A settlement between the federal Consumer Financial Protection Bureau and a Texas homebuilder is drawing renewed attention to a controversial issue that was prominent during the years preceding the housing bubble: kickbacks in home real estate transactions.
Put another way, do you know where your money is really going when you pay thousands of dollars in loan fees and closing charges? Is your realty broker or builder getting an extra piece of the action through side deals with lenders or title agencies - all at your expense through higher charges?
The CFPB's allegations in its case against Dallas-based Paul Taylor Homes Ltd. illustrate how these arrangements can work: According to the settlement, the builder created partnerships with two lenders - one a bank, the other a mortgage company. In reality, however, according to the CFPB, "both entities were shams" designed to funnel kickbacks to Taylor for referrals of home purchasers needing mortgages.
Though the partnership entities had names - Stratford Mortgage Services and PTH Mortgage Co. - and appeared to be the funding sources for the loans, they in fact were shells with no separate employees, office space or real substance, the CFPB alleged. They did not advertise their mortgage businesses to the general public, instead servicing only Taylor purchasers.
Paul Taylor Homes denied any wrongdoing as part of the settlement. Asked for comment for this column, a lawyer for Taylor Homes, Van Shaw, said Taylor "has chosen to settle this matter to avoid the expense of potentially extended litigation with the government. The company now considers the matter closed." As part of the settlement, Taylor must pay the federal government $118,194, the amount of money the builder received from the alleged kickback scheme starting in 2010.
This was the second such case the CFPB has settled in the past two months. In April, the agency fined four large mortgage insurance companies - Mortgage Guaranty Insurance Corp., Radian Guaranty Inc., Genworth Mortgage Insurance Corp. and United Guaranty Corp. - a total of $15.4 million for alleged illegal kickbacks to lenders. The under-the-table payments, said CFPB Director Richard Cordray, "inflat(ed) the financial burden of homeownership for consumers" by raising their mortgage premium charges. The firms admitted no wrongdoing as part of their settlements.
Federal authorities have been investigating and taking action against real estate kickback schemes since the mid-1970s. Federal law prohibits the giving or accepting of fees, kickbacks or "things of value" in exchange for referrals of customers who are applying for or obtaining a home mortgage. Cases have ranged from the prosaic - lenders or title agencies providing realty agents cash, free trips to resorts, tickets to sporting events - to subtler schemes. For example, a realty firm or builder might put up 10 percent of the capital to start a partnership with a lender or title agency but get kickbacks totaling 70 percent of the profits, based on the volume of referrals.
Though federal law permits "affiliated business arrangements" among real estate and settlement service providers, those arrangements must have economic substance - they are adequately capitalized, no partner receives compensation based on referral volume, they have separate office space and employees, among other requirements.
Many large real estate brokerages and homebuilders have such affiliate tie-ins and are required to disclose their existence to clients and advise them that they have other choices for services. Industry proponents of these arrangements argue that they provide faster, more reliable service in transactions at a fairer cost than can be achieved by consumers going out and shopping on their own.
But critics such as Doug Miller, executive director of Consumer Advocates in American Real Estate (CAARE), dispute this. He argues that tie-ins often squeeze out service providers who choose not to affiliate with a big realty firm or builder, reduce competition and raise costs to consumers.
"I'd like to know the last time removing competition causes prices to go down," Miller said in an interview.
His advice to homebuyers: Always shop for title insurance and settlement service alternatives to the in-house deals you're offered. Ask your realty agent to help you shop beyond the affiliation network. Agents have a duty to help you get the best deals and best service, and they often know where they are. If you find better prices from unaffiliated vendors, don't let anybody pressure you to go with the in-house, preferred provider. It's your legal right to choose.
Kenneth Harney's email address is firstname.lastname@example.org