A “systemic problem” that’s been around for many years has reared its head, Marc Savitt, president of the National Association of Independent Housing Professionals (NAIHP), has said.
Savitt refers to incentives offered by affiliated business arrangements. Though these arrangements are legal – when a large homebuilder also offers mortgage loans or title services through its own finance unit – the promises they make or incentives they offer to consumers in order to close a deal and make a profit are not.
The Consumer Financial Protection Bureau (CFPB) last week required that a Texas homebuilder, Paul Taylor, deposit over $100,000 he received in kickbacks from his jointly owned mortgage company into the Treasury. The homebuilder is now banned from future real estate settlement services, including mortgage origination.
The settlement resolves violations of the Real Estate Settlement Procedures Act (RESPA), enforced by the CFPB, which prohibits giving and receiving kickbacks for services and also specifies detailed guidelines for affiliated business arrangements.
“Kickbacks harm consumers by hampering fair market competition and by unnecessarily increasing the costs of getting a mortgage,” said CFPB Director Richard Cordray in a statement. “The CFPB will continue to take action against schemes designed to let service providers profit through unscrupulous and illegal business practices.”
Savitt does not object to one-stop shops, which can be convenient for consumers as long as they conduct honest business.
“Yes you can give a discount or an incentive to a consumer provided you don’t make it up anywhere else in the transaction, and that’s where the problem lies,” he said. A homebuilder might, for example, offer a customer $5,000 off closing costs and a 3.5% interest rate for using its affiliated mortgage company. But when it comes time to lock in the rate, they’re offering 4% instead.
Though a common occurrence prior to the downturn, Savitt said dishonest affiliated business arrangements haven’t been a problem recently because builders haven’t been building houses in this economic climate.
“They’re painting an illusion and it’s anti-competition,” Savitt said of dishonest affiliates. “We believe in competition and letting everybody present themselves and allowing the consumer pick the best deal.”