New Referral Rules Aim to Protect Buyers

In a move to protect consumers from potential “adverse steering,” the Clinton administration has toughened federal regulations governing referrals of home buyers to mortgage lenders, title companies and other settlement service providers.

The new rules, issued last week, revoke portions of controversial home settlement regulations adopted in the closing days of the Bush administration in 1992. Any real estate broker, mortgage lender, title and escrow agency or law firm providing home real estate settlement services in the United States will have to conform to the new regulations when they take effect in mid-October.

A key focus of the rules concerns the rapid growth of affiliated business interrelationships among real estate brokers, mortgage lenders, title companies and other service providers. Most large-volume realty brokers and home builders across the country now offer in-house or affiliated mortgage-financing options for their clients. Some firms offer discount-priced “one-stop shopping,” allowing a consumer to sign up for a package including mortgage financing, title search and insurance, property and casualty insurance, and closing services.

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Other companies offer highly sophisticated “computerized loan origination” programs that search among 10 to 20 participating lenders to come up with mortgage alternatives that are custom-tailored to the home buyer’s needs.

Federal law since 1983 has permitted affiliated home settlement business arrangements, provided they are fully disclosed to the consumer and are not mandatory--i.e., you’re free to shop elsewhere for any or all of the services.

The new regulations attempt to limit what officials at the Department of Housing and Urban Development consider the possibility that in some affiliated business arrangements, consumers may be discouraged from actively shopping for title, closing or mortgage services beyond those connected with the realty broker’s or builder’s firm.

The new rules prohibit companies from paying referral fees to any employee who directly deals with consumers and who performs a settlement service--such as a loan officer--on behalf of consumers. The Bush administration’s rules, by contrast, permitted front-line employees to be paid for such referrals.

Real estate sales associates--who are independent contractors, not employees of their realty firms--never have been allowed to receive referral fees for directing clients to mortgage, title or other affiliated settlement providers.

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But under the new regulations, “managerial” employees--branch managers or executives who only rarely deal directly with individual home buyers--can receive bonuses or other payments based on the overall “capture rate” or volume of business sent by their offices to affiliated settlement service firms.

“The goal,” said Sarah Rosen, a HUD official who helped draft the rule, “is not to put roadblocks in front of [affiliated realty service arrangements], but to put the focus back on the consumer’s best interests. We want to make sure that employees who are in a direct position of trust with the consumer will not have undue incentives to steer” them to affiliates, rather than encouraging them to shop around.

Large real estate firms with multi-service subsidiaries and affiliates generally think HUD’s new approach is too heavy-handed and intrusive on the issue. Ron Maas, general counsel to New Jersey-based Weichert Realtors, the country’s highest-volume independent home realty brokerage company, argues that as long as consumers are alerted that business affiliations exist, “they are smart enough to know how to shop, and most of them in fact choose to do so.”

Maas’ firm owns a mortgage subsidiary, a title company and an insurance affiliate--some or all of whose services are offered as an option to home buyers. The home mortgage subsidiary functions as a broker or mortgage banker for national and local lenders, according to Maas. Depending upon location, a home buyer might be able to choose among 20 to 25 competing mortgage lenders by going through the Weichert in-house loan program.

But the typical “capture rate” for mortgage financing in a branch office may be just 25%, Maas said. The other three-quarters of customers, in other words, get their home loans elsewhere--presumably after shopping independently. By attempting to control which employees deal with the consumer on settlement services, argues Maas, “HUD is needlessly complicating” the real estate business and “interfering with our ability to provide these services efficiently.”

Not all big realty firms agree with Maas, however. Robert Rist, president of California-based Coldwell-Banker Residential Affiliates, welcomes “the certainty that now we know what we can do and what we can’t” in offering settlement services to consumers.

Coldwell-Banker’s 2,500 franchise offices, for example, haven’t offered mortgage financing or title insurance in part because “we weren’t certain about the federal rules,” according to Rist. “But now we can actively pursue that nationwide.”

The upshot of all this for home buyers? Look for more--not less--”one-stop shopping” in the coming months. And look for a new wrinkle in disclosures: Under the new rules, you’re not only going to get a disclosure form, but you’re going to be asked to sign it as well, so everybody knows that you know who’s partnering with whom.

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Distributed by the Washington Post Writers Group.