The National Association of Home Builders has become the second industry group to file suit to block changes to the Real Estate Settlement Procedures Act, or RESPA, seeking a court injunction that would allow builders to continue offering consumers incentives for using their affiliated mortgage and title insurance companies.

Some aspects of the new RESPA rule — such as new standardized loan disclosure forms — are being phased in over the course of the year (see story). But beginning Jan. 16, the Department of Housing and Urban Development will prohibit builders from offering incentives such as payment of closing costs or home upgrades when consumers use their affiliated companies.

Enacted in 1974, RESPA is intended to prevent settlement services providers from paying illegal kickbacks and referral fees to people or companies that are in a position to send business their way.

Since 1992, however, HUD has allowed real estate brokers, builders, title insurers and others to form affiliated businesses that offer "bona fide" discounts and packages of settlement services. Under RESPA, consumers must be informed about the relationships between the companies and cannot be required to use any particular provider.

But in issuing final RESPA rule changes on Nov. 17, HUD narrowed the definition of "required use" to stipulate that only settlement services providers — and not home builders — qualify for the exemption for affiliated businesses.

In its complaint, NAHB claims the final rule "singles out home builders" in an "arbitrary and capricious" manner, because settlement services providers will still be allowed to offer incentives through affiliated businesses under RESPA. Home builders have made "substantial investments" to open affiliated mortgage companies to reduce costs and uncertainty over the closing process, the lawsuit claims.

HUD, in its impact analysis of the proposed rule change, said most builders offset the cost of incentives by charging a higher interest rate, jacking up a home’s price, or inflating closing costs.

"The agency believes that, more often than not, consumers do not gain from, and can be misled by, deals involving economic incentives from a builder to obtain a loan or settlement services from an affiliate," HUD said in its analysis.

HUD said that because only one-sixth of home sales are of new homes — and that only one-third of single-family homes are built by large home builders — no more than 5 percent of home sales would be affected by the new "required use" definition. The number is likely to be smaller, HUD said, since that estimate assumes that all large home builders have affiliated businesses, when many do not.

Plaintiffs in the NAHB suit include Centex Homes and the company’s affiliated mortgage lender, CTX Mortgage Co. LLC; D.R. Horton Inc., its affiliated mortgage lender, DHI Mortgage Company Ltd., and D.R. Horton’s affiliated title company, DHI Title of Texas Ltd.; Hovnanian Enterprises Inc., its affiliated mortgage lender, K. Hovnanian American Mortgage LLC, and Hovnanian’s affiliated title company, Eastern Title Agency Inc.; and Pulte Homes Inc. and its affiliated mortgage lender, Pulte Mortgage LLC.

NAHB is the second industry group to sue HUD over RESPA in recent weeks. The National Association of Mortgage Brokers sued HUD on Dec. 19 over the new Good Faith Estimate (GFE) form, which requires the disclosure of yield-spread premiums paid by lenders when borrowers take out loans with higher interest rates. The GFE also requires that the rebates be credited to borrowers (see story).

The lawsuits are unrelated, and HUD actually sided with mortgage brokers in deciding to ban incentives offered by home builders’ affiliated businesses — a point noted with some bitterness by NAHB.

In adopting the new, more restrictive "required use" definition, HUD "accepted the arguments of mortgage brokers that compete directly with the [home builders’] affiliated mortgage lenders — without any explanation or reasoning, much less the type of independent legal analysis that is required," NAHB said in its Dec. 22 complaint. "HUD’s decision to endorse the view of the mortgage brokers, particularly in light of the current financial climate, is insupportable."


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