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Home Buyer Alert: Pay-To-Play Is The Industry Norm

This article is more than 9 years old.

Real estate agents have always referred buyers to mortgage people to secure mortgage financing to buy homes.  There are lots of real estate agents and there are lots of mortgage people and a process of elimination is necessary to determine who gets referred by whom.  Real estate agents count on mortgage people to complete the financing aspect of the deals they work very hard to mine, structure and close.  The mortgage people, who consistently get the job done right with no drama, tend to get those referrals.  Or so it would seem.

But a lot of those mortgage people who consistently get the job done right with no drama, also pay for those real estate agent referrals. It is now common practice for real estate firms to have “in-house” lenders, and those real estate firms are compensated by the lenders for those relationships to exist.  The idea being that the lenders will have first dibs on the real estate entities’ homebuyers’ mortgage business in exchange for that compensation.  The proliferation of these relationships has elevated their existence to industry norm and would be simply evolutionary if not for one regularly ignored issue; RESPA 3500:14 (b).

RESPA (Real Estate Settlement and Procedures Act) 3500:14 (b) states that “No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in § 3500.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.” No referral fees.

This morning I received a recruiting e-mail from a Chicago based lender and attached to that e-mail was a press release.  The press release announced the lender’s new relationship with a large New York real estate entity and how the lender was forecasting a 100% increase in their purchase mortgage business as a result.  Of course I am not privy to the details of the formation of that relationship but it is a safe bet that compensation is an element of this new partnership.

The natural order of things is that business and industry evolve, cycle, morph and change, I get that. But the mortgage industry lives by regulations that exist to protect consumers.   “Steering” and compensation for referrals top the list of things that consumers are supposed to be shielded from by the good folks at the CFPB (Consumer Finance Protection Bureau) and the enforcement of RESPA (Real Estate Settlement Procedures Act), tools.

Proponents of real estate/lender relationships will advocate that any compensation is strictly for joint marketing purposes or that having an in-house lender offers easier access to mortgage financing for consumers.  Objective scrutiny will collapse these arguments and restricted consumer access to lenders beyond the compensated relationship will be evident.

Unfettered access in the real estate/mortgage arena creates the competition that fuels market economy dynamics, and ultimately benefits consumers through lower costs (rates and fees), and better service.  Restricted access by definition, can limit these market economy dynamics.

The existence of “in-house” lenders and the practical application of a compensated relationship limit the ability of outside lenders to compete for that same business. In a market economy, the absence of competition hurts consumers (see Economics 101), in the mortgage industry, that’s why the CFPB and RESPA exist.

I belong to the army of outside mortgage reps waiting for the CFPB to show up and either enforce RESPA or change the regulations and officially un-outlaw in-house lending arrangements. It’s your ball CFPB, call the play.