Steering: The Most Violated Law In Real Estate

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I just picked a random ZIP code in my local MLS, and out of the first twenty listings I came to, ten had explicit violations of one or more of the sections of RESPA regarding steering right there in the listing. This did not include lender-owned real estate, which has its own set of issues in this regard. All I did was count two common violations.

The first was "Buyer must be prequalified by X", where X was some loan originator. In a way, I understand this. Forty percent plus of all escrows locally are falling out, and the vast majority of them because of unqualified buyers who cannot qualify for the loan. This wastes a minimum of about a month, plus when it goes Active again, it looks like it's been on the market for longer than it really has. Bad thing all around for the seller. The justification used is that for some reason, the agent trusts that particular loan officer to render a real opinion. Perhaps occasionally, a lender owned property will even try to require prospective buyers to prