by CCAR’s REALTOR®/Lender Committee
REALTORS® can make a difference in the current legislative session by eliminating a practice in our industry that regularly harms consumers. Texas House Bill 2385 addresses what is known to regulators as “required use.”
“Required use” is widely used by volume or national builders to require the use of their mortgage and title companies. Here is how it works:
Your client goes to a new home build site and enters into a contract to purchase land and build a home. During your client’s build, the builder of the home offers an incentive of $15,000 towards kitchen upgrades (various incentives can be used), so long as the client agrees via contract to use the choice or owned lender or title company of the home builder. Later, when it is getting close to finalizing the mortgage and title issues, the client must use the lender or title company that they signed to use through the incentive, regardless if the actual market rate at this time is much less. At this stage, the incentive becomes a penalty, as the client must pay the $15,000 if the client decides to use a better market rate from a lender or title company that is not the choice or owned lender/title company.
Although the “required use” issue is viewed as a Real Estate Settlement Procedures Act (RESPA) violation, neither the Housing and Urban Development (HUD) nor the Consumer Financial Protection Bureau (CFPB) has had the resources to redress.
There is a history of Texans asking for “required use” oversight and enforcement at the state level. Legislation in the same spirit of HB 2385 was sponsored in the past, but was withdrawn because in March 2009, HUD indicated that the Department would begin to enforce the “required use” provisions nationally. Unfortunately, a lawsuit dissuaded HUD from moving forward in enforcing the provisions (see National Association of Home Builders, et al. v. Shaun Donovan, et al., Civ. Action No. 08CV1324, United States District Court for the Eastern District of Virginia, Alexandria Division). Today, CFPB oversees the “required use” provisions. Like HUD, CFPB has not taken any action to enforce.
Numbers don’t lie: Choice or owned title and lenders capture approximately 80% of their perspective mortgage and title business. In comparison, REALTOR® in-house mortgage companies struggle to capture 15% of their perspective business because there is no incentive penalty. HB 2385 helps ensure consumers have a choice in their mortgage or title business, up until they close without a penalty.
Examples of “required use” and the consumer:
- A buyer was offered a $22,000 discount on the price of a home for using an affiliated lender, but the interest rate offered by the lender was 0.5% higher than the market rate and the origination fee charged by the affiliated lender was higher.
- A buyer would be required to make a higher earnest money deposit and would lose a $2,000 “closing incentive” if the buyer did not use the builder’s affiliated lender.
- A $3,000 incentive is promised on the purchase price and $6,000 towards closing costs, if the buyer used the affiliated lender, which charged an interest rate that was 1% higher than the market rate and carried additional fees.
How can you make a difference? The REALTOR®/Lender Committee is encouraging you to contact your State Representative and Senator to ask them to support House Bill 2385.
As always, if you have a question or comment about anything related to lending, please contact us at [email protected]