We have an Affiliated Business Arrangement (AfBA) with a homebuilder. The builder currently discounts the purchase price of its homes if the buyer uses our company to finance the purchase. If the buyer chooses to use another mortgage company, there is still a discount, but it is lower. The builder, who is the majority owner of our company, now wants to offer discounts only to those buyers who use our company to finance the purchase. Is this a compliance problem?
The issue of builder incentives and preferred and/or affiliate lenders continues to be a controversial one. There are two sides (at least) to the argument. On the pro-builder side is the assertion that a preferred lender or affiliated lender allows for better coordination between lender and builder, and thus a smoother, more predictable financing process, thereby improving the overall experience for the consumer.
The counter to this argument is that, even if there is no express “requirement” for the buyer to use the builder’s lender affiliate, as a practical matter the buyer is being “required” to do so, in violation of the AfBA exception to RESPA Section 8 (12 U.S.C. §1024.15), one of the conditions of which is that, with limited exceptions: “No person making a referral has required (as defined in 12 U.S.C. § 1024.2) any person to use any particular provider of settlement services or business incident thereto…” (Emphasis added.) (12 U.S.C. §1024.15(B)(2)). Critics also argue that the builder is “steering” the consumer to the builder’s preferred or affiliate lender, thus preventing the consumer from shopping in violation of anti-steering provisions.
Much depends on the definition of “required use,” which is found in 12 U.S.C. §1024.2 is as follows:
“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.” (Emphasis added.)
Some builders try to address this issue by having a list of preferred lenders. To one degree or another, however, that may still thwart the consumer from shopping outside that list. By excluding other mortgage companies from the builder incentive, the risk of a RESPA violation increases because it could be argued that such exclusivity of the incentive is a de facto “requirement.”
Prior to the CFPB regime, HUD attempted to deal with this issue through RESPA and proposed rulemaking to change the regulation to expressly prohibit certain activities. These efforts included the elimination of “forced” builder’s incentives. In response to a lawsuit filed by a homebuilders association, HUD agreed to delay the prohibition. In the interim, authority for rulemaking was transferred to the Consumer Financial Protection Bureau (CFPB). At this point, the CFPB has taken no formal regulatory action with respect to this issue and is monitoring complaints received.
But in recent CFPB Guidance on mortgage servicing agreements (MSAs) issued on October 8, 2015, the CFPB said:
“Impermissible actions that some MSAs attempt to disguise, such as the steering of business in connection with kickbacks and referral fees, may result in consumers paying higher prices for mortgages than would likely be the case without disguised kickback or referral fees. These practices also tend to indirectly undermine consumers’ ability to shop for mortgages, which can raise costs for consumers. In terms of thwarting shopping, one investigation that ended with an enforcement action revealed that consumers’ ability to shop was hindered when a settlement service provider buried the disclosure that consumers can shop for settlement services in a description of the services that its affiliate provided. See 12 U.S.C. 2607(c)(4); 12 C.F.R. 1024.15(b)(1). In another instance that also resulted in an enforcement action, a settlement service provider did not disclose its affiliate relationship with an appraisal management company and did not tell consumers that they had the option of shopping for services before directing them to the affiliate. The steering incentives that are inherent in many MSAs are clear enough to create tangible legal and regulatory risks for the monitoring and administration of such agreements.” (Emphasis added.)
Until the CFPB specifically announces an express prohibition on builder incentive programs (a form of MSA), we will continue to see them utilized based on the belief that a properly crafted incentive program can be built that avoids violation traps. The cautious approach is not to get involved with these programs. But in the end, whether or not to do so is a business risk decision that only the company can make. As you can see, this is a highly technical area. So, do not hesitate to call us or your attorney if you need help.
Michael R. Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group