Mortgage lenders have taken great pains over the years to cultivate their relationships with real estate brokers, a rich source of business referrals.
Now, however, those relationships are being threatened by consumer-protection rules put into place late last year. Predictably, people in just about every segment of the mortgage industry are hopping mad about the rules and fearful of losing business as a consequence.
The controversy has given birth to lawsuits that seek to nullify the rules, and to efforts to have them eliminated by Congress.
Hearings on the issue have been scheduled for July 1 by a House Small Business subcommittee, and critics of the rules are hoping friendlier legislation will result.
A number of lenders fear that they would be effectively locked out of real estate offices. For example, the rules let real estate brokers earn fees by linking up electronically with just one lender, possibly to the exclusion of others. In addition, real estate brokers will have new incentives to give the bulk of their business to sister companies.
Electronic Networks Spawned
The rules are hastening development of electronic networks over which lenders could distribute mortgage information and receive and process applications.
Such systems -- called computerized loan origination systems, or CLOs -- would be linked to terminals in real estate offices and would help lenders cement relationships with the realtors by generating fee income for them from borrowers. And lenders unable to connect to these systems could lose business. Large thrifts are among those worried about the implications of CLOs, says Kenneth McLean, a lobbyist who represents some of them. "These systems could develop into yet another way to steer business."
Designed to Combat Kickbacks
The rules, adopted by the Department of Housing and Urban Development last November to implement the Real Estate Settlement Practices Act of 1974 and its 1983 amendments, are designed primarily to combat kickbacks to real estate brokers for loan referrals.
But they also define some permissible practices, and this permission is causing the most trouble.
A major sore point is that the rules permit referrals between parent company and subsidiaries, and even allow payment of referral fees to employees of related companies. For example, a mortgage company could pay a referral fee to a broker who works for a real estate company as long as the two companies have common ownership.
In the past, computerized loan origination systems have had difficulties because of legal problems in compensating brokers.
But, to the consternation of many lenders, the new rules clearly allow brokers using CLOs to earn fees. Moreover, the rules do not define a CLO, leaving open the possibility that a single lender could establish such a system with real estate brokers, locking out competitors.
"The whole idea of RESPA was to avoid kickbacks," says Howard Birmiel, a lawyer for the Coalition to Retain Independent Services in Settlements . "Instead, it has created a new form of kickback."
The Mortgage Bankers Association of America and Mr. Birmiel's coalition, whose members are small providers of settlement services, are suing to have HUD's regulations set aside, challenging the rule-making process and charging that the rules violate the intent of the 1974 act.
Consumer Interests Stressed
However, with hearings already scheduled, observers believe lobbying efforts could be more fruitful than the lawsuits.
The mortgage bankers group is basing most of its objections to the rules on consumer interests.
"If the agent gets a referral fee unrelated to any work he has performed, then the customer may not be getting the best price or the most favorable terms on the mortgage," says Warren Lasko, the group's executive vice president.
The trade group is opposed to the charging of fees to borrowers for use of a computerized loan origination. "But if there must be fees, they should be charged up front," Mr. Lasko says.
"The consumer should at least have the chance to say, |What is that for and why do I have to pay it?' At the closing, it's too late."
Larry Platt, a Washington lawyer who specializes in issues involving the 1974 act, takes a different view.
"They're concerned about concentration in the industry, about the rules allowing large companies to capture the market," he says.
"What the MBA seeks to preserve is an antiquated network of personal relationships that afford borrowers no better choices or better prices, and in fact may be more expensive."
Mr. Platt says he has as clients some mortgage banks that belong to the trade group but disagree with its policy. Some mortgage banks believe the rules present an expansion opportunity and that the public would benefit from increased competition.
Seizing the Moment
Indeed, some people have welcomed the new regulations. Jack Guttentag, a Wharton School professor who is about to launch a multiple-lender CLO, says: "The advantage of the new rules is that they have made a lot of people aware of the opportunities," he says.
Hamilton Financial Services Corp., San Francisco, is among several companies seeking new ways to work with realty brokers. The company, which owns a mortgage bank, reportedly plans to enroll thousands of real estate agents as mortgage originators.
Such developments are doing little to allay fears among small and midsize lenders that giant financial-service companies could come to dominate the mortgage process.
They could, for example, sell homes through real estate subsidiaries, finance them through mortgage-banking units, and handle details of closing and settlement.
HUD Steps Up Enforcement
With the legal and lobbying efforts still in full force, such major competitive threats have yet to develop, but it's still early in the game.
And while critics question the value of the rules to consumers, HUD is determined to push its enforcement efforts. It characterized its recent $700,000 settlement with Coldwell Banker Real Estate Group Inc. and affiliated companies over alleged violations of the 1974 act as a stern warning to the industry that it intends to take the rules seriously.
Among other violations, the agency had accused Coldwell of charging improper fees to customers who entered into listing agreements, referring title business to an affiliate without proper disclosure, and pressuring operators of a computerized loan origination system owned by an affiliate to steer business to Sears Mortgage.
HUD is also drafting rules that it says will provide further penalties and give it additional muscle in enforcement.