Bribery to Work with the Builder’s Preferred Lender

When ever I’m working with a home buyer who may be considering new construction, I know I might lose them to the builder’s in house lender.   Often times the builder will offer an enticing credit to the buyer’s closing costs only if they obtain their financing from the builder’s preferred lender.   

How can having a Loan Originator (in this case, they are a retail sales mortgage person, or what ever Jillayne refers to them as  🙂  since they wait to be fed from the builder, often sitting at the construction site) who’s livelihood is supported by the Seller (i.e. the Builder) be in the Buyer’s best interest?    Who is looking out for whom?  How do you know the Loan Originator will not disclose the Buyer’s private information to the Builder if pressed?

Enough of my questions…here are some of my recent dealings with the Builder credit when working with the preferred lender.

The builder offered a $4000 closing costs credit when working with their lender.   After reviewing the builder’s lender (BL) good faith estimate (GFE), it was easy to see how they were doing this.    The rate being quoted for a 30 year fixed was 6.125% at a 1% origination and a 0.125% discount.   The actual current 30 year fixed rate that I would have quoted on that day was 5.875%.   The BL was getting over 1 point (over $2000) on the backend of the transaction.   Since the BL is a bank, the $2000 on the back did not show on the GFE.   My client did not have the Truth in Lending to provide me, so I don’t know if there was additional padding with any prepayment penalties to credit the lender.   If not, I am certain that the builder just increased his sales price by $2000 to fund the difference of the “buyer closing costs

152 thoughts on “Bribery to Work with the Builder’s Preferred Lender

  1. Is this similar to listing agents insisting on using their preferred Escrow service, which is often not known?

    If a buyer uses the title company for escrow services, he saves some money but often he has to go with what listing agents insists on.
    Poor seller doesn’t even know that this practice by listing agents sometimes ticks off some buyers.

  2. Rich, a difference with the builder is that they are offering a couple thousand dollars to the buyer to go with their lender trying to make it seem like a benefit when in fact, it may not be.

    Listing and selling agents will often both insist that their preferred title or escrow companies are used. Especially if there is an “arranged business relationship” as I wrote about at: http://www.mortgageporter.com/reportingfromseattle/2007/04/title_insurance.html

    Escrow services are often split 50/50 between the buyer and seller (unless it’s a builder–they often receive discounts).

  3. Hi Rhonda and Rich,

    Rhonda’s question about serving the best interests of the consumer is good one and raises the bigger issue of Affiliated Business Arrangements (which is what Rich is referring to.) Let’s save that topic for a different post. Do you want me to write it? I think I volunteered to write it a couple of weeks ago.

    I believe it is possible to serve the best interest of the client under AfBAs, IF done correctly. Many are not.

    Retail mortgage salespeople do not have any duty to put the client’s interests above their own, no matter who they work for: bank, broker, credit union, consumer finance company.

    Here is the direct quote from HUD.

    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.

    http://www.hud.gov/offices/hsg/sfh/res/resconsu.cfm
    Fourth question down from the top.

  4. Retail mortgage salespeople who have builder clients tell me the reason builders prefer to offer incentives to homebuyers, to work with the builder’s preferred lender, is because the builder wants the transaction to close. Builders do not want homebuyers ending up with an incompetent retail mortgage salesperson located at an out-of-state institution working with people who are not readily available by phone to all parties when needed.

    But that’s just what I hear. We need to hear from some builders and some preferred lenders of builders.

    Lenders give builders great rates and fees on their construction loans with the understanding that their retail mortgage salesperson will be able to be on site to have a fair shot at capturing some of the retail mortgage sales business.

    I say the way to compete is to educate the homebuyer like this, and show how the builder’s lender priced the loan, then show how your firm can compete….and why chosing a lender on who has the lowest rates and fees does not always make sense.

    Another way to compete is to solicit some builder clients and show them how your firm will better serve the consumer.
    🙂

  5. Thanks, Jillayne. I had a response that wound up in the RCG’s spam bin (I believe). With the first scenario, the consumer would have paid 0.125% more in discount/origination fees for a rate that was 0.25% higher than market to have the benefit of working with the builder’s lender.

    Many builders also require that the lender support their advertising cost, too.

    I love it when the buyer’s agent counters the offer with the same credit or lowers the cost of the home by the credit and uses the buyers LO vs the builders LO…the builder typically accepts the offer. They want to sell the house. IMHO, it has nothing to do with wanting the house to close and everything to do with having a LO under your control and in your pocket.

  6. I worked as a sales manager for a builder (Toll Brothers) for 4 years. We had specific incentives for buyers using our lender that we could not offer buyers using outside lenders. We were told the reasoning was, like Jillayne said, they want the buyers to close. Using a preferred lender keeps the buyers info in one place, and essentially gives the builder easy access to the status of the loan.

    Sounds good, right? Well, would the builder give so much in incentives just for this reason? Maybe, but it seems the lender and builder had their hands in each other’s pockets too. Both stood to make a few bucks off the closing.

    A buyer was allowed to bring a GFE from another lender, and our lender would try to match it, but it was always funny to me how our lender defended their higher rates by saying the outside lender wasn’t disclosing all the fees, and they would not see the outside lender’s hidden fees until closing. Always seemed like scare tactics to me, but it worked.

    Now that the market has cooled a bit, it appears the builders are a little more flexible with their incentives, regardless of the lender.

  7. Hi Tim, I just published a post at http://www.mortgageporter.com regarding the Seattle Times article (your first link). The LO is terrible and I’m glad they printed her name. I’ll bet she thinks it’s great publicity and will help her career. I feel so bad that the LO cannot make her mortgage payment in light of the correction in the subprime market…NOT.

