Loan Referral Fees Get Preliminary OK : Lender Critics of Citicorp Liken Practice to a ‘Kickback in Disguise’

Real estate agents may soon be able to earn a fee for referring a home buyer to a particular lender without breaking the real estate anti-kickback law, under proposed regulations released Monday.

The decision by the U.S. Department of Housing and Urban Development (HUD) to exempt real estate agents and others in a position to broker mortgages bestows the agency’s official blessing on Citicorp’s controversial MortgagePower Program.

Since 1986, when the lending giant received an informal legal opinion from HUD permitting it to proceed with the program on a nationwide basis, Citicorp has allowed MortgagePower agents to charge a fee for helping borrowers arrange financing through the program.

Meeting Conditions

Under the proposed regulations, HUD would grant exceptions to the long-standing prohibition against accepting referral fees when certain conditions are met, namely:

--The fee is paid directly by the borrower to the referring agent rather than indirectly through the lender.

--The arrangement is fully disclosed in writing to the borrower at the time of loan application and at the loan settlement. HUD would require that affected borrowers receive the following disclosure statement:

“You are advised that this fee may be avoided entirely if you approach this or another lender directly. Additionally, lower mortgage interest rates and mortgage broker fees may be available from other mortgage lenders or mortgage brokers.”

--Payment of the fee is not made a condition of loan approval.

--The referring agent must help arrange the financing by performing a service “of value” beyond merely bringing the borrower and lender together, according to the proposal. A real estate agent could meet that test, for example, by obtaining credit and appraisal information.

--The fee must remain “reasonable” relative to the services provided.

Many Lenders Critical

Many lenders are sharply critical of the MortgagePower program, charging that the fee paid by the borrower amounts to little more than a kickback in disguise. Much of the controversy was aired during a panel discussion sponsored by the Mortgage Bankers Assn. earlier last week when competing lenders tore into Citicorp, with one accusing it of “buying market share” through the program.

“No longer will service, price of the mortgage, advertising, knowledge on the part of the sales representative or reputation” serve as the basis for who gets loan business, but “who pays the most” to referring agents, said Steve Ashley, president of Sibley Corp., a mortgage banking firm in Upstate New York.

Ashley said in parts of the Northeast, certain real estate offices have “locked out” lenders who do not permit referral fees. “There is a conflict of interest when realtors steer borrowers to lenders with the most favorable compensation rather than the best mortgage,” he said.

Robert D. Horner, chairman of Citicorp Mortgage, who also appeared on the panel, responded that Citicorp is “hardly steering” when only 15% to 20% of its loan volume comes from MortgagePower members.

Long Delay

Five years have passed since Congress passed amendments to the 1974 Real Estate Settlement and Procedures Act (RESPA), which these regulations are intended to implement.

The delay, uncommonly long even by Washington standards, was due in part, according to industry analysts, to litigation challenging the scope of the act and efforts by the Office of Management and Budget to stop the regulations on grounds that the marketplace should operate unfettered by any prohibition on mortgage referral fees.

The new regulations would become effective later this summer, unless HUD decides to revise its proposals after reviewing comments from the public, which it will take up until July 15.

Under the MortgagePower program, real estate firms pay Citicorp an annual fee ranging from $1,000 to $2,500 to obtain expedited loan processing and better mortgage terms for their home buying clients.

Citicorp, in return, gives participating agent members the right to charge a negotiable fee to the borrower, which tends to range from $100 to a half percent of the loan amount, according to Horner.

Credits Program

Horner gives MortgagePower much of the credit for making the firm the nation’s largest home lender, with $13.1 billion mortgage originations in 1987. MortgagePower is “probably the most successful mortgage program in the country today,” he said.

E. Robert Levy, executive director of the Mortgage Bankers Assn., of New Jersey, accused Citicorp of reducing its origination fees to compensate for the extra borrower payment.

According to Horner, the lower fees are a result of the operating efficiencies achieved through the MortgagePower program. “Customers come to us better informed and, in many cases, with applications already completed,” he said.

Over the past 18 months, according to Horner, several companies have launched similar loan programs. They include, he said, Prudential Home Mortgage, Travelers Mortgage Services, Chemical Bank and Dime Savings Bank.