I took a pre-approval loan application from a previous client, but then they purchased a new home and the builder gave them $10,000 in options if they went with their preferred lender. Of course, I lost the loan. Isn't this against the law?
–Larry from Washington
I get this question quite often, and it is very important. Thus, I don't mind coming back to the topic every few years. I believe it is especially important today and will be more so in the future, because much of the current inventory shortage will be solved through new home purchases.
By against the law, I am guessing that you are considering this a RESPA violation. While RESPA does regulate kickbacks and affiliations between vendors in a real estate transaction, up until now this particular practice has been one which has escaped major regulation. One reason might be that the builder is also the seller. It is legal for the seller to give a concession directly to the buyer, as long as it is allowed by the loan program.
What has been scrutinized by HUD, and now the CFPB over the years, is the fact that the seller in this case is tying the concession to use of an affiliated party. I should clarify that the party is affiliated if the builder owns the lender, there is a joint venture or a marketing agreement. If there is no affiliation beyond “a preference for a lender,” then the concern may not be as applicable – but that does not mean there will not be future regulation of the practice.
Even though there has been scrutiny, right now this is common practice that loan officers have to deal with. We must clarify that we are not giving legal advice, but we have heard of no court decisions or regulations which have made this practice illegal. The question that follows is: How do you avoid losing your clients in this situation? We will address this question next week.
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
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