listings that demand CW pre-approve the buyers.  I know this isn't a RESPA violation but it is definately unethical and something needs to be done about it.

Sorry for the rant, I'm just a little annoyed today with these CW practices.

Oct 26, 2008 07:21 AM #1
Rainer
46,117
Greg Zaccagni
The Federal Savings Bank - Wheaton, IL
Illinois Mortgage Lender

Donne:

Thanks for your kind comments.  In IL it appears Countrywide has been banned from originating new mortgage loans by the state legislature but they are apparently using their federal bank charter to get around it.  Check out this article for more details.

Consider reading my prior blog discussing Illinois & other states suits against them.

Illinois Attorney General Sues Countrywide for alleged deceptive loan practices

Oct 26, 2008 07:50 AM #2
Rainmaker
601,272
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Greg - thx for the info.  Seems I remember reading about the CA suit a few months back, which was filed the same day as the IL suit.  I was also checking out some of your archived posts and liked the one back in May about the Georgetown study on APR.  I would love to re-blog that post on my outside website, if that's ok with you, of course.

Oct 26, 2008 09:48 AM #3
Rainer
46,117
Greg Zaccagni
The Federal Savings Bank - Wheaton, IL
Illinois Mortgage Lender

I would consider it a compliment!

Oct 26, 2008 09:55 AM #4
Rainmaker
48,665
Brenda Tressler
Crye-Leike Realtors - Clarksville, TN

Hello!Hello! Very interesting post... I just recently came across a builder in Nashville, TN that required you to use their lender to receive a 10,000 credit off their home and A VA foreclosure where Countrywide (Seller) required you to pre-qualify thru Countrywide before they would accept your offer... Both buyers were DU approved with me & my company. Neither deals sounded fair or legal to me! Brenda :)

Oct 26, 2008 10:09 AM #5
Rainer
46,117
Greg Zaccagni
The Federal Savings Bank - Wheaton, IL
Illinois Mortgage Lender

Hello Brenda:

I don't believe we have any ability to do something about this ourselves but if you choose to encourage your client(s) to call RESPA's Enforcement phone number @ 202-708-0502 I would very much appreciate you updating this blog with details about what happened!

Oct 26, 2008 10:19 AM #6
Rainmaker
48,665
Brenda Tressler
Crye-Leike Realtors - Clarksville, TN

Hello!I will pass this number to them... and update you if I hear anything. I try to be fair to all but both of these happened the same week. Even my customers asked me if they could do that and that it did not sound fair. Thanks and I hope you are having a good week-end! Brenda :)

Oct 26, 2008 10:29 AM #7
Rainer
38,744
Kevin & Maryellen Garasky
KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington - Coeur d'Alene, ID
KMG Mortgage Group - ID & WA

Greg - I hate to disagree with you, but I must.  This issue, specifically, is addressed on the hud.gov website under RESPA "FAQ's for Homebuyer's" section:

Example Situation

Question: A builder is offering to pay my closing costs or give me an upgrade package only if I agree to use his mortgage company. Is this legal under RESPA?

Answer: Yes. While a builder cannot require you to use a mortgage company with whom he is affiliated, a builder is allowed to offer you a discount if you use a specific company. Under RESPA, the builder cannot charge you more for the home if you do not use his affiliated mortgage company.

click here for link

In the case with Brenda's situation above, I have challenged this with HUD directly myself.  They told me there was no violation.  HUD told me that they might "trust" the other mortgage professional more and, therefore, know that the offer is "true and valid" (HUD's words, not mine), but as long as the builder doesn't require the buyer to go there to close the loan, there is no violation.

I know this stinks (I wish it were a violation, since it is CLEARLY steering), I have been told that it is not a violation :(

Maryellen

Oct 26, 2008 10:45 AM #8
Rainmaker
601,272
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Greg - I, too, have contacted HUD about CW practices of demanding that prospective buyers pre-approve with them (CW) as a condition of submitting an offer and I was told the same thing.  It's not a RESPA violation to demand that prospective buyers pre-approve with a designated buyer just as long as it's not a requirement that the buyer use the lender in order to close the transaction.

Having said that though, I still find CW practices of demanding that every prospective buyer pre-approve with them (CW) or they can't submit an offer are unethical and they need to be stopped.  As I illustrated above, CW can't approve everyone (they are not Cal-Vet approved) so just because they can't approve someone, doesn't mean that the buyer isn't a valid and qualified buyer.

Oct 26, 2008 01:18 PM #9
Rainer
46,117
Greg Zaccagni
The Federal Savings Bank - Wheaton, IL
Illinois Mortgage Lender

Kevin & Maryellen:

While this is a complex issue there are examples of the feds insisting the builder provide the same incentives to buyers using outside lenders.  Here are a few link I found on this subject.  I have several news clips on .pdf if you would like me to send them?

http://realtytimes.com/rtpages/20061113_fedsinvestigate.htm

http://110realty.com/articles/MORTGAGES%20Builder%20Tie-ins%20to%20Their%20In-house%20Mortgages.doc 

Oct 26, 2008 01:24 PM #10
Rainer
38,744
Kevin & Maryellen Garasky
KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington - Coeur d'Alene, ID
KMG Mortgage Group - ID & WA

Greg,

Absolutely, I'd love your .pdf's!  I'll contact you off-line with my e-mail address.  The more ammo we have, the better off we'll all be.

It may not be a violation of RESPA, but that wouldn't be the first time one part of the government said something is legal and another part of the government said it is illegal.  Politics as usual.

What Donne says it true - it is unethical and needs to be stopped.  I had a work around one time when this happened to me.  The builder was requiring a CW approval letter.  Since I am an approved broker, I submitted the loan through CLUES/CLOUT, got the underwriting findings and forwarded it.  "There's your CW approval!"  That was one fax I sent with a smile!

Maryellen

 

Oct 26, 2008 01:36 PM #11
Rainmaker
601,272
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Maryellen - a couple of times, I was fortunate to get a CW rep who agreed to take my own DU findings as proof of qualification.  But the next time, I will try your way and just run it through clout.

Oct 26, 2008 01:58 PM #12
Rainer
38,744
Kevin & Maryellen Garasky
KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington - Coeur d'Alene, ID
KMG Mortgage Group - ID & WA

Donne,

Just one word of warning: make sure your builder/seller agent has a good sense of humor.  I'd like to say this won me brownie points for ingenuity and creativity, but it didn't.  But, at the very least, I got my point across - especially when they found out I used to be a corresponding underwriter for CW.  I had a good laugh, though.

Maryellen

Oct 27, 2008 11:21 AM #13
Rainmaker
601,272
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Maryellen - I'll keep that in mind but I'm still going to try it, if for no other reason but to get my point across as well.  Needless to say, if the shoe were on the other foot, they be singing another tune.  Heck, they would do the same thing.

Oct 27, 2008 01:41 PM #14
Rainmaker
184,952
Ann Dail
Baton Rouge Area Homes, Louisiana, USA, 225-761-0551 - Baton Rouge, LA
Broker/Realtor,CRS, ePRO, SRS, B.A.Chem

I have noticed a builder who builds not only in Louisiana, but Texas and several other states offering $4000 or more to buyers who use both their lender and title company.  If buyer fails to use either, the monetary offer isn't given.  This seems like steering to me too.  However, when my buyer client contacted the government, she was told as long as the relationship is disclosed in writing and agreed to by the buyer, it isn't illegal. 

The closing group used a notary, not an attorney who could not answer any of my clients questions at closing.

 

Nov 25, 2008 09:04 AM #15
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Rainer
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Greg Zaccagni

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