Jeff Byrd, president of Eagle Realty in Roseville, Minn., stood up during a real estate conference two weeks ago and asked about the legality of rebates that are paid to consumers without lenders’ knowledge. Byrd questioned whether real estate companies that offer real estate transaction-related rebates keep lenders informed about these rebates, and whether fraud is committed if lenders aren’t informed about the rebates.
The real estate panelists he addressed, who were brokers and executives at discount and limited-service real estate firms, had no immediate answers.
A number of real estate companies offer some form of rebates to consumers, among them LendingTree, HouseRebate and some Help-U-Sell franchises. Byrd said this week that he has continued to probe into the rebates issue.
“I am getting conflicting opinions on the legality of commission rebates that are not shown on the HUD-1,” he said. The HUD-1 is a standard financial disclosure form used in real estate transactions. “Some loan officers state that all agreements relating to the transaction, including rebates of commission to the buyer, must be disclosed.” But a lawyer who Byrd spoke with suggested that “the buyer representation agreement is a confidential fiduciary contract between the buyer and the buyer’s agent and any rebates that are a part of it are confidential and do not need to be disclosed.”
As with any legal matter, opinions can differ. State laws vary in the treatment of real estate rebates, and a few states prevent rebates. Byrd said he’s interested to know whether real estate companies and enforcement agencies, alike, are paying attention to the issue.
Brian Sullivan, a spokesman for the U.S. Department of Housing and Urban Development, said all fees paid by buyers and brokers should be listed on the HUD-1 form. “Any fee paid, either by the buyer or by the broker (regardless of whether it’s paid outside of closing) must be disclosed on the HUD-1.”
The department instructs loan officers to itemize “all charges imposed upon the borrower and the seller by the lender and all sales commissions, whether to be paid at settlement or outside of settlement, and any other charges which either the borrower or the seller will pay for at settlement.” And all charges to be paid outside of settlement should be included on the HUD-1 form and marked “P.O.C.” for “Paid Outside of Closing,” Sullivan also said.
So far, there haven’t been any high-profile challenges to rebate practices among discount real estate firms, said Mike Thiel, associate counsel for the National Association of Realtors. “I’m not aware of any enforcement actions related to that,” he said.
An absence of disclosed information about rebates is more likely to be considered a breach of contract than a matter of criminal fraud, Thiel said, unless the rebate amount was substantial. But in general, it’s best to document all financial aspects of the transaction on the HUD-1 form, he added. “If I were to advise somebody (about rebates), I’d say, ‘What the heck, put it down there.’ “
Eric Cunliffe, senior vice president and general manager of realty services for LendingTree, which links consumers with mortgage brokers and Realtors and offers several types of rebates to consumers, said the company paid out about $5 million in consumer rebates in 2003, with most of those rebates relating to real estate transactions and a small percentage relating to mortgage transactions. This year, LendingTree expects to give out about $10 million in rebates, Cunliffe said.
LendingTree offers rebates in the form of airline miles, gift cards and credits to closing costs, and these offerings and the disclosure requirements can differ in various states, Cunliffe said. “Our legal team…has a requirement for each of the brokers to disclose these rebates as appropriate in the states where they’re taking place,” he said.
In a single-sided transaction, the typical Lending Tree consumer rebate would be about $1,000 for a home priced at $225,000, according to a LendingTree business report, while the consumer rebate in a double-sided transaction might amount to $2,000 of the total commission.
Rick O’Neil, president of real estate discounter Help-U-Sell, said some individual franchises are offering consumer rebates, and the company is investigating a universal rebate policy. “We’re looking as a corporation to incorporate that,” he said. There are “different rules and regulations within each state. We’re looking at this very, very closely,” O’Neil said.
Cody Ann Moran of Century 21 Findley Real Estate, a member of the Georgia Real Estate Fraud Prevention & Awareness Coalition, said she hasn’t heard of enforcement actions involving real estate rebates to consumers. But there is a general litmus test for separating mortgage fraud from compliance. “The simplest way to determine the difference between whether it’s fraud or not fraud: If the lender knows about it then it’s not fraud – if the lender doesn’t know about it then it’s fraud,” she said.
Of course, there are gray areas, Moran said. A common type of violation involves a seller who doesn’t have time to complete home repairs prior to the close of the transaction, and instead writes a check to the buyers outside of closing. “If the lender doesn’t know about it, that becomes an issue. If the lender goes back and sees that those repairs were not done, then that becomes a fraud issue,” she said.
Moran said another typical example of fraud involves a buyer who cannot afford a down payment on a home. Loan officers have in some cases proposed some creative financing, involving a revision to the sale contract, to allow the transaction to go forward without the down payment. Moran said enforcement agencies typically go after repeat offenders.
Byrd said that though his company has refused to participate in such practices, “We have had loan officers pressure us to have the seller write a check to the buyer outside of closing for the difference between the amount of closing costs agreed to on the purchase agreement and the actual amount of closing cost.” For example, sellers might agree to pay $7,000 in closing costs for the buyer while the actual closing costs were $4,000. In these schemes, the seller could then pay the $3,000 difference to the buyer “outside of closing without the underwriter’s knowledge,” Byrd said.
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