Federal housing regulators have agreed to delay for 90 days implementation of a rule change that would bar home builders from offering consumers incentives when they agree to use builders’ affiliated mortgage and title insurance companies.

The new rule — one of many changes to the Real Estate Settlement Procedures Act (RESPA) being phased in by the end of the year — was set to take effect Jan. 16.

The National Association of Home Builders sued the Department of Housing and Urban Development on Dec. 22, saying the rule change arbitrarily applies to affiliated businesses operated by home builders. Affiliated businesses formed by settlement services providers like title insurers would still be allowed to offer discounts and settlement services packages (see story).

NAHB had sought a preliminary injunction against implementation of the rule, but a hearing scheduled for Jan. 9 was canceled after HUD voluntarily agreed to delay its implementation for 90 days.

A HUD spokesman told Inman News that the department agreed to push back implementation until April 16 in order to "mount a vigorous defense of the merits of the provision itself." Department of Justice lawyers representing HUD can now focus on defending the rule change from NAHB’s allegations that it is "arbitrary and capricious" and should be thrown out altogether.

RESPA makes it illegal for settlement services providers to pay kickbacks and referral fees to people or companies that can send business to them. The rule was amended in 1992 to allow real estate brokers, builders, title insurers and others to form joint ventures, known as affiliated businesses, and share profits the companies generate. Consumers must be informed about the relationships between the companies and cannot be required to use any particular provider.

Affiliated businesses are exempt from the "required use" provision if 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 builders are up in arms because HUD, as part of an update of RESPA rules issued in November (see story), narrowed the definition of "required use" to stipulate that only settlement services providers — and not home builders — qualify for the required-use exemption.

In justifying the change, HUD said home builders were offsetting the cost of incentives such as home upgrades by charging a higher interest rate, increasing a home’s price, or inflating closing costs.

HUD spokesman Brian Sullivan said that nothing in the new definition of "required use" prevents home builders from offering incentives or discounts to consumers or suggesting that consumers use their affiliated lender or title insurance business. But it would prohibit them from offering incentives that are only valid if buyers use the builders’ affiliated business, Sullivan said.

Rather than being true incentives or discounts, such offers actually amount to penalties imposed on consumers if they choose not to use the builder’s affiliated lender or title insurer, HUD maintains.

Home builders dispute those allegations, saying their incentive programs increase competition, lower costs and give consumers "a full range of options to explore the best possible deal to purchase a home."

With home builders trying to clear excess inventory, HUD’s "suspect and radical" definition of required use "could not have come at a worse time," said William P. Killmer, vice president of NAHB’s advocacy group, in a court filing. The new rule, he said, would "greatly obstruct NAHB’s members from stimulating consumer demand and moving excess supply."

The National Association of Mortgage Brokers is challenging another aspect of HUD’s final RESPA rule, filing suit on Dec. 19 over requirements that yield-spread premiums paid by lenders when borrowers take out loans with higher interest rates be credited to borrowers on a new, standardized Good Faith Estimate form being phased in this year (see story).


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