When homebuilders behave badly, some of their customers may have an unexpected resource: The federal government's "RESPA police," who have become increasingly active in resolving consumers' complaints through nonpublic interventions with builders.
RESPA stands for the Real Estate Settlement Procedures Act, a consumer protection statute that targets kickbacks and other settlement-related abuses.
The RESPA police are investigators at the Department of Housing and Urban Development. They are best known for their splashy public settlement agreements with realty, title insurance and mortgage companies, sometimes involving hundreds of thousands of dollars.
But with no public fanfare, the RESPA police have begun intervening in complaints brought by individual consumers who say builders are unfairly forcing them to use the contractors' affiliated mortgage companies. The affiliates' loan deals, say the complaints, typically are more costly than those available from independent mortgage brokers and lenders.
In one case outlined by HUD officials in an interview, a builder canceled a sales contract and seized an $11,845 good-faith deposit when a buyer refused to use the builder's affiliated mortgage company. Under RESPA, builders and others generally are prohibited from requiring the use of a specific lender or title company as a condition of a sale.
After RESPA investigators contacted the builder and gave the firm 15 days to resolve the dispute, the builder - who officials declined to identify because no public action was taken - not only allowed the buyer to proceed with independent financing, but paid the buyer's lender to lower the interest rate.
In another recent nonpublic intervention, a consumer complained that a builder seized her $10,000 deposit when she refused to accept the loan deal offered by the builder's mortgage affiliate. The affiliate's loan officer "fraudulently altered financial documents," according to HUD, "that would have placed the consumer in a home she could not afford."
In other words, the builder's loan officer allegedly was willing to approve her for a mortgage amount and monthly payments that ultimately would cause her to lose the home to foreclosure. After investigators intervened on her behalf, the buyer was refunded the $10,000 earnest money deposit.
In a case involving popular incentives dangled by many builders to attract buyers in soft markets, a prospect was offered a "free" morning room addition to the new house. The builder said the addition was worth about $13,500. The only hitch was that the purchaser would need to use the builder's mortgage subsidiary. The builder assured the buyer that the rates, fees and terms offered by the subsidiary were "very competitive" with outside lenders and brokers, according to the complaint.
But when the buyer checked out the competition, he found the subsidiary's fees to be bloated - a $5,400 "origination" charge, for example - and far more costly than in the regular market. The buyer complained to investigators at HUD, arguing that the builder was engaged in an intentionally deceptive practice. After investigators hinted at legal action, the builder agreed to waive the $5,400 fee and threw in the $13,500 morning room to boot, according to HUD.
Investigators actively are pursuing other nonpublic mortgage-related complaints, say officials, including allegations that builders:
Raised the prices of homes when buyers declined to use their mortgage affiliates or subsidiaries.
Required buyers to deposit extra sums of money in escrow accounts if they refused to use the affiliated lender.
Coerced buyers into using a designated lender with the threat of withdrawing a $5,000 "seller's credit" toward closing costs, plus adding $10,000 onto the home price.
If you find yourself in a builder squeeze play involving mortgage, title or other affiliates, HUD has some practical advice for you:
Compare interest rates, loan terms and closing costs of several independent lenders before agreeing to use the builder's affiliate or wholly owned subsidiary. Determine whether the affiliate's rates and total charges are higher than the going market rate and offset any discounts, incentives and upgrades dangled in front of you.
If you intend to use a builder's affiliated mortgage company to take advantage of incentives and then refinance the loan to get a lower rate, be sure that the mortgage note does not contain a hefty prepayment penalty designed to discourage early refinancing.
Be suspicious about large discounts or additions that are contingent upon using the builder's loan affiliate. Knowing what comparable homes in the area are selling for may help you determine whether the builder is offering a true discount or is simply raising the price of the home before offering the discount.
If you have a complaint involving high-pressure tactics designed to coerce you into using a builder's affiliate, you can call the RESPA enforcement staff at 202-708-0502. Alternatively, you can e-mail: email@example.com. For background on RESPA, visit www.hud.gov.