Costa Mesa-Based Firm’s System : Mortgage List Dispute Pits Lenders Against Brokers

A scrap is brewing between mortgage lenders and real estate brokers over an obscure legal issue that could affect the way billions of dollars in mortgage loans are sold.

The tussle has attracted little attention outside the real estate industry. But both sides have dispatched lobbyists to importune the federal Department of Housing and Urban Development, and both sides consider the stakes high.

The fight concerns a computerized mortgage system devised by Prudential Real Estate Affiliates Inc. in Costa Mesa, a fledgling network of franchised real estate brokerages that the big insurance company started in 1987. At issue is the money Prudential pays its brokers who use the computer system.

That system--called CLOS, as in to “close” a loan--electronically matches home buyers with a suitable mortgage from one of 10 or so lenders listed, including Prudential’s own mortgage lending subsidiary.

For every customer who uses CLOS, the brokerage gets $100 from Prudential to reimburse the brokerage for hiring an employee to operate the system.

Prudential plans to sign up 3,000 brokerages nationwide by 1993, and it estimates that lenders could eventually sell as much as $10 billion worth of loans through CLOS.

The problem, says the Mortgage Bankers Assn. of America, isn’t the computer: It’s that $100 fee. The trade association says it’s a conflict of interest when a broker gets paid to refer customers to a mortgage lender. Lenders fear a broker will then “steer” customers only to certain lenders, where they might not get as good a deal.

And, the lenders say, such an arrangement violates federal law governing real estate transactions.

The Real Estate Settlement and Procedures Act--RESPA--forbids paying referral fees to brokers.

Prudential and the National Assn. of Realtors, on the other hand, say the money isn’t a referral fee; it merely covers the brokers’ costs of operating the computer, which is now permissible under federal law. Prudential has an October letter from HUD saying so.

But HUD officials are writing new RESPA regulations at the urging of mortgage lenders, and both sides are pressing to persuade HUD to come down in their favor on the payments.

Both powerful trade associations say they have the consumer’s interest at heart.

“The thing that disturbs us is the ‘Big Lie’ technique the Mortgage Bankers Assn. is using,” said William North, executive vice president of the National Assn. of Realtors. “They keep saying these payments are referral fees, when really the lenders are reimbursing the broker for running the computer system.

“This system actually makes getting a mortgage a lot more convenient for consumers,” North said.

Not so, says Robert M. O’Toole, senior staff vice president at the Mortgage Bankers Assn.

“From our point of view, it’s purely a matter of getting a fee and steering a customer to that lender,” O’Toole said. “And that’s contrary to the law. Without the fee, we’d have no objection to computer mortgage systems.”

Computerized mortgage systems appeared in the early 1980s, long after Congress passed RESPA in 1974. But they didn’t really catch on until recently.

A second wave began a few years ago with Citicorp’s MortgagePower. In 1986 HUD lawyers said Citicorp could reimburse brokers for their costs in running MortgagePower. The mortgage lenders got alarmed and persuaded HUD to reconsider its rules regarding the Real Estate Settlement and Procedures Act, which Congress intended to protect consumers in buying a home.

The proposed new rules were set out for public comment in May, and HUD was flooded with 2,000 responses, which it says is an unusually large number. Most of the comments, says the mortgage bankers group, were negative.

In December a new set of regulations was leaked to the public which were much more favorable to the mortgage lenders. According to the lenders’ interpretation, the new rules would have prohibited Prudential’s $100 payment to its agents.

That’s where the matter stands now. HUD says it hasn’t decided the issue yet, and both sides say HUD Secretary Jack Kemp has not yet committed himself either.

The matter may ultimately be thrown back in Congress’ lap, since either side could ask that the law be amended if they don’t like the new regulations.

Prudential says it has its own lobbyists trying to catch HUD’s ear. But meanwhile it’s business at usual at the new Prudential subsidiary atop a mid-rise office building in Costa Mesa’s South Coast Plaza area.

After little more than a year, Prudential had 300 affiliates signed up by the end of April. They are required to use Prudential’s computer system, although they aren’t required to use CLOS, which stands for computerized loan origination system.

CLOS works this way: The customer specifies what type of loan he’s looking for--adjustable rate, lowest monthly payment or some other requirement--and the computer reads back the loans that come closest to fitting those requirements, deleting the lender’s name from the information.

If the loan is approved, the lender pays Prudential $425.

But Prudential insists it’s less interested in the money than in using CLOS as a way to sign up more brokerages for its franchise system. Prudential hopes the system will be a strong lure for attracting home buyers to its brokerages.

“We don’t have any ambitions to become mortgage lending kingpins,” said Carl Espy, a senior vice president at Prudential Real Estate. “We’re just trying to make the buyers feel more comfortable.”

Unlike Citicorp’s MortgagePower, says Espy, the Prudential system offers more than one lender, with as many as 10 choices in some markets. While the system could eventually account for 20% of the loans on homes sold through its brokerages, Prudential says--and possibly as much as half in some markets--that still leaves as much as 80% of the loans to lenders not on the CLOS system.

Already signed up for CLOS are several national lenders, including GMAC Mortgage Co. and Shearson Lehman Hutton Mortgage. Prudential is seeking a few more to combine with three or four local lenders in each state.