HUD backs down on builder incentives

HUD's agreed to go back to the drawing board on a RESPA rule change that would have barred home builders from offering consumers incentives they could only cash in on if they used builders' affiliated mortgage and title insurance companies.

The new rule was originally set to take effect Jan. 16. Implementation was pushed back to April 16 after the National Association of Home Builders sued in December to block implementation. At the time, HUD said it needed more time to mount a legal defense (see story).

Today, HUD said it plans to withdraw that aspect of the RESPA rule change and seek public comment on defining the scope of prohibitions on "required use" of affiliated businesses.

Affiliated businesses are exempt from the "required use" provision as long as they offer a combination of settlement services at a total price lower than the sum of the market price of the individual services, and if the discount is not made up by higher costs elsewhere in the settlement process.

But HUD said home builders were offsetting the cost of incentives they offered by charging a higher interest rate, increasing a home's price, or inflating closing costs. So HUD narrowed the definition of "required use" to stipulate that only settlement services providers -- and not home builders -- qualified for the required-use exemption.

A press release HUD issued today might lead you to believe HUD is only delaying implementation of the new required use definition by another 90 days, to July 16, while it solicits public comment on whether to withdraw its new definition.

But a joint motion HUD and NAHB filed today with the U.S. District Court for the Eastern District of Virginia suggests they have already made the decision to withdraw the required use definition and start over.

From the motion:

"On today’s date, HUD officials have elected to seek the withdrawal of the very portion of the new RESPA rule (i.e., “required use”) that is the subject of plaintiffs’ challenge in the instant civil action. Agencies that seek to withdraw rules promulgated by the prior administration that have yet to go into effect must notice the same for public comment; here, HUD has provided a period of thirty (30) days. HUD officials have sent a notice to this effect to the Federal Register for immediate publication.

"As this Court is likely now aware, the administrative record in this case spans nearly 8,000 pages, and the legal issues raised by plaintiffs’ civil action are somewhat complex. Given the above, it would be a waste of scant judicial resources to have this Court review both that voluminous record and the parties’ substantial memoranda when the agency’s actions will likely render such time and effort moot. As a result, the parties have agreed that the filing of initial summary judgment memoranda on March 9, 2009, would be a waste of these very resources."

In a notice to be published in the Federal Register, HUD said everybody -- consumers, regulated industries, HUD -- would be better served by a new rulemaking proceeding, in which it would "similarly strive to ensure consumers are protected from certain practices conducted by affiliated business arrangements."

From the rule:

"Since issuance of the final rule, HUD has determined to reevaluate the scope and operation of the required use provision. This issue is one of importance in the RESPA context, and HUD, regulated industries, consumers and the public generally would be better served by new rulemaking. New rulemaking would offer HUD with the opportunity to present a new proposal based upon HUD's reevaluation of the required use provision. New rulemaking would provide consumers, industry, and other interested members of the public with the opportunity to comment on a definition of 'required use,' ... and for HUD to make informed decisions based on this new commentary."