The U.S. Department of Housing & Urban Development (HUD) has published a notice seeking public comment on how it might strengthen and clarify the Real Estate Settlement Procedures Act (RESPA)’s prohibition against the “required use” of affiliated settlement service providers. HUD’s Advanced Notice of Proposed Rulemaking is requesting comments from the public that might inform any possible future revision or clarification of this prohibited practice.
It is considered a violation of RESPA when a consumer is required to use a particular mortgage lender, title company, or other settlement service provider that is affiliated with another business in their mortgage transaction. However, whether a consumer is “required to use” a particular affiliated service provider when they are offered a discount or some other incentive is less obvious.
“It is our intent to keep an open mind on how to approach this vexing question over what is, and what is not, ‘required use,’” said David H. Stevens, HUD’s Assistant Secretary for Housing/Federal Housing Commissioner. “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.”
RESPA was enacted to prevent kickbacks for referrals that increase costs of settlement services and to encourage shopping for settlement services. HUD remains committed to RESPA’s goal of protecting homebuyers against unnecessarily high settlement costs by addressing both incentives and penalties that limit competition and shopping for settlement services. With the notice HUD released, the Department seeks comment from an array of sources with experience or knowledge of affiliated business arrangements in residential mortgage transactions. In addition, HUD welcomes comment on actions it might take in addition to or instead of rulemaking that would better address the improper use of affiliated business arrangements.
HUD’s current definition of ‘required use’ reads:
“Required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package or (combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.”
A number of consumer complaints concern home builders, who are in a position to refer settlement service business to their affiliated mortgage and title companies. For example, a developer or homebuilder might offer to reduce the cost of a home (by adding free construction upgrades or by discounting the home price) if the home buyer uses the developer’s or builder’s affiliated mortgage lender. In some circumstances, these incentives may not represent true discounts and homebuyers may ultimately pay more in total loan costs.
Consumers also complain that the timing of the contract with the builder precludes them from shopping, and the affiliated lender is then able to charge higher settlement costs or interest rates that are not competitive with those of non-affiliated lenders. The complaints indicate that these incentivized referrals to affiliated lenders may be steering techniques that effectively “require the use” of the affiliate.
For more information, visit www.hud.gov.