WASHINGTON / CATHERINE COLLINS : Realtors’ Loan Service Fees Stir Controversy

The enticements that some mortgage lenders will offer realtors as incentives to recommend their loans to home buyers vary--money, televisions, even vacations.

One lender offered this “realtor vacation package”:

“Visit Sea World on us. For every loan closed, you will receive a paid vacation for two to San Antonio. This will include air fare via Southwest Airlines, lodgings at the Wyndham Hotel and day passes to Sea World. For each loan closed your name will be re-entered into our Grand Prize vacation drawing to the romantic city of San Francisco. Call us. Shamu is waiting.”

It sounds like a great little perquisite, but the problem is that under federal law it is illegal for a realtor to take money for lender referrals.

The practice violates the Real Estate Settlement and Procedures Act (RESPA). The law was passed in 1974 because referral fees paid by mortgage lenders to realtors--kickbacks--were so common that they were driving up consumer costs, the Mortgage Bankers Assn. said.

“Realtors do not typically collect referral fees, but if they do, they should be prosecuted to the full extent of the law,” said Norman Flynn, president of the National Assn. of Realtors.

There is little argument here. The realtors, mortgage bankers, consumer groups, members of Congress and Department of Housing and Urban Development are all similarly opposed to old-fashioned referral fees.

But they disagree vehemently over the latest twist that one-stop shopping has brought to the real estate business: Some realtors now take loan applications and charge for that service.

The battle lines have been drawn: It’s the realtors against everyone else, which may be the reason for some of the histrionics.

At a recent realtor-sponsored conference, one realtor said, “Forgo innovation, forgo your birthright.”

Mortgage bankers want the RESPA legislation amended to prohibit loan processing by realtors. Realtors want the law left alone. Each side claims to represent the consumer in this debate.

But self-interest is oiling the machinery of this inter-industry war.

Mortgage bankers and consumer groups say the realtors are using a “loophole” in RESPA. The regulation that prohibits lenders paying realtors for referrals is no longer an issue because it is the consumer who now pays the tab.

And although the law says that realtors cannot receive a fee for a simple referral, they now provide a service--filling out the application.

But the mortgage bankers ask how realtors can avoid the conflict of being paid by both the seller, who pays the realtor’s commission, and the buyer, who pays for the help with the loan application.

“To give clear and impartial direction to the borrower, there must be a separation of powers and duties,” said Angelo Mozilo, president of Countrywide Funding Corp., a mortgage banker in Pasadena.

“There’s the lender, the appraiser, even the termite inspector. If the real estate broker is receiving remuneration from any of those entities involved in the process, he can’t be impartial.”

Consumers Union backs the mortgage bankers. Michelle Meier, counsel for government affairs at the consumer group, said:

“The work involved is so minimal and problematic that I don’t consider it a bona fide service. But the biggest problem for the consumer is that he relies heavily on his real estate broker for an objective opinion. Unfortunately, when the real estate broker has a financial stake in what lender is chosen, the consumer is not going to get impartial advice.”

Citing a HUD study, Meier said almost half of all consumers choose a lender recommended by their agent.

However, realtors are saying that they have every right to be compensated for services rendered.

“Mortgage bankers are asking for a federal law to fence themselves in, to keep out competition from other sources,” Flynn said. “They keep trying to wrap themselves in the pro-consumer shroud, but to put false barriers in the marketplace would be detrimental to consumers.”

The heated conflict between mortgage bankers and realtors has arisen largely because the biggest mortgage banking company in the country, Citicorp, uses realtors as loan processors.

In an effort to increase customer service and speed up the loan process, Citicorp tested a computer loan application program in New York in the early 1980s. Although it also was available to lawyers, mortgage bankers and accountants, it was mostly realtors who signed up for membership in the program so they could provide an extra service for their customers.

The program was a big success and the financial company expanded it nationwide in 1985, said Bob Horner, the chairman of Citicorp Mortgage Inc. in St. Louis.

But it wasn’t long before realtors found themselves also running the program for would-be buyers who were not their customers, too. And they began to charge for the service.

Citicorp has never paid realtors who use its program for loan applications. In fact, its members pay Citicorp between $1,000 and $2,500 a year, depending on size, for access to the computer program. Not all realtor-members charge clients for the service, and among those who do, fees vary greatly--from $100 to two percentage points of the loan balance.

Horner is no apologist for the program. Citicorp’s background credit check would prevent any realtor from greasing the skids for an unqualified buyer, he said. Horner is tired, he lamented, of what he calls the deliberate and misleading portrayal of Citicorp’s highly successful program.

“We violently oppose referral fees,” he said, “and Citicorp has never paid a realtor for a loan application.”

HUD is in a quandary. Twice the federal housing agency has issued informal opinions saying it was permissible for realtors to charge extra fees for these services. Recently, however, HUD drafted a regulation to limit the practice, but it was never signed because the outgoing secretary, Samuel L. Pierce, thought it should be left for his successor, Jack Kemp, according to the Mortgage Bankers Assn.

Hearings scheduled on the subject for early June before the House subcommittee for housing and community development were canceled. Pressure dealing with the first omnibus housing bill in more than 10 years was to blame for the postponement, according to a panel staff member, who said the hearings will be held eventually.

If the staffer’s assessment is a good indicator, the realtors may have a tough time of it before Congress.

“If I were a real estate broker,” said the staffer, “and I’ve got to close a deal to earn my commission, naturally it is in my best interests to qualify the home buyer for a loan. That’s what real estate brokers help to do. There’s nothing new. I ought to be thankful if there is a new computer program out there that enables me to do my job more expeditiously. Hell, I should be willing to charge less.”

South Pasadena, Walden Woods and the New Orleans French Quarter have been placed on the “most endangered places” list by the National Trust for Historic Preservation.

“Preservation of significant cultural landmarks is essential if Americans are to have a sense of identity and place,” said J. Jackson Walter, president of the trust.

The list is part of the organization’s support for cultural legislation to protect sites from development pressure, vandalism and the scarcity of money for maintenance.

Besides South Pasadena and the other two locations, this year’s list named Antietam National Battlefield Park, Md.; Columbus Landing Site in the Virgin Islands; Deadwood Historic District, S.D.; Fort Frederica National Monument, Ga.; Kennecott Mines, Alaska; Penn School, S.C.; Roycroft Inn, N.Y., and West Mesa petroglyphs, N.M.