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Your Mortgage : Limits Asked on Realty Referral Fees


WASHINGTON — In a major reversal of federal policy, the Clinton Administration wants to ban virtually all payments for referrals among employees of affiliated realty brokers, mortgage lenders, title insurers, escrow agents and others who provide real estate settlement services to consumers.

It also wants to spell out the first guidelines for one of the fastest-growing trends in the home real estate field--computerized loan origination systems (CLOs).

The Clinton initiatives are contained in a long-awaited regulatory package sent to Capitol Hill for review just before Congress' July 4 recess. The proposals represent a rethinking of controversial policies adopted by the Bush Administration in its closing hours.

The most significant change would prohibit referral fees paid by a real estate brokerage firm to employees who steer home buyers to affiliated mortgage lending, title or other service providers.

Under current rules, such employees can be paid cash--or be compensated in other ways--for each home-buying customer who applies for a mortgage from an affiliated lender. The employee can also be paid for additional referrals of the same client to affiliated title, escrow, home inspection, casualty insurance or other services.

For example, say you're buying your new home through Ajax Real Estate Corp., a hypothetical brokerage firm in your area. As you're signing your home purchase contract, an Ajax "buyer service" representative offers you the option of "one-stop shopping." Rather than taking the time and effort to search the marketplace for a mortgage lender, a title insurance agent, a property inspector, an escrow or settlement agent, she suggests you sign up with Ajax affiliates in these fields and come away with what she says will be a discounted bottom-line cost.

Giving you a pre-printed federal form, the buyer service representative discloses the interrelationships among the affiliates. You sign up for the package deal, and the employee gets a cash commission of $750--undisclosed to you--for simply directing your business to the affiliates.

Under regulations adopted by the Department of Housing and Urban Development (HUD) in late 1992, Ajax is free to reward its local employees for referrals like this. But HUD has now concluded that paying fees to employees who are directly in contact with the consumer--and who can strongly influence the home buyer's choices--should be illegal.

By giving employees a potent financial incentive to keep highly profitable home finance and settlement-related business activities in-house, HUD believes the consumer's interest may be compromised. Rather than Ajax Real Estate encouraging its home-buyer clients to shop for the lowest cost, best-quality mortgage money, title insurance and escrow services, the firm--via its branch manager or buyer-service employee--has an inevitable incentive to discourage aggressive outside shopping. At its worst, Ajax's "one-stop shopping" may in fact deliver a poor quality, overpriced package of services to the home buyer.

The proposed new rule would prohibit all employee bonuses and commissions directly tied to referral volume within an affiliate network. But it would leave a notable exception: Real estate company employees who "do not routinely deal with the public" could still receive "bonuses and compensation" for the "generation of business among affiliates."

Major realtors with extensive affiliated-service networks had no immediate reaction to the proposal. But a trade group that represents their interest--RESPRO, the Real Estate Service Providers Council--denounced the plan. Sue Johnson, RESPRO executive director, said it amounts to a "dangerous intrusion by the federal government into employers' internal compensation practices" within the real estate field.

The second key focus of the proposed new rules--computerized loan origination systems--attempts to protect consumers from making payments for mortgage services they don't need or get.

CLOs typically are electronic, interactive systems listing loan options open to the borrower. Through computer terminals in a real estate broker's office, a home buyer can scan a menu of loan offerings from competing firms, and then actually apply for a mortgage. Usually a fee for CLO services is charged to the consumer. Lenders listing loan offerings may also pay the CLO operator--which may be the realty firm--some form of fee as well.

The new HUD proposal sets out detailed criteria for CLOs that qualify for exemption under federal anti-kickback rules. One of the requirements, for example, is that the CLO display competing mortgages in a "lender neutral" manner. Some critics of existing CLOs say they can be set up to make one lender's offerings appear to be best in the marketplace by omitting competitors with better pricing and products.

Another requirement that's already drawing fire is HUD's rule that "qualified CLOs" must allow a minimum of 20 lenders to be listed.

"That's totally arbitrary," says Phillip Schulman, a Washington attorney who represents dozens of mortgage companies. "You don't need 20 sets of loan programs to give consumers a choice. Their heads are going to be spinning."

Still another controversial proposal: That CLO fees be paid by the borrower "outside of and before closing." Though the intent appears to be to ensure that consumers understand what services they're paying for, the rule would appear to allow CLO operators to collect the fee as little as one minute before the final settlement occurs.

Distributed by the Washington Post Writers Group .

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