Home Financing Ninja

RESPA: Section 8 - Builders Requiring the Use of the In House Mortgage Company - A Counter Point to A Counter Point

In the past two days, there have been a few articles about RESPA Section 8 - Required Use Rule as it relates to builders and the builders in house mortgage company.

Let's get ready to ruuummmmmbbbbblleeeeeeeeeeeeeeee ...... (Cue upbeat music)

In the left corner is Ed Gillespie and his article (rant) about what I believe is a personal experience.

From his article "Do I really have to use the Seller's Lender?" (12/24/10), here are the summary points, I believe

1. To get certain sales incentives, you have to use the in house lender (ANSWER: NO, one can use any lender they want)
2. To get a home in a certain subdivision, you have to use a certain in house lender (ANSWER: NO)
3. To put a contract on a home, you have to get prequalified with a certain in house lender (ANSWER, Absolutely not)

In the right corner, is everyone's favorite Maryland and Virginia Real Estate Broker, Lenn Harley.  Her article (one day later) "Can or Should New Home Builders Require or Be Permitted to Require the Use of Their In House Lender or Approved Lender ... " (12/26/10).  Lenn debates the fact of Ed not having the proper citations on his writing, but in fact provides the actual citation that Ed was referring to

Section 8, Paragragh C, Sub paragraph 4 (Sec 8 (c)(4) )
"The consumer is not required to use a particular settlement service provider"

It is clear that in Ed's case, this happened to him and he wound up losing a deal because of the end user's lack of education.

The Active Rain confirmed loan officer program (group) recently conducted an interview with Dr Gary Lacefield.  Dr. Lacefield is the president of the Texas firm, Risk Mitigation.  He consults companies on proper RESPA procedures and serves as an expert witness in criminal and civil trials.  Dr. Lacefield was presented this EXACT scenario and agreed, this is clearly a violation of the Required Use Rule. (Oh, and did I mention that Dr. Lacefield used to be the senior HUD investigator for the Texas region?)

Here is what I found on the Federal Register about this subject:

Required use means a situation in which a person's access to some distinct service, property, discount, rebate, or other economic incentive, or the person's ability to avoid an economic disincentive or penalty, is contingent upon the person using or failing to use a referred provider of settlement services. In order to qualify for the affiliated business exemption under § 3500.15, a settlement service provider may offer a combination of bona fide settlement services at a total price (net of the value of the associated discount, rebate, or other economic incentive) lower than the sum of the market prices of the individual settlement services and will not be found to have required the use of the settlement service providers as long as: (1) The use of any such combination is optional to the purchaser; and (2) the lower price for the combination is not made up by higher costs elsewhere in the settlement process. (See 73 FR 68239-68240)

I agree with Lenn's point about there being some good with the builder having a bit of control over the choice of lenders in order to get the homes built and sales closed.   However, I do not agree with the point she tries to make about efficiency (such as working with 50 different lenders on 50 different lots) nor do I agree that the "lender has been vetted by the builder."  In my area, most builders have either reps of the major locals banks that they have done business with or they (the builders) have their own lending arm.  In all instances, we all know that these lenders make compensation by SRP (service release premiums) that can go unchecked (unregulated.)

So in the spirit of the law, I should be allowed as a consumer to shop for better deals, yet still be able to get all the "perks" that the builder is offering regardless of which lender I choose.  In my particular case, i know that I was givien the highest possible rate, allowing my loan person (a CBA of my builder) to get the highest possible compensation.  THIS IS WHAT IS ILLEGAL AND HAS TO STOP.

Loan Officers, Mortgage People Unite - Start calling HUD and start educating Realtors and Builders.  And remember, the majority of RESPA complaints come from other real estate industry professionals that you work with every single day!!!

Comments, let me hear you.  I will also see what I can do about getting Dr. Lacefield back for a follow up interview!!!