Use of Computer to Match Loans, Home Buyers Drawing Fire : Lending: Some financial institutions say payments made to brokers are really illegal referral fees. But brokers defend the practice as being in consumers’ interest.

An obscure legal dispute could affect the way in which mortgages totaling billions of dollars are marketed to home buyers.

Once a quiet argument between lobbyists and bureaucrats at the Department of Housing and Urban Development, the dispute has spread to Capitol Hill, where a House hearing is scheduled for April 19.

Here’s the background: Citicorp, Prudential Real Estate Affiliates of Costa Mesa and a few other companies use computers to match home buyers with suitable mortgages. In Prudential’s case, the lender pays Prudential $425 per customer. Prudential then pays its broker $100 to defray the cost of operating the computer system.

The Mortgage Bankers Assn. contends that the $100 payments are, in fact, referral fees, which are barred by federal law. The reason: Consumers might not get the best deal from a lender who is paying brokers to refer customers to him.

Prudential’s computer system, for instance, offers a choice of, at most, eight lenders. Citicorp’s system offers just one: Citicorp.

Interest on Citicorp loans, the mortgage bankers contend, averages one-quarter to one-half a percentage point higher than that on most loans. Citicorp counters that its rates are “competitive.”

“These programs are a very expensive convenience,” said Sharon Canavan, a lobbyist for the mortgage bankers. “Borrowers should take the time to go out and shop.”

That’s nonsense, says the National Assn. of Realtors: The Prudential system, for instance, actually offers consumers a wider choice by offering loans from as many as eight lenders in one place. And the $100 only reimburses the broker for costs incurred, says the realtors association.

It’s perfectly legal, and both Citicorp and Prudential have letters from HUD saying so.

“You can’t tell people to work for nothing,” said William North, executive vice president of the realtors group, “and HUD agrees with that.”

The dispute is the latest turf fight in the financial services industry after nearly a decade of sweeping changes that saw savings and loans gain some of the powers of banks and banks push into such new businesses as stock brokerages. This fight wouldn’t even have been possible 10 years ago, when computerized mortgage systems were just emerging.

But as the new systems proliferate, they threaten to move much of the marketing of mortgages out of the offices of the thrifts and mortgage companies and into real estate brokerages. Prudential, for instance, estimates that as many as a fifth of the mortgages in some cities could eventually be marketed through its 2-year-old system--or about $10 billion worth of mortgages.

“It’s clear (the mortgage bankers) are upset because the brokers are doing something they’ve never done before: marketing mortgages,” said Stanley M. Gordon, a Newport Beach lawyer and lobbyist for Prudential.

When the mortgage bankers’ group couldn’t persuade HUD to declare the payments illegal, it began lobbying Congress to change the law. This is now the group’s top priority.

HUD declined to issue clearer regulations and put an end to the argument, partly for fear of offending the heavy-duty players involved and partly because it’s still digging out from last year’s huge influence-peddling scandal, according to sources familiar with the agency.

The politicians may be reluctant to make major changes too.

“It’s going to be tough to get anybody to take sides on this,” said one House staffer. “Everybody’s going to want to punt because, if you’re able to link the big real estate brokerages with the big banks, eventually you’re going to knock out the middle man, the small thrifts and the mortgage bankers.

“That’s why this issue is such a screamer.”

This could be the mortgage bankers’ last chance: The group can’t afford to keep spending large sums on lobbying. And some of the trade association’s own members--including Citicorp and some Prudential subsidiaries--disagree with its stand. Furthermore, it’s up against one of Washington’s most powerful lobbies, the National Assn. of Realtors.

On the other hand, Congress may be in a mood to listen. Housing will be a major issue on Capitol Hill this year, as the House and the Bush Administration prepare housing plans. And the mortgage bankers are trying to line up consumer groups on their side.

The law behind the debate is called RESPA, the Real Estate Settlement and Procedures Act of 1974, which sought to protect consumers from unscrupulous brokers and lenders. The act bans referral fees but says a lender can give “reasonable value for services provided.”

It’s that line, the realtor group says, that justifies reimbursing brokers for operating the computer systems.

HUD agreed and gave letters approving the practice to Citicorp’s MortgagePower in 1986 and Prudential’s Computerized Loan Origination System, or CLOS, in 1988. These are by far the two biggest networks, although the mortgage bankers complain that other, smaller systems are starting up around the nation.

Citicorp is the largest mortgage lender in the country. Most of the $12 billion in mortgages that it wrote last year came through the 4,000 MortgagePower computer systems installed in the offices of real estate and mortgage brokers in 37 states.

Unlike Prudential, Citicorp does not reimburse the broker, but charges brokers for using the system and leaves it up to them whether to pass the cost on to their customers.

This might seem much ado about nothing--except for the potentially huge amounts of money involved and the importance of CLOS, in particular, to Prudential’s corporate strategy.

Prudential began selling its franchises to brokers in 1988, long after most other real estate franchises started. Many brokerages--and many of the best ones--are already affiliated with other franchise companies, such as Century 21 and Coldwell Banker.

In order to grow, Prudential needed a “hook” to get brokers to sign up, and its hook was CLOS. Another selling point for these systems is that they speed loan approval for borrowers. In less than two years, Prudential has signed up 500 brokerages nationwide.

The issue is so important to Prudential and Citicorp that they have put their own lobbyists on the case. While the debate so far has attracted little attention outside the industry, it may heat up if politicians begin holding hearings.

Meanwhile, mortgage bankers are getting ready to roll the dice, having voted recently to spend $250,000 to lobby Congress.

“This year is their big shot at it,” said Gordon, the Prudential lobbyist. “They can’t afford to keep spending that kind of money.”