    The home buyer, SWITCHED JOBS from a boring office job to a commission fitness trainer right after closing. Come on–gimme a break! And, as confusing as loan documents and overwhelming the purchase process can be (especially if you have a crappy LO) Home Buyers must make sure they understand what their mortgage program is and how it works. There is a financial accountability that seems to be lacking with some home buyers.

    This stuff frys me. 🙁

  8. We recently closed on a condo conversion where the unit became available because the previous purchaser could not close using a lender other than the “assigned” lender. There were no incentives to use the assigned lender, and the only issue was they could close where most could not. This is typically true of the first 1/3 or so of closings as other lenders won’t fund the first one with the rest of the development empty or rented.

    We in fact did not use the builder’s lender in the end, and did close, but it was a bear. Had the builder’s lender been satisfactory in that case, we would have used them. I always have the buyer get GFE’s from the builder’s lender and another lender. All things being equal, then the builder’s lender is the better way to go. 9 times out of 10 that is the case.

    A buyer’s agent has to be aware of any buyer weaknesses. Sometimes you do not want the seller’s services to know everything about the buyer, as that often (though not necessarily legal) is like telling the seller himself what the weaknesses of the buyer may be.

    As to Title and Escrow for resale properties, I am a firm believer in Seller picks Title and Buyer picks Escrow. I have ALWAYS had problems the few times we use “seller’s choice of escrow”. It’s not worth the $50 or so savings to use seller’s escrow on resale.

    New construction and condo conversions, the exact opposite. Better to use their Title and escrow unless there is some reason you can’t. Most often there is no property recorded yet, and the Title and Escrow Company who are recording each property for the first time are often the best to do that, given their experience and sometimes their need to package several closings in a block for funding purposes.

  9. Shaun, “A buyer was allowed to bring a GFE from another lender, and our lender would try to match it…”

    Often it is not fair to let the builder’s lender “match” someone else’s GFE as an “end run”. This just happened and it was like the lender saying “I was going to rip you off unless you held my feet to the fire. OK, you win”. Not good enough. He better BEAT it by an incentive difference at that point. Not fair to the other lender who “outed” his plan. That said, I find at least 80% of lender incentives to be true benefits to the buyer.

    I like Toll Brothers BTW. They are known mostly for their design work and I know them from the East Coast. While their designs may appear run of the mill at times, that is only because others copied them, and they always seem to be on the cutting edge of new trends. To this day I peek at Toll Brothers designs and finishes to see if anything is new and to test “fad changes”.

    Speaking of fad changes, be a bit wary of Travertine use.

  10. “How can having a Loan Originator who’s livelihood is supported by the Seller be in the Buyer’s best interest? Who is looking out for whom? ”

    Question for the realtors here –

    Replace “loan originator” with “buyers agent” in the above scenario
    and post the justification please.

  11. 1) No lender is supposed to represent the buyer’s best interests, whether associated with the builder or not.

    2) Unless the Buyer’s Agent is able to say “don’t buy here, let’s go look down the street for a better place”, they are not a buyer’s agent.

  12. Jillayne,
    How do you feel about this:

    “No lender is supposed to represent the buyer’s best interests, whether associated with the builder or not.”

    BTW, comment 3 has been rescued from the spam bin…thanks, Ardell! 🙂

  13. Rhonda,

    I’ll be interested in Jillayne’s answer as well. I think a huge part of the problem is the industry from the top has made it clear that lenders do not have this duty. When consumers are lulled into believing that lenders DO have this duty, they are not watching out for themselves the same way they would if they knew the real facts.

    When Jillayne gets around here, I’d like a review on agents. I remember this question being raised. Russ Cofano says licensees in WA do not have fiduciary duties, and so I agree that is the case. Someone asked if being a member of NAR (being a REALTOR) elevates the duties beyond statatory to fiduciary. Not sure if anyoe answered that one. I’d be most interested in that answer.

  14. Ardell, I emailed Jillayne to give her a heads up on my question…here is her response (all though, I’d love for her to comment more after class…hint hint, Jillayne):

    Hi R,

    I am currently on the Kingston ferry heading to Sequim to teach a mtg fraud class to 100 realtors.

    Fast answer:
    A corp has one main goal: to maximize profits within the bounds of the law.

    if the individuals within the corp do not hold professional status w/fiduciary duties, those individuals owe duties to their company to maximize profits (within the bounds of the law.)

    you can post this.

    I feel at odds with this because I truly believe that I do have duties to my clients whether it’s fiduciary or not. I don’t start my day thinking…how much money am I going to make for Mortgage Master today…it just doesn’t work for me. I’m more about helping people and providing advice. And yes, this does wind up providing me a paycheck but there are times when I’ve closed loans making very little if any or where I give advice all day long….provide GFEs to clients and never have a transaction come to fruition…which is the only way I make money for me or the company.

    The part of your question that got my wheels going was “No lender is supposed to represent the buyer’s best interests”…key word being represent.

    Am I reading too much into this? 😉 Like I do sometimes…what is an example of “represent”.

  15. Regarding real estate agents, WA law says “a licensee who works with a buyer ‘represents’ that buyer (unless they “represent they seller”).

    I don’t think anything or anyone charges the lender with the same duty.

