Federal regulators are once again scrutinizing incentives tied to the use of homebuilders’ affiliated mortgage and title companies, looking for evidence that they cost consumers more than they’re worth, help inflate appraisals, and lower underwriting standards.

The Department of Housing and Urban Development (HUD) in 2008 proposed a ban on such incentives, but backed down last year after homebuilders sued over the proposed rule change (see story).

Now HUD is asking for studies and data regulators say would further their stated goal: protecting consumers from abusive incentive schemes while still allowing affiliated businesses to offer legitimate discounts or packaged settlement services.

In a June 3 Federal Register notice, HUD said it’s preparing to draft new rules strengthening and clarifying an existing policy that prohibit real estate brokerages, homebuilders and others in a position to steer homebuyers from requiring that they use affiliated business.

The Real Estate Settlement Procedures Act (RESPA) — anti-kickback legislation passed by Congress in 1974 — was revised in 1992 to allow real estate brokers, builders, title insurers and others to form affiliated businesses and offer discounts and packages of settlement services.

Consumers must be informed about the relationships between the companies and cannot be required to use any particular  lender, title company or settlement service provider that is affiliated with another business.

What constitutes "required use" has turned out to be a "vexing question," said Federal Housing Commissioner David Stevens, in a statement announcing HUD’s intention to draft new rules to clarify the issue.

"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," Stevens said.

As part of an overhaul of RESPA rules implemented this year, HUD originally proposed changing the definition of required use to stipulate that only settlement services providers, and not homebuilders, would qualify for the exemption for affiliated businesses.

The National Association of Home Builders complained that the change singled out homebuilders in an "arbitrary and capricious" way. Homebuilders have made "substantial investments" to open affiliated mortgage companies to reduce costs and uncertainty over the closing process, homebuilders said in their lawsuit.

The latest edition of the National Association of Realtors’ Washington Report said HUD’s previous attempt to rewrite the rule "was narrowly tailored and did not affect most real estate professionals. However, any new provision could impact real estate professionals and therefore NAR will be commenting again on this issue."

During a public comment period that closes Sept. 1, HUD said it’s seeking input that will help it analyze a range of issues, such as whether some homebuilder incentives are actually discounts or if they are built into the cost of a home.

HUD will also investigate whether homebuyers are less likely to comparison shop for a loan if they are asked to commit to use an affiliated lender months ahead of time when they enter into a contract for the construction of a home.

Also of interest to HUD is whether consumers are capable of valuing some incentives offered by builders, such as kitchen upgrades, when comparing loan terms and settlement costs offered by affiliated and non-affiliated lenders.


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