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HUD Coming Down on Builder Affiliate Referrals

Agency seeks comment on RESPA issue

June 3, 2010

By staff

The U.S. Department of Housing and Urban Development plans to step up enforcement against builders and other firms that violate the Real Estate Settlement Procedures Act prohibition against the required use of affiliated settlement service providers.

The housing agency disclosed its intentions in a public filing today.

According to HUD, it is seeking public comment on how it might strengthen and clarify RESPA's prohibition "from an array of sources with experience or knowledge of affiliated business arrangements."

"It is our intent to keep an open mind on how to approach this vexing question over what is, and what is not, 'required use,'" Federal Housing Administration Commissioner David Stevens said in today's statement. "Clearly, consumers are complaining that they are being presented offers they believe they can't refuse and are essentially being required to use certain affiliated service providers."

HUD explained that it is a RESPA violation to require a prospective borrower to use a particular mortgage lender, title company, or other settlement service provider that is affiliated with another business in their mortgage transaction.

Any package discounts offered to homebuyers must be optional, must be a true discount below available prices and must not be made up by higher costs elsewhere in the settlement process.

HUD zeroed in on builders, which it says have generated complaints because they are in a position to refer settlement service business to their affiliated mortgage and title companies. Examples cited were the reduction of home prices or increases in upgrades when the builder's mortgage company is used.

"In some circumstances, these incentives may not represent true discounts and homebuyers may ultimately pay more in total loan costs," the statement said. "Consumers also complain that the timing of the contract with the builder precludes them from shopping, and the affiliated lender is then able to charge higher settlement costs or interest rates that are not competitive with those of non-affiliated lenders."

HUD suggested such affiliated referrals could be considered "steering techniques."

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