  16. I recently had two deals with new construction.. On one the builder’s preferred lender offered no incentives but builder was pretty specific about not being reasonable if for some reason we needed more time to close.. On the other one they offered 15K in incentives.. to buy down rate and pay closing costs.. it was such a huge difference that we had to use in house mortgage.. They did not fund in house but acted as brokers just as other lenders in my area do.. long and short is buyer got a better rate and money toward closing but it’s been tough as loan agent doesn’t work in middle of week as he works weekends.. so everything seems to be moving slower then necessary..

  17. Thanks Rhonda and Ardell for your comments on choice of Escrow. to give an example, recently we across a property where listing agent was insisting on using his/her preferred escrow–“Truely Mobile Escrow”. Have you heard this name before?

  18. Rich,
    I have never heard of that escrow company. There are so many escrow companies out there…that my not knowing of them doesn’t mean much! 😉

    As a lender, I have my favorite closer to work with but when it’s a purchase, 99.9% of time, it’s designated on the purchase and sale agreement and I must abide by that.

    I wish I could choose who the escrow co. is more often!

  19. Rich,

    Haven’t heard of them. Do you know why the listing agent is so “insistent”? If it is simply because they are “mobile” and seller doesn’t have to “go to escrow”, most companies provide that service if they know far enough in advance that you want it.

    Why is the question, not who are they. All escrows are capable of closing escrow. I simply find that buyer should have their choice of escrow, but it’s not worth losing the house over.

  20. Rhonda,

    I say Seller’s choice Title, because Title is ordered when you list the property BEFORE the buyer is a known entity.

    I say Buyer’s choice of Escrow because 99 times out of 100, the buyer’s “stuff” is 15 to 20 times MORE than the seller’s “stuff”, AND seller choice escrow doesn’t usually do enough for “the other guy’s client”. AND I see them err in the seller’s favor on prorates an HOA charges.

    Reality is Seller equals listing agent and Buyer equals buyer’s agent, I agree. But still the principle holds that seller should NOT choose escrow (meaning listing agent).

    Fair is fair…one picks Title ;and the other picks Escrow. EVERY escrow company can be good for some and not for others. The agent that is “connected” to that escrow gets the service. Just how it is. Equal treatment is not the order of the day. Squeaky wheel only gets the grease if they are a repeat business contact OR if we come screaming OR with goodies OR both. I scream, client brings goodies 🙂

    I had one client of new construction who couldn’t get a signing appointment even though her condo was ready and her docs were in. Seller’s choice of escrow and they were scheduling her a week out. I told her to show up at 4:30 and sit in the lobby and refuse to leave, BUT to also bring them food because they would want to leave and go eat dinner. They ate her goodies during the signing and all worked out. If it were “buyer’s choice of escrow” that would not have been necessary. But all’s well that ends well.

  21. I am back in town.

    Regarding the choice of title and escrow:
    Title is buyer’s choice per RESPA.

    Regarding non-recourse loans, we would have to hear more from Seth. We mostly use a Deed of Trust in Washington State for residential loans. He may be referring to a state in which the primary document for residential loans is a “mortgage” in which the foreclosure proceeds judicially instead of non-judicially (like in WA State).

    Regarding Truely Mobile Escrow, They are licensed, but with a different spelling: “Truly.”

    https://fortress.wa.gov/dfi/licquery/dfi/licquery/getdetail.aspx?file=27841&LicN=540-EA-27841&N=

    Probe deeper into WHY the listing agent is INSISTING on using this escrow company. Find out specifically if this agent is receiving anything of value in return for referring clients to that escrow firm (other than a promise of fantastic service).

  22. Regarding Rhonda’s comment #16, some loan originators (like Rhonda) voluntarily act as if they are a fiduciary for a consumer (to put the client’s interests above one’s own interests.) No law is telling Rhonda she has to do this, she just DOES it.

    Represent: kind-of like being an agent for a consumer. You are acting as if you were a part of the consumer. The idea is that an average, random consumer does not know as much as a loan originator does when it comes to making mortgage loans. There is a power/knowledge imbalance. So to balance things out it is only fair (to use Ardell’s language) that the person with the greater knowledge and power act in the interest of the client because it is too easy for someone with MORE power and MORE knowledge to harm someone with less.

    A home is a BIG life purchase, not unlike law and medicine. I have been advocating for fiduciary duties owed by all retail mortgage salespeople (no matter where they work) for over 6 years.

    Think about the scales of justice; how we, as a group of people like things to be balanced and “fair.” When you represent someone, you are acting as a warrior, fighting on their behalf. You are an extention of that person. Like a body part.

    Rhonda, you are your client’s body part. LOL. We could have fun with that.

  23. Real estate agent duties are spelled out in each state’s agency law.

    Real estate agents who are also members of the Nat’l Assoc of Realtors owe fiduciary duties to clients. Refer to Code Provision number 11-2

    • Standard of Practice 11-2
    The obligations of the Code of Ethics in respect of real estate disciplines other than appraisal shall be interpreted and applied in accordance with the standards of competence and practice which clients and the public reasonably require to protect their rights and interests considering the complexity of the transaction, the availability of expert assistance, and, where the REALTOR® is an agent or subagent, the obligations of a fiduciary.

    http://www.realtor.org/mempolweb.nsf/pages/printable2007Code

  24. “Regarding the choice of title and escrow:
    Title is buyer’s choice per RESPA”

    I think title should be the buyer’s choice, after all, it is insuring their new home and if they have issues in the future, shouldn’t they be able to deal with the company of their choice?

    It’s interesting to me having a title background…we use to spend quite a bit of time trying to figure out how to put the control of who orders title in the listing agents hands…Form 17 was a major victory for our efforts. We were able to explain to listing agents why they need a prelim/TBD title upfront and selling agents seem to honor that.

