The NAHB and 34 members and affiliated companies have filed suit in federal district court in Virginia against the U.S. Department of Housing and Urban Development (HUD) and HUD Secretary Steve Preston. The suit challenges HUD’s impending ban on builders being able to offer customers incentives for using affiliated lenders, which will no longer be allowed as of mid-January.

“NAHB did not pursue this course lightly, but had little choice because HUD’s rule goes into effect on Jan. 16,” NAHB president and chief executive officer Jerry Howard said in a statement. “We are optimistic that the matter will be resolved swiftly, so home builders can help drive the nation’s economy forward in the new year.”

The suit, whose plaintiffs include some of the nation’s largest home builders, asks the court to prevent HUD from enforcing the rule, calling it “arbitrary, capricious and contrary to law,” and asks for a preliminary injunction preventing its implementation until the case is resolved. 

According to the suit, the new rule overturns 16 years of Real Estate Settlement Procedures Act (RESPA) law that allowed builders to offer buyers incentives for using affiliated lenders.

“The final rule, which becomes effective Jan. 16, 2009, is contrary to law because the plain language of RESPA’s affiliated-business-arrangement exemption specifically states that these types of arrangements, as long as they follow certain restrictions, are not to be prohibited,” the suit says (emphasis included in the complaint). “Indeed, HUD has endorsed home builder incentive programs, providing direct advice that these programs are legally permissible under RESPA.”

While officials at HUD maintain that it passed the rule to protect consumers, the suit claims that it actually harms them by “eliminating from a home buyer’s pool of options the opportunity to take advantage of incentives offered by the home builders in exchange for the customer’s use of their affiliated mortgage lenders. The only explanation HUD has offered for this is its conjecture that government, rather than the consumer, is in the best position to determine whether a package deal is a good one for the consumer.”

As a practical consequence of the new rule, the suit claims that builders will be able offer incentives to use an unaffiliated lender, but not their own. “Ironically, a home builder can actually require the use of the non-affiliated lender,” the plaintiffs argue.

“As the American people struggle through the worst recession in years, the federal government must take responsible action to stimulate housing production and provide meaningful incentives to get consumers back into the housing market,” Howard said. “HUD’s new rule hinders those objectives. …This rule is bad for consumers, bad for the housing industry, and bad for the economy.”

Pat Curry is senior editor, sales and marketing, at BUILDER magazine.