HUD is asking a lot of questions about 'required use'
The Obama administration wants to stir the pot on a highly contentious issue involving homebuilders and their customers: the legality of the discounts, rebates, closing costs, upgrades and other lures that builders often dangle in front of buyers -- but only if they agree to use the builder's affiliated mortgage lender.
In the real estate business, the issue is known as "required use." Under the Real Estate Settlement Procedures Act, consumers cannot be compelled to use the services of affiliates of realty firms, title companies, builders and other market participants.
For example, a realty broker cannot legally force you to obtain your title insurance or mortgage from one of its affiliates. It can inform you of the availability of affiliated service providers but may not require you to do business with them.
In recent years, the Department of Housing and Urban Development, which administers the settlement procedures law, has received complaints about builders allegedly steering purchasers to affiliated lenders in exchange for discounts off the house price or other incentives.
Some consumers complained that not only were they pushed into mortgages with higher rates, fees and closing costs than those readily obtainable in their local marketplace, but that when they objected, the builder either demanded that they go to closing with the affiliate or lose the discounts that attracted them in the first place.
In one case outlined by HUD enforcement officials, a large builder canceled a buyer's contract and seized an $11,845 good-faith deposit following the buyer's refusal to use an affiliated mortgage lender. In another case, a buyer complained that a builder seized her $10,000 deposit when she rejected the high-cost loan deal proffered by the builder's mortgage affiliate. According to HUD, not only did the affiliate's loan officer "fraudulently" alter financial documents, but the terms of the deal itself "would have placed the consumer in a home she couldn't afford."
To prevent future abuses, HUD broadened its definition of "required use" to include economic duress -- situations where consumers believe they must use an affiliated or recommended service provider "to avoid an economic disincentive or penalty." HUD also said any discount or rebate must be bona fide and "not made up by higher costs elsewhere in the settlement process," such as above-market loan terms.
The National Association of Home Builders objected to the change and filed suit in federal court to block HUD's move. The suit charged that HUD had not performed adequate research before adopting the rule and that it would unfairly cut consumers off from legitimate, valuable discount programs offered by many builders.
Rather than fight a prolonged court battle, HUD withdrew the rule change and put the issue on ice. Now, however, the administration wants a full public airing of the pros, cons and mechanics of builders' rebate programs that are tied into affiliated loan deals.
In a Federal Register notice June 3, the agency invited consumers, mortgage market participants, realty agents, builders and other interested parties to provide information on their experiences and what they know about the programs' operations.
For example, HUD wants to know if there is evidence that some builders tack the costs of the incentives -- upgrades, rebates or discounts -- "into the cost of the home and are therefore not true discounts." Is there hard evidence that affiliate loans come with higher rates or total fees than those available elsewhere in the local market? Since builders can earn hefty fees in the secondary mortgage market by selling loans with higher- than-prevailing rates, is that a key source of profit? Do builder incentives discourage or prevent consumers from shopping for better financing -- thereby costing them more for many years?
Roy DeLoach, chief executive of the National Association of Mortgage Brokers, has no doubt that builders' affiliates charge puffed-up fees and rates -- and not coincidentally take business away from his members. "We've gotten hundreds of complaints from buyers who want to use lower-cost financing" available through brokers "but who can't because they're locked into contracts that effectively shut them out."
David Ledford, senior vice president for housing finance at the National Association of Home Builders, could not disagree more. Builders have no economic or competitive reason to charge higher mortgage rates or fees through their affiliates, Ledford said in an interview. That's because "most builders do not intend their affiliates to be a profit center" but rather a means to a more efficient, dependable transaction.
The main purpose for the affiliates, said Ledford, "is to make sure the financing process doesn't foul up the sale of the house."