    For a title company, at least in the past–I’ve been away from that field for over 7 years, there is a lot of effort put into the listing side (property profiles, comps, etc.).

    Since it’s a purchase and sale agreement…it’s all negotiable, isn’t it?

  25. Agreed Rhonda. It’s all negotiable. And it’s all about control.

    Tradition and the old adage “it’s just the way it is,” seems to be the driving force.

    I have to laugh sometimes at RESPA. If RESPA was enforced with any teeth, transactions would be slowed a tad until people became familiar with how to work within its framework. In lending, new TIL’s would have to be drafted due to re-disclosure rules actually being enforced, etc..

    In my opinion, there should not be ANY reference to title and escrow in the NWMLS. The title companies enjoy free advertising and its a way for the sales reps to “carve” out their territory per se with the agents. Same goes for advertising in the real estate magazines. If they want to advertise have them buy their own space on their own page.

    Buyers should ask themselves why they are paying such a premium for insuring new construction: where’s the chain of title? who could make a claim in the traditional sense for a title problem?

  26. I was a very strong title rep in SW King County “back in the day”. I balked at paying for advertising in magazines with agents. (I think I had one ad many moons ago and I use to advertise my agent network group and agents paid me!). When a rep pays for advertising, they can be bumped by the next rep who’s willing to shell out a few more bones for the ad space or buy a bigger ad space. It’s the worst way for a title rep to do business.

    IMHO, if a title company has provided a commitment for the listing agent, it should be used (as the current trend is). There is a cost involved in producing the title commitment and when they’re cancelled, it’s a loss to the title company which is factored into the premiums consumers pay.

    The buyers policy is the most affordable since it’s “simultaneous issue” as compared to what the seller pays. And new construction is a higher risk policy for the title insurer due to mechanics liens (from the builder not paying sub-contractors).

  27. Jillayne said: “Regarding the choice of title and escrow:
    Title is buyer’s choice per RESPA.”

    I am 99.9% positive that is not a correct statement.

  28. RESPA is a very complex piece of legislation with many sections. Mostly we know it as the “anti kickback” legislation. Title Ins. is addressed in Section 9 of RESPA.

    In the Seattle area, I vividly remember the time that we switched from soliciting business from selling agents, who represent the buyer, to listing agents, who represent the seller. It was the time when title reps shifted from working for salary, to working on 100% commission. A rtitle rep could lock up a transaction by having the listing agent open title. This was 1988, 1989.

    http://www.hud.gov/offices/hsg/sfh/res/respamor.cfm

    scroll down to “Details about RESPA”
    Number 2.

    It’s near the top of the page.

    “2. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.”

  29. “In the Seattle area, I vividly remember the time that we switched from soliciting business from selling agents, who represent the buyer, to listing agents, who represent the seller. It was the time when title reps shifted from working for salary, to working on 100% commission. A rtitle rep could lock up a transaction by having the listing agent open title. This was 1988, 1989”

    Hmmm….that’s when I left Chicago Title (then salaried) to work at Transamerica Title (to be paid commission). The county manager could not believe I would leave CTI after years of being an underpaid rep (it took 3 long days of smoozy meetings in the Columbia Tower Club)! I received phone calls after I left from my former co-workers at CTI THANKING me for quitting…they changed how they paid the title reps! 🙂

    Some days I feel like such an ol’ timer!

  30. Title and Escrow and RESPA and who pays and who picks requires an understanding of the differences State to State.

    In States where there is no escrow and buyer and lender’s Title Insurance is one all inclusive policy, Buyer’s Choice is the norm, regardless of who pays for it.

    On the East Coast “Title” IS “Escrow”, there is no separate escrow process, so Title is most often chosen by buyer.

    On the East Coast there is an actual Title Abstract and full chain of owners done, unlike West Coast. West Coast, instead of reviewing the chain, has sellers offer and guarantee to buyer “clear title” via the “owner’s policy”. It is HOW the SELLER conveys clear title, and so is ordered by and paid for by the seller and is normally seller’s choice as it falls back on the seller if clear title is not conveyed.

    Lender’s Title is paid for the buyer ONLY if the property is financed. If it is a cash deal, buyer does not pay for Title Insurance under standard contracts.

    Choosing Title and or Escrow should be “buyer’s choice” IF we are talking about WHERE the buyer SIGNS their loan documents. That procedure should be handled by someone chosen and hired by the buyer. Here that means escrow. On East Coast that mans Title.

    RESPA does NOT REQUIRE that the buyer choose Title. That was a mis-statement. Though RESPA does prevent the seller from “forcing” a Title Company on the buyer, it does not preclude the seller from selecting the Title Company, as long as all parties agree in writing. I believe RESPA also has a provision for if Seller picks seller should pay…checking that.

    RESPA is very easy to enforce. Enforcing what people “THINK” RESPA says, is not, because RESPA does not say what some think it says.

    RESPA does not say a lender can’t take an entire real estate office to Vegas or Hawaii. RESPA says a lender can’t take two agents in the office who give them business to Vegas or Hawaii and not all of the other agents in the office who don’t give them business. Hawaii’s a stretch…but Vegas?? Maybe not 🙂

  31. RESPA would be an interesting topic for a post (not one that I’m up to tackling)… I’m not sure that I can take an entire office…I know I can’t take the one’s that I work with. And, I cannot do anything with expections of referral business.

    I’m not even allowed to give a starbucks coffee card to say “thanks for the referral” to a past client or an agent. I’m sorry…but I think some parts of RESPA are stupid.

  32. Rhonda,

    RESPA permits any amount of money to be spent to promote your business, and NOT A DIME to be spent to REWARD someone for giving you business.  Pretty simple.

    You can take me to lunch since I have never given you business, to try to get me to give you business. But once I started giving you business, you could not take me to lunch anymore to thank me for that business.  I keep it simple.  I made YOU lunch 🙂

    RESPA is SO not “stupid”. Here’s their general thinking. If I use you 6 times to assist my clients and you become non-compeititve one day. Often vendors will give BEST deals to get business and then become LESS competitive once they feel like they are “a shoe in”. RESPA never wants an agent to have second thoughts about switching professionals to BEST FOR CLIENT because the feel “obligated” as a result of “gifts”.

    No loyalty allowed when it comes to ancillary service providers. Regardless of whether it is Lender or Title or Escrow, if you are not best choice for THIS client, then there is just no room for decisions based on loyalty factors and RESPA views “gifts” of thanks or reward as a means of garnering loyalty.

    How does one prove that the lunch was to promote the Company’s business and NOT to thank the agent for prior business. If they never ever did business with you in the past…that’s easy.

    Seriously, do I need the $5.00 Starbucks card when it is not permitted? I used to get them in the mail from my previous Title Rep and I would give them to people who needed a cup of coffee and couldn’t readily afford to buy one. Now I use a different Title Company.

    A Title Rep can bring me a brochure box with THEIR name on it and hope I use it to promote THEM. They can’t bring me one with MY name on it or NO name on it. It’s not stupid and it’s not hard.

  33. Hi Ardell,

    Can you please provide source links for your statements?

    Here is my source link:
    http://www.hud.gov/offices/hsg/sfh/res/resp2608.cfm

    CHAPTER 27–REAL ESTATE SETTLEMENT PROCEDURES

    Sec. 2608. Title companies; liability of seller

    (a) No seller of property that will be purchased with the assistance
    of a federally related mortgage loan shall require directly or
    indirectly, as a condition to selling the property, that title insurance
    covering the property be purchased by the buyer from any particular
    title company.
    (b) Any seller who violates the provisions of subsection (a) of this
    section shall be liable to the buyer in an amount equal to three times
    all charges made for such title insurance.

    And from this page:
    http://www.hud.gov/offices/hsg/sfh/res/resindus.cfm
    scroll down to numbers 16 and 17

    16. Can a lender set up a contest for real estate agents under which the agent who provides the lender with the most business will win a trip to Hawaii?
    A: No. Under RESPA, the trip itself, and even the opportunity to win the trip, would be a thing of value given in exchange for the referral of business.

    17. Can a lender give a borrower an incentive, such as a chance to win a trip or a rebate, for doing business with the lender?
    A: RESPA does not prohibit a lender or other settlement provider from giving the borrower an incentive for doing business with it as long as the incentive is not based on the borrower referring business to the lender.

    Regarding title insurance companies, they have their own state insurance commissioner guidelines regarding how much money they can spend per year on their clients (Realtors, etc.) aand taking agents on trips does not bode well with state insurance commissioners.

    Back to federal law, RESPA Section 8 helps us understand that the reason our federal government does not want vendors to take agents to vegas or hawaii is because the person who ultimately pays for the trip is……

    …….the consumer, in the form of higher fees.

  34. I think RESPA is misunderstood and many professionals (lenders, title, agents) feel like they have a grasp on it and everyone else is wrong. I’ve had agents tell me that if they provide me with a 1003, I owe them a commission. It’s not that simple (at least that’s my understanding).

    “some parts of RESPA are stupid” is what I stated (emphasis on “some”, please). I stand by that. I think there is nothing harmful if I were to provide a $5 coffee coupon to someone to say “thanks for thinking of me when Mr. and Mrs. Jones needed mortgage advice”.

    I don’t believe that a title rep can provide flyer boxes to an agent because the agent DOES NOT work with that rep. If the box is given with expectations of receiving business from the agent, that’s a RESPA violation (or at least, my understanding of it).

  35. “You can take me to lunch since I have never given you business, to try to get me to give you business. But once I started giving you business, you could not take me to lunch anymore to thank me for that business”

    I believe (Jillayne, help me out here) that I can go out to lunch with agents when we work together as long as we’re talking about business, such as new loan programs, etc. and as long as the lunch is not a fancy woo-woo thanks for all of the buyers you give to me.

  36. Rhonda,

    As long as you can look in the mirror and say I did that to promote my business and not to cause the agent to feel obligated to me in any way…you can do it.

  37. “RESPA does not prohibit a lender or other settlement provider from giving the borrower an incentive for doing business with it as long as the incentive is not based on the borrower referring business to the lender.”

    Jillayne,

    We should have a face to face on RESPA sometime, but see above re trip to Hawaii. A lender can take an entire company to Hawaii who has never given them business, because it could not be misconstrued as a “kickback” since there was no business received to kick back from. If they never get any business from that company as a result of the trip, there is clearly no violation.

    A business can spend any amount of money to promote their business. They can’t spend a dime to garner loyalty or to thank someone for business.

    Most companies just say NO because it’s harder to figure out what RESPA is actually saying than it is to just say NO. Not a bad policy by the way from the Broker’s standpoint. Still can’t figure out how the provide lunches for Broker’s Open Houses in some areas. Some do it right and some do it wrong so from a Broker standpoint, “Just Say No” is best, but not the law.

  38. Rhonda,

    If the box advertises the Title Company they can do that. The Title Company can give you 8,000 pens to give to all of your clients with their company name and phone number. They can’t give you one pen with your name and your phone number.

    I think it’s pretty simple…but apparently not as simple as I thought.

    Promote Title Company…all OK. Promote agent or thank agent (even with a $5.00 Starbucks card) NO.

  39. Jillayne,

    They can’t “require” it but they can negotiate it. Once buyer agrees it is not a “requirement” of the seller…it is a requirement of the agreement.

    In the case of new condos in a huge building and condo conversions, sometimes no other lender can do it for the first one except the builder’s lender. So it becomes a condition of being able to close. Not sure about Title Company on that one. A lender often will not fund a loan on one unit of a building with 100 other unoccupied properties, which forces you to use that lender or wait for a “block” of closings. But if you want first pick and you want to close ASAP, sometimes you have to use their lender. Not sure about Title’s reluctance to insure or not on the same basis.

  40. Oftens a broker or correspondent lender CAN close when a condo does not yet have FNMA approval. 😉 It’s actually kind of fun…I do the loan and sell it to the condo’s lender after closing and I get to keep my client.

  41. Remember to separate out title insurance companies (and their state guidelines) from lenders.

    http://www.hud.gov/offices/hsg/sfh/res/respamor.cfm#HT

    Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan.

    So Rhonda, go ahead and take a Realtor to lunch, but that thing of value (the fancy lunch) cannot be exchanged for a deal.

    Obviously, reciprocity is implied when we take clients to lunch. However, we don’t want to say to a Realtor: Each time you refer a closed transaction my way, I will take you to a swanky restaurant for a fine dining experience.

    Talking about services over lunch is common and ordinary and happens every day. It fuels the local economy. Don’t stop doing that! Our fed government just doesn’t want us exchanging deals for a lunch.

    Really, who are we kidding? Lunches are not the problem in the industry. It is the large, expensive, ongoing, expected items of value that don’t make sense for the consumer….because the consumer is the one who pays for these things in the form of higher fees.

    Right now in California, their insurance commissioner is considering limiting title insurance company premiums because of the rampant, ongoing problems of high premiums, low claims payouts, coupled with millions of dollars in money changing hands between title companies and Realtors.

    But don’t get me started. I have to prepare for a class tomorrow.

    A longer post on Affiliated Business Arrangements is overdue.

    Which should I write first?

    1) Conclusion to my four part series on the Subprime Meltdown
    2) Reasons for and Reasons against different types of lending institutions (very important right now with Bank of America’s new promotion being heavily promoted)
    3) How to commit a RESPA violation and get away with it legally: An introduction to AfBAs.

  42. Jillayne, even though the subprime issue I’m tired of (not your post…just the whole enchilada)…sounds like you have your next 3 post all lined up in that order! 😉

    I would love to see a GFE on BOAs new program to see if any costs are “priced in” to the rate…nothing is free.

  43. CHAPTER 27–REAL ESTATE SETTLEMENT PROCEDURES

    Sec. 2608. Title companies; liability of seller

    (a) No seller of property that will be purchased with the assistance
    of a federally related mortgage loan shall require directly or
    indirectly, as a condition to selling the property, that title insurance
    covering the property be purchased by the buyer from any particular
    title company.
    (b) Any seller who violates the provisions of subsection (a) of this
    section shall be liable to the buyer in an amount equal to three times
    all charges made for such title insurance.

    ————————–

    Take a meander through ANY MLS and see agents listing comments that say: “title/escrow to be through ……First American (Pacific NW Title, Talon Group), Fidelity Title (Chicago Title, Ticor Title), Land America (Transnation, Commonwealth, Lawyers) etc… Golly, who’s got the market wrapped up? Lot’s of competition when consumers are essentially dealing with three major insurance providers operating under different nameplates.

    Blatant abuse in my opinion. Maybe Mike Kreidler down in Olympia should have subpoenaed the NWMLS to have a look.

  44. Tim,

    Agent orders Title before they list a property. Should that be “free”?? Buyer can’t participate at that point because buyer is an unknown. Then listing agent ASKS that Title be the one who already worked on it, and I agree that is a fair request, unless reason not to. but NOT as to escrow.

    Should be sellers choice of Title and buyers choice of escrow.

    What does RESPA say about Escrow? Maybe not much because where the law was written Title IS closing agent. Here we have to use a little more common sense and say buyer can’t pick Title because Title was already ordered before buyer was a known entity and buyer picks escrow.

    Only other answer is Title has to offer a fee for service rate of ordering Title prior to listing to be charged to seller, and not wrap it into one package.

    But the way it exists now, I see no other fair way to handle it. Title Companies should not have to work for free and we can’t list a property without ordering Title first.

  45. Pingback: Real Central VA - Tracking the Charlottesville and Central VA real estate market and more » Thursday links - 05-09-2007

  46. Agents should not order a preliminary title before they list the property.

    They order property information records, sometimes called a “listing package” which consists of data from Metroscan and a copy of the last conveying deed such as a Warranty Deed, in order to obtain the legal description needed for the listing paperwork.

    Go ahead and order all the preliminary titles you want, but if a buyer wants to direct title at the point of sale, then buyer gets to direct title.

    Yes, there is a title cancellation fee
    No, title companies do not charge or enforce this, which is their own fault.

    Title companies LIKE IT that listing agents order title at the beginning of the transaction because it gives the selling agent the impression that title is already wrapped up, and it’s a non-negotiable point.

    Really, though, this is mostly about power negotiations between the REAL ESTATE AGENTS. By this I mean, if the listing agent has title already chosen, then the selling agent has the power to direct escrow.

