Steering Home Buyer to Lender for Fee Criticized : Mortgages: Prudential Real Estate Affiliates Inc. of Costa Mesa is one broker who accepts reimbursement from lenders for referrals. A trade group assails the practice.
Real estate agents who accept fees for linking home buyers with mortgage lenders are shortchanging the clients they are paid to represent and the practice should be made illegal, a congressional panel was told Wednesday.
In testimony before the House banking subcommittee on housing and community development, a trade group representing mortgage bankers criticized Prudential Real Estate Affiliates Inc. of Costa Mesa and other real estate brokers who accept reimbursement from lenders for referring home buyers.
“It is fundamentally wrong for a real estate broker, who is receiving a substantial commission from the seller of a home, to have a financial interest in where the buyer of the home gets a mortgage,” said Ronnie J. Wynn, president of the Mortgage Bankers Assn.
Prudential and Citicorp Mortgage have created a computerized loan-origination system that is made available to real estate agents across the country.
Under Prudential’s system, agents help home buyers find mortgages offered by Prudential and a handful of other participating lenders. When a buyer selects a mortgage, the lender pays Prudential a fee of $425, and Prudential passes along $100 to the real estate agent. Prudential says the $100 is to defray the cost of operating the computer system, not a referral fee.
Citicorp Mortgage lists loans offered only by Citicorp but also pays agents who use the service.
Most mortgage bankers are excluded from the systems and their trade group said it wants Congress to outlaw the practice through an amendment to the Real Estate Settlement Procedures Act of 1974 (RESPA).
In separate testimony, the National Assn. of Realtors told the subcommittee that the computer systems do not create conflicts of interest or result in discrimination against mortgage bankers who do not participate.
The group also said the computers do not increase the cost to consumers of buying a home. It argued that the listings streamline the process of buying a home because borrowers can conduct more tasks at the broker’s office.
But Wynn said the payments raise the cost of housing, encourage steering of buyers to participating lenders and discourage competitive mortgage pricing.
“MBA strongly believes referral fees do not add value but create an environment that could undermine the integrity of the mortgage process, while adding unnecessary costs to the American home buyer,” he said.
The Department of Housing and Urban Development approved Citicorp’s MortgagePower service in 1986 and Prudential’s Computerized Loan Origination System in 1988. Although these are the two biggest networks, mortgage bankers said smaller systems are springing up around the nation.
Leonard N. Druger, vice chairman of Citicorp, said MortgagePower features faster loan approvals, limited documentation requirements, reduced origination costs, and superior levels of service for borrowers.
“There have been virtually no consumer complaints about the program,” Druger said. “In addition, no one has ever brought to our attention a single consumer complaint filed against our program with HUD. The complaints Citicorp has heard have been from its competitors. It is the competition, not the consumer, that has stirred the controversy.”
RESPA, which is designed to protect home buyers from excessive closing costs, bans referral fees but says a broker can be given “reasonable value for services provided.” Real estate agents argue that the fees they receive fall into the latter category.
A proposed rule banning the fees was tentatively approved by HUD in 1988, but it was not allowed to take effect.
The computerized system “is not magical, is not a cure-all, and is anything but objective,” said E. Robert Levy, executive director and legal counsel for MBA. “It is too easy to abuse this system. Congress must stop it. It’s an intolerable conflict. It doesn’t work.”
