Rules tightened on referrals to services

Nation's Housing

June 16, 1996|By Kenneth R. Harney

WASHINGTON -- IN A move to protect consumers from potential "adverse steering," the Clinton administration has toughened federal regulations governing referrals of home buyers to mortgage lenders, title companies and other settlement service providers.

The new rules, issued earlier this month, revoke portions of controversial home settlement regulations adopted in the closing days of the Bush administration in 1992. Any real estate broker, mortgage lender, title and escrow agency or law firm providing home real estate settlement services in the United States will have to conform to the new regulations when they take effect in mid-October.

A key focus of the rules concerns the rapid growth of affiliated business interrelationships among real estate brokers, mortgage lenders, title companies and other service providers. Most large-volume realty brokers and homebuilders across the country now offer in-house or affiliated mortgage-financing options for their clients. Some firms offer discount-priced "one-stop shopping," allowing a consumer to sign up for a package including mortgage financing, title search and insurance, property and casualty insurance, and closing services.

Other companies offer highly sophisticated "computerized loan origination" programs that search among 10 to 20 participating lenders to come up with mortgage alternatives that are custom-tailored to the homebuyer's needs.

Federal law since 1983 has permitted affiliated home settlement business arrangements, provided they are fully disclosed to the consumer and are not mandatory -- i.e., you're free to shop elsewhere for any or all of the services.

The new regulations attempt to limit what officials at the Department of Housing and Urban Development (HUD) consider the possibility that in some affiliated business arrangements, consumers may be discouraged from actively shopping for title, closing or mortgage services beyond those connected with the realty broker's or builder's firm.

The new rules prohibit companies from paying referral fees to any employee who directly deals with consumers and who performs a settlement service -- like a loan officer -- on behalf of consumers. The Bush administration's rules, by contrast, permitted front-line employees to be paid for such referrals.

Real estate sales associates -- who are independent contractors, not employees of their realty firms -- never have been allowed to receive referral fees for directing clients to mortgage, title or other affiliated settlement providers.

But under the new regulations, "managerial" employees -- branch managers or executives who only rarely deal directly with individual homebuyers -- can receive bonuses or other payments.

"The goal," said Sarah Rosen, a HUD official who helped draft the rule, "is not to put roadblocks in front of [affiliated realty service arrangements], but to put the focus back on the consumer's best interests. We want to make sure that employees who are in a direct position of trust with the consumer will not have undue incentives to steer" them to affiliates, rather than encouraging them to shop around.

Pub Date: 6/16/96

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