    This should go away. Why? Because on a foundational level, real estate agent-directed title and escrow serves the real estate agent (by whatever kickbacks they are receiving) and not the consumer.

    Consumers; sellers and buyers, should choose title and escrow based on good rates, good service and timely payment or resolution of claims.

    New business strategy for title and escrow companies: start selling your services to buyers and sellers.

    Historically, it has been too expensive to conduct this kind of marketing so title and escrow companies take the easier route and sell to people with the power to direct business: lenders and real estate agents…..and builders.

  47. “Yes, there is a title cancellation fee
    No, title companies do not charge or enforce this, which is their own fault.”

    I think this is changing…title companies do have to attempt to collect on cancelled titles. Plus, even when I was in title ins., when we noticed a patern of cancellations from a particular agent, we did not encourage that relationship to continue. It’s not beneficial to the company.

    If the buyer starts directing titles and cancellations increase, title companies will react and change how they do business. Whether that means they do a report specifically for the Form 17 for a fee upfront or they just stop doing TBD’s…is left to be seen.

    Even our RCG attorneys have commented on their last posts the importance of ordering title prelims due to Form 17.

  48. Questions:

    1) how do agents differentiate between title companies? Is it the “great service?” Generally, no. Agents receive no title insurance service in the line of work and do not pay the premium for insurance. Their customer does. Agents do receive marketing information, CMA supplements, are taken to lunch, postcards, farming stuff that agents are supposed to pay for (theoretically)etc…

    2) When was the last time an agent’s client, said, “boy, I sure received great service from Ticor Title.” Never. That would probably put a “huh?” question mark on the face of the agent.

    3) When was the last time you had a Title sales rep talk to the principle that paid for the service and premium? NEVER.

    If I took a random sample of 10 agents (even loan officers), probably 8 of them would not be able to differentiate between First American, Stewart or Chicago, for example. Can Legacy Escrow Service, Inc. or any other independent tell you the difference? Absolutely, because we work hand in hand with title providers and back office staff all day long. Agents only know title reps, who’s sole job is to influence and win the agents referral of their clients.

    Agents don’t work with the gears that turn the wheel behind the scenes. None of this I understood until Lynlee and I opened our office. Lots of things became very clear.

    I’m not calling out title companies or agents, only opening up the idea that RESPA is supposed to protect the consumer, but the industry at large seems to have little teeth.

    Today, even when title companies can’t stay out of the news due to alleged kickback issues and captive reinsurance shams, they pay the “toll fee” and it’s back to business.

  49. My response post got lost. Rats.

    Anyway, Yes, Rhonda, frequently, but we ask them to insert “preferred.” Whether they do it or not I can’t control.

    True story: One of the loan officers we work with on a semi-regular basis had a client come in while I was in their office. The LO was explaining the quick version of the loan process and indicated that the service providers he worked with were XYZ. The LO was very careful with words because the LO knew I was listening (like i’m the police or something, it cracked me up) Anyway, what the LO was suprised to hear from me was that while I was happy that they mentioned me I interjected directly to the borrower that they should do shopping and that they were not obligated to use Legacy Escrow Service, Inc.

  50. Jillayne,

    There’s a lot more to Title than “insurance”. Identifying liens, encroachments and easements is NOT something you want to do AFTER the buyer is in contract.

  51. Yes, I completely agree with you. Most of the title work is done before the insurance policy is issued.

    In fact, if a title company does it’s job properly, the chance of paying out a claim on the policy is very, very low.

    The premium really goes to pay for all the work done before the policy is issued.

    It might be wiser for title companies to move away from insurance commissioner oversight and to instead just sell a product that spits out a computerized title status report. You could call it an Assurance report (v. an Insurance policy)

    Now the home seller can purchase this when the home goes on the market to show to the buyer. If they buyer’s lender requires a title insurance policy, perhaps the lender will self-insure, since title insurance claims payouts are so low.

    But how did we get on this subject when we’re suppose to be talking about builders and their preferred lenders?
    🙂

  52. It’s amazing how posts can take on a personality of their own! We don’t seem to have many builders or builder fed lenders commenting either.

    I could do an entire post about one of my personal purchases with a “major” builder who made me use their lender and title co… I just might… I’ll have to think of a creative name for the builder…. 🙂

    I could totally see title insurance companies developing a report for listings (such as the reports they have for limited title/second mortgages) and maybe charging similar fees ($100 – $200). Then there are no cancellation fees and everything is fair. If the buyer stays with the title company for the listing, the pre-title fee is credited.

    Wow, Jillayne, between our “title pasts” we’ve fixed everything!

    But…I would have loved to hear more about the builder/lender relationship.

    Specifically that the buyer credit is a result of increased rates or jacked up sales price….

  53. Many people get great deals from builder lenders. I myself have. There are just as many good and bad deals with builder lenders as with the rest of the industry.

    A builder is a seller with a product. Everying is negotiable. Negotiable sometimes means ‘You want this house…here’s what you gotta do”. But being forced to use a lender on a single family house? All you have to do is show up with the money from your own lender. Run one up the side if you have to. Then close.

  54. Ardell, I would say that is the perfect “closing comment” on this post. It is all negotiable, What a way to sum this up! However, I do really recommend that buyers get a GFE from the Builder’s LO and let their LO have a chance to review it. I’ve been amazed at how many times the “builder deal” is easy to match!

  55. “Retail mortgage salespeople who have builder clients tell me the reason builders prefer to offer incentives to homebuyers, to work with the builder’s preferred lender, is because the builder wants the transaction to close.”

    Jillayne and I agree on this issue. The couple of “points” they offer as incentive can best be described as an “insurance policy” for closing.

    “However, I do really recommend that buyers get a GFE from the Builder’s LO and let their LO have a chance to review it.”

    Rhonda’s closing comment makes complete sense.

  56. In your first scenario of a $4000 closing cost credit—-did you ask the preferred lender to give you a qoute at the rate you were qouting….ie 5.875 @ 3 pts……if you wanted to compare apples to apples with program, rate, and then lender fees then this should have been your starting point. I bet you would have found that even at 5.875%, the preferred lender still had lower “net” lender fees—once you factor in the closing cost credit.

    I work for a builder’s preferred lender, as an originator, and have for about 10 years—three builder’s preferred lenders in total. The builder offers an incentive out of its own profit from the sales price because at the end of the day it saves the builder money by doint so.

    – The builder’s agents do not have to manage 50 escrows by calling on 50 different lenders/brokers. Thus, a preferred lender ensures timely closings.
    – The buyer has a solid loan approval within 30-days of contract, whereas outsider lenders might drop the ball by procrastinating until the escrow is ready to close
    -Many of the incentives are tied to options/upgrades and it does not cost the builder that same amount of money in cash to offer that incentive. Example, a $5,000 design center credit may only cost the builder $2,000 to install those options.

    In regards to the preferred lenders being competitive or not, it has been my experience with all three builder’s preferred lenders that I have worked for that they are all very competitive with repect to lender fees, programs, rates, and with the incentive factored in. Most preferred lenders are correspondent lenders or banks becuase this allows them to have control over the whole process with processing, underwriting, and funding of the loan—once again to ensure a timely closing. Are they going to do loans for one point like a loan officer who makes a 60-80% split with their broker…..Definitely not. Most make about 1.5%-2.0% on any loan, but they are corresondent lenders and banks which generally means that they are going to get a lot more rebate on a loan then a broker would for the same rate due to servicing release premiums. A broker might qoute 6.0% and make a point on the back where as a preferred lender can qoute the same and be making a point and a half on the back.

    As an originator, I always tell my clients to bring me good faith estimates to me so that we can compare apples to apples. Most of the time, we find that they are saving money. I will admit that I often have to charge more points than a broker might in order to get the same rate, however once you factor in the credit the total net lender fees are still less using us. It may be that we have a $5000 closing cost credit and that we have to use $2000 of it to get the same rate as the outside lender, but at the end of the day the buyer is still saving $3000 more than if they used their outside lender.

    In most cases, when the buyer compares apples to apples with the outside lender and preferred lender, they will see that they save money using the preferred lender. It depends on the incentive from the builder, but if their is a closing cost credit then in most cases the preferred lender will be just a little bit better. So how is that not looking at the best interest of the buyers?

  57. Jason, I did compare the “preferred lenders” GFE nickle to nickle. 6.125% was at 1.125% with the builder’s lender. That day, 5.875% was at 1% with me. The other costs were pretty comparable.

    How is it looking in the best interest of the buyer? The buyer should be able to chose the lender they want to work with. Many builders will down right refuse to allow this. This practice doesn’t even seem like it should be legal IMHO. IT’S THE BUYER’S CHOICE.

    The buyer does have the right to compare lenders. My point in these examples that I recently dealt with, the builder’s lender was not better. And, I have had times when the selling agent bumped down the price or kept the price the same and asked the builder for the credit while keeping the buyer with me, and THE BUILDER AGREED.

    “Outside Lender” is your view. When I am the Mortgage Professional who has been counseling the buyer and helping them select a program best suited for their needs…sometimes working with them for months…just to have a BUILDER BRIBE them…it’s wrong. If the deal is truly better, I can accept it. As I mentioned, lately that has not been the case. I don’t feel that I’m the “Outside Lender” when I’m the one with the relationship with the buyer. The builder’s LO has their client bought and paid for…bribed.

    $4000 credit at a higher interest rate and origination from the loan officer? The credit was padded in the LOs rebate on the back end.

    Is that in the buyer’s best interest?

    The second scenario, the builder’s lender had limited products (they are a bank), and this builder would not give the closing cost credit to the buyer. My buyer elected to stick with me for the better program and lower payments.

    Is that in the buyer’s best interest?

  58. Pingback: Builders Lenders Bribing Buyers « Fredericksburg’s Real Estate Voice

  59. I was thinking in this downward market that one of the reasons builder wants you to use their preferred lender is so that the loan and subsequent home appraisal will all be approved for the sale price (even though an actual unbiased appraisal may show otherwise). Example: the home sales price the builder is asking for the home is $500k, however the home is really only worth $450k. Appraiser (who most likely has some kind of relationship with the Builder’s preferred lender) is “encouraged” to make sure the home appraises at the $500k sales price so the loan will go through. In effect netting the builder $50k more than the home is really worth.

  60. Pingback: Builders Lenders Bribing Buyers | Fredericksburg Real Estate

  61. Pingback: Georgetown, Texas Real Estate Blog » Blog Archive » Bribery to Work with the Builder’s Preferred Realtor

  62. Good post Rhonda, You inspired me to write a follow up blog to this entitled “Bribery to Work with the Builder’s Realtor” Something that has been on my mind for the past 2 weeks.

    Now the shoe is on the other foot and I know how the lenders feel! I proposed a different type of Preferred Realtor Program that would cooperate and not compete with the real estate community. I wonder if the same can be done effectively for the lender programs.

    Edward

  63. Thanks, Edward! It’s amazing how people are not able to see through how the homes are priced factoring in all of the great bells, whistles and rebates–while the buyer is paying for it.

Leave a Reply