When Housing and Urban Development Secretary Steve Preston announced the department’s “long-anticipated mortgage reforms” on Nov. 12, he said the changes to the Real Estate Settlement Procedures Act (RESPA) would help consumers to shop for the lowest cost mortgage, avoid costly and potentially harmful loans, and save hundreds of dollars at the closing table.
One provision of the reform bill was largely overlooked--the fact sheet on the final changes to the rules made no mention of it--was the section on ‘required use’, which starts on page 33 of the document. Under the new rule, which takes effect Jan. 16, builders no longer will be able to offer home buyers incentives, such as a guaranteed interest rate on a mortgage, for using an affiliated mortgage company.
“The statute says that no party can require a home buyer to use the services of another,” says Bill Renner, director of single-family finance for the National Association of Home Builders. “What HUD has taken that to mean for last 15 to 20 years is that builders can offer an incentive for the use of an affiliated mortgage company. What HUD has said is that effective Jan. 16, builders won’t be able to do that. It’s illegal.”
A coalition of large and medium-sized builders are working with NAHB to figure out what, if any action, the organization might take, Renner says. A lawsuit is among the options being considered, with a decision being reached as soon as next week.
Marketing and mortgages 'needed a de-linking'
Barton Shapiro, deputy director for HUD’s office of RESPA and interstate land sales, says that HUD “does not interpret RESPA from prohibiting anyone from offering incentives. It limits tying an incentive to using an affiliated lender. HUD believes customers will use (affiliated lenders) if there’s real value.”
In its broadest sense, the statute is designed for consumer protection and to encourage shopping at the earliest stage of the transaction, Shapiro says. Among the comments that HUD received when it was reviewing the law was that the discounts offered to borrowers using affiliated lenders were made up in higher costs elsewhere in the process, and that borrowers were put into more expensive or riskier loans.
“What goes on currently with these incentives is that they are tying the sale of the house to the use of affiliates so people will be dazzled and won't look elsewhere,” Shapiro says. “There’s no real way to see if there is a benefit. … We needed a de-linking of the marketing of the house from the use of affiliates if we were ever going to encourage shopping for mortgages.”
Chuck Shinn, president of nationally recognized Shinn Consulting in Littleton, Colo., says that the use of affiliated lenders are a best practice that he recommends to builders as a way to make the home-buying process easier for customers. “The more we can take care of all the needs of the customer, the better off we are and the better off the customer is,” Shinn says.
To a certain extent, though, Shinn says, builders have brought the new rule on themselves through abuses over the past years. “Were there kickbacks and other things that were going on? Yeah,” Shinn says. “Did we as an industry abuse that relationship? Probably.”
Gil Rudolph, co-chair of the financial institutions practice at Miami-based law firm Greenberg Traurig says the required use section of the statute was “thrown in there to deal with perceived abuses. The mortgage brokers and lenders were clearly winners here. The losers definitely are the home builders when it comes to the required use provision.”
Affiliated lenders help builders, borrowers
Builders say the use of affiliated lenders offer real value to home buyers, both in terms of better interest rates and the ability to lock in a closing date. Vern McKown, president of Ideal Homes in Tulsa, Okla., says he’s had two quarters in which his company missed 100 percent of its closing dates using third-party mortgage companies. His customer satisfaction scores are about 2 points lower with customers who use outside lenders. "It’s about that missed closing,” he says. “It becomes a giant blame game,” McKown says. “The customer doesn’t care whose fault it is. They’re just aggravated they can’t move in. I have seen customers sit in the lobby for hours waiting to close; those people were mad at everybody. The whole experience is a nightmare.”
For the builders themselves, the incentives to use affiliated lenders help reduce cancellations because they know the buyers are pre-qualified, the paperwork will be complete, and closings will happen on time. They’ve also been a powerful sales tool that helped them survive this year's difficult housing market.
“We ran promotions on interest-rate buy downs all year,” says Kim Shelpman, CEO of Melbourne, Fla.-based Holiday Builders. “With the new rule, I can’t guarantee 5-percent mortgages anymore. I can’t buy a commitment. I have to offer it to everyone.”
That may not necessarily be the way the rule plays out, Shapiro says. HUD makes a clear distinction between affiliated lenders and preferred lenders. The department currently is working on guidance for the required use rule; builders with in-house mortgage divisions may be able to work with a small group of preferred lenders, offering guaranteed interest rates through all of them.
“If you had an affiliated lender and a group of preferred lenders, would that promote shopping? We’re still fleshing that out,” Shapiro says. “We want to promote innovation. We don’t want the rule to get in the way. It is our goal to get some guidance out by the effective date. It’s just taking some time.”
Assuming that the rule does going into effect as planned, builders can continue to offer incentives linked to the use of affiliated lenders on any contracts signed through Jan. 15, even though the closings may take place after that date, Shapiro says. Between now and Jan. 16, builders need to educate themselves and make some preparations, Rudolph says. He put together this alert on the basics of the new rule, and how it impacts home builders.
“We’ve got a one-month window still, but there’s work to be done on contracts, a lot of new training to be done, and you better look at your advertising,” he says. “These are all things that have to be looked at very, very carefully. You can still offer incentives to people to buy a home. You just can’t direct them to an affiliated settlement provider.”
Pat Curry is senior editor, marketing, at BUILDER magazine.