Last December, an eager mortgage banker in Northern California sent out a flyer to local real estate offices promising to pay $100 to realtors for each home loan borrower referred to him.
A harmless business practice?
No, say federal housing officials, if the banker actually paid fees for home loans originated by federally regulated banks or by lenders who sell their loans into the secondary mortgage market, which is most mortgages.
Such a practice is considered an illegal kickback punishable by up to one year in jail and a $10,000 fine. And according to federal officials and real estate industry observers, the practice is becoming more common in California as lenders scramble to capture a shrinking supply of home loans brought on by the sudden rise in mortgage interest rates last year.
The number of home loans originated here in the last quarter of 1994 fell 54% from the same period in 1993, according to Dataquick Information Systems, La Jolla.
You have the same number (of lenders) seeking fewer loans, and this competition prompts some to cross the legal line, said U.S. Department of Housing and Urban Development executive David Williamson, who is charged with regulating loan practices.
Currently, HUD has 100 investigations going in California, where "a great number of allegations and complaints come to our office"--prompting Williamson to characterize California as "the worst state" when it comes to violations of laws that govern real estate kickbacks--the federal Real Estate Settlement Practices Act, commonly referred to as RESPA.
Kickbacks steer consumers to a particular lender or title company without regard to the most competitive loan or title policy for the borrower, and are becoming more sophisticated, according to Williamson, and buyers and borrowers are often oblivious to how, when and where they occur.
For example, realtors rent out space to mortgage brokers and charge excessive rent in exchange for the agent referring business to the lender. In a quid pro quo for home loan referrals, the mortgage broker routinely pays for the real estate agent's advertising or pays the realtor a monthly consulting fee for doing nothing but referring business.
Title companies give real estate agents fax machines, computer equipment and vacations to Las Vegas or Hawaii in exchange for referring title insurance business, and some lenders offer a raft of goodies to mortgage brokers who steer business to them, according to Williamson.
"California has been a challenging state for us," said Williamson, who is director of RESPA enforcement for HUD. One explanation is that real estate agents and brokers here are confused by state and federal law. State statute permits referral fees if they are disclosed to the borrower before the close of escrow.
Nevertheless, "federal law prevails and it is still illegal," Williamson said.
Late last year, HUD sent a letter to the state attorney general, local district attorneys and the state departments of real estate and insurance, trying to better coordinate RESPA enforcement in the state. This has led to more cooperation among the agencies and should help HUD in its current investigations, Williamson said.
"There is less business and (lenders) are fighting for every little bit that's left, leading to short cuts," said Pamela Strickland, president of California Assn. of Mortgage Brokers in Sacramento. The trade group is trying to educate its members to the importance of abiding by the law.
Indeed, most of the complaints that flow into the HUD office come from other mortgage brokers and bankers who "are frozen out of a (real estate) office because (the realtor) has a deal with someone who is paying kickbacks," said Strickland.
But the real victims are the borrowers who may not be getting the lowest loan rates with the best terms.
Consumers are advised to carefully read the Uniform Settlement Statement given to them before closing, which details all charges and which should reference any referral fees.
For more information, mortgage shoppers can obtain a copy of the "Consumer's Guide to Mortgage Settlement Costs," published by the Federal Reserve Bank of San Francisco and available through its Public Information Department, P.O. Box 7702, San Francisco, Calif. 94120.
Inman is a syndicated real estate columnist.