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Realty Referral Fees Compromise Offered

April 21, 1996|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — In an unusual concession to Capitol Hill Republicans, the Clinton administration has tipped its hand in advance on a forthcoming controversial regulation affecting home buyers, mortgage applicants and the industries that serve them.

Equally significant, the administration revealed that it plans to backpedal on a key consumer protection issue--and end up closer to what Republicans have demanded.

The controversy concerns referral fees: Should the rapidly growing number of Realtors and home builders who own or have interests in affiliates in mortgage lending, title insurance, home inspection, escrow and other settlement services be permitted to pay employees for referring consumers to those affiliates?

For example, say you plan to purchase a house through a prominent real estate brokerage firm in your area--call it Megacity Homes Corp. The sales agent you dealt with introduces you to an associate of hers, a Megacity "consumer service representative."

The associate asks for a few minutes of your time to show you a video about the impressive array of other home purchase-related businesses that are affiliated with Megacity in some way. They include:

* A wholly owned mortgage banking subsidiary that not only specializes in the sort of "jumbo" loan you're going to need but originates loans for some of the largest mortgage firms in the country. The rates and service are "the best anywhere," according to the consumer representative.

* A home inspection company that offers discounted fees only to Megacity clients. Megacity is co-owner of the inspection agency.

* A fire and hazard property insurance agency.

* An escrow or settlement firm that can orchestrate all the details of your closing, hassle-free.

After the video, the representative notes that you are, of course, free to go out and shop for all of these services on your own. But, he says, "you are going to save a lot of money and time" by using Megacity affiliates, either individually or as a package deal. "After all," he adds, "we want you to be our long-term customer, and we want you to tell your friends good things about our firm. So naturally we're going to give you the lowest-cost package around."

Sounds good. And in large realty firms in numerous markets, something akin to this hypothetical example already exists.

Under a federal regulation adopted in the final days of the Bush administration in 1992, service representatives can receive substantial fees--the amounts undisclosed to you--from the parent firm for simply referring your business to one or more of the affiliates. What must be disclosed to you in writing is that business relationships exist among Megacity and its affiliates and that you're free to shop elsewhere.

Nearly two years ago, the Clinton administration's housing experts took a look at "one-stop shopping" arrangements like this and decided to ban most commissions, fees and other types of referral compensation paid to employees of affiliated real estate service providers.

The Department of Housing and Urban Development concluded that giving realty employees financial incentives to keep lucrative mortgage, title and settlement business inside the corporate tent could compromise the consumer's interest.

Rather than encouraging more buyers to comparison-shop among competitors, HUD said, well-paid employees might effectively discourage any shopping whatsoever with enticing promises of price savings and fine service--whether the promises were accurate or not.

HUD's proposed rule barring most employee compensation for referrals to affiliates raised the hackles of large realty and financial organizations. But only when Republicans took over the House and Senate in 1995 did industry critics gain Capitol Hill allies who wielded direct strategic power over HUD's budget and entire housing agenda.

Late last month HUD decided to compromise. In a House banking committee briefing, the agency revealed that its final regulation on referral fees will allow employees to receive fees for referrals to affiliates, as long as the employees only "market," rather than perform, any actual settlement services. HUD also flashed the green light for referral compensation by a variety of other employees--a bank teller, for example, who sends a client to the bank's mortgage affiliate.

HUD's forthcoming rule, however, would still prohibit realty agents--who generally are independent contractors, not employees--from receiving money or other compensation for directing clients to affiliated businesses.

Most realty, finance and consumer groups had no immediate comment on HUD's briefing papers. But at least one trade lobby--the Real Estate Services Providers Council--said that despite the apparent compromises, "HUD has no business regulating how companies compensate their own employees."

HUD says it would like to move ahead and publish the new rule as quickly as feasible in the coming weeks.

*

Distributed by the Washington Post Writers Group.

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