New Home Builders and their "In House Lenders"
I have been doing this job for over a decade and consider myself an expert in mortgage lending. In that time I have worked with many clients that chose to purchase a new home from several national and regional home builders. With my expertise comes experience and after all these years I have learned that the relationship between a new home builder and their in house lender is shady at best and deserves to be brought into the spotlight.
As a mortgage loan originator I have seen builders force or coerce the buyer into prequalifying or using their preferred lender, which is a clear violation of RESPA (Real Estate Settlements and Procedures Act) and Anti-Steering laws that are governed by the CFPB ( Consumer Finance Protection Bureau).
RESPA was enacted to protect abuses during the real estate settlement process. The primary focus of the act was to eliminate kickbacks or referral fees that tend to increase costs of real estate services for the consumer. Anti-Steering laws, which came from the Dodd-Frank Act, were designed to stop real estate companies, home builders, and mortgage companies from steering mortgage borrowers to certain mortgage programs or certain mortgage companies for their benefit. Both regulations are watched very closely by the CFPB and the bureau has been pretty busy handing out hefty fines for any violations. The most recent one is from Jan 31st of 2017 where the CFPB fined Prospect Mortgage LLC for $3.50 Million dollars for an illegal kickback scheme. Included in the order was two real estate brokers: ReMax Gold Coast and Keller Williams Mid-Willamette and a mortgage servicer: Planet Home Lending. Combined they were ordered to pay $495,000 for their involvement. Why is this important and what does it have to do with new home builders?
For decades new home builders have been using the same kind of tactics that were laid out in the Prospect Mortgage order to steer their buyers toward using their in house lender to get prequalified and or close the loan with. I have experienced this first hand many times and have lost many deals because of the collusion that exists between these two parties. I am not stomping my feet and throwing a fit here because I lost some business. I had the better deal on the table each time and my clients would of benefited, BUT the builder was offering “incentives” to use their preferred lender and would not allow my clients to receive the same incentives if they chose my company for their financing.
It is very common for a buyer to receive incentives from the builder in the form of credits toward the closing costs or upgrades for the home. I have seen anywhere from $3,000 – $10,000 being offered to go with their in house or preferred lender and that is too big a carrot being dangled to pass up. Unfortunately there is no such thing as a free lunch. Usually the builder has already built that extra cost into the price of the home and since the lender doesn’t have to compete for your business they approve you for a high rate with high costs. The only person losing out in this situation is YOU, the buyer. Now here’s the catch………..there’s always a catch!
When each of my clients compared my offer to the builder’s lender, they chose me as their mortgage lender because I had the best deal on the table. Then inevitably I would get a phone call from my client that they can’t use me for the financing because they would LOSE the $3,000-$10,000 incentive from the builder. Hmmm, so you’re telling me my client loses the builder money if they go with me, but they have to take a higher rate and pay more in costs? In my early career I made it a mission to undercut the builder’s lender enough to win the business, but the collusion doesn’t just stop there. After I “won” the business they made it so difficult to close the loan by delaying title work to me, delaying closing dates and various other tactics to make me look incompetent. I’m glad I won the business, but closing the loan with that many headaches made it almost not worth it. Today I am more reserved about working with builders and my first question is always: Will they allow you to use the incentives with any mortgage company?
The whole thing doesn’t make sense and it sounds totally illegal. Well, thanks to the CFPB, It is!
Many consumer watch dogs have been pointing at these builder/lender relationships for years and hopefully soon we will see the CFPB bring a similar order against one of them to set an example and change how business is done with new home builders. A consumer should never be forced or coerced into taking a bad deal because they want to buy a product. Not all builders behave this way, I have done several loans where they were happy to offer the same incentives to the buyer and they can choose any mortgage company they want. This is my advice to new home shoppers: Look for a reputable builder that will offer you the same incentives whether you use their preferred lender or not. Stand up to your builder and ask for the incentives and the choice to use any lender who offers the best deal. If the CFPB doesn’t get to this issue soon, I hope consumers can cause enough stir to change how these builders treat them.
Eric Weishaar
President | NMLS# 207659