HUD Backs Off Tougher Rules For Builder Lenders

by Peter G. Miller
May 18th, 2009

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For several years there has been a big battle in Washington regarding the way in which new homes are financed. Basically, builders often give “incentives” if only you will use their lender. Their lender, of course, is unlikely to be the world’s cheapest source of financing, thus you may get upfront benefits but may also pay extra over time.

HUD tried to stop the practice with a new rule banned the “required use” of the builder’s mortgage lender, was promptly sued by the home building industry and has now withdrawn its proposal altogether, meaning that new home buyers will continue to have the opportunity to pay more than they should for real estate financing.

It may seem improbable, but the HUD notice in the Federal Register is fascinating reading. For instance, it says that:

“It is HUD’s view that, especially given the attention focused on HUD’s concerns through this rulemaking, the prior definition of ‘‘required use’’ can be used to address some deceptive referral arrangements, even though it does not achieve the enhanced consumer protections that HUD sought with
respect to mortgages involving affiliated business arrangements. HUD will
continue to seek consumer protections, especially as mortgage products
continue to change, often becoming more complex and challenging buyers’
understanding of the costs and nature of mortgage transactions. HUD is not
abandoning its goal of providing greater protections to consumers in real estate settlement transactions, but remains open to different means of achieving this goal.”

HUD also says that it “reiterates its commitment to fair real estate settlement practices that are not misleading, prevent abuse, offer proper disclosures to homebuyers, and promote choice and competition. HUD’s
intent in revising the definition of “required use” was to clarify its
interpretation of RESPA’s requirements with respect to transactions involving affiliated businesses in order to promote more competition among settlement service providers. After further evaluation and consideration of the concerns voiced by consumers and industry participants from various fields about the application of the revised definition of “required use,” HUD has concluded that all would benefit by HUD withdrawing the revised definition and addressing “required use” through new rulemaking.”

Disappointment

You might have thought with a new Administration that the deal would change and that borrowers would get a fairer shot in the marketplace, but not so. HUD bought such arguments as the idea that “builder affiliated lender model has efficiencies which are passed on to consumers” and that builder-affiliated companies “help prevent mortgage fraud.”

Right.

As yourself a question: How often do you think a builder’s lender says “no” to a builder’s client?

If builders only served-up FHA loans with full appraisals, fair terms and fully-documented loans the matter would be less serious. Let’s have a survey and see how many recent new home buyers are in trouble — and where they got their loans.

HUD is right. New rulemaking is needed. Real rulemaking that protects the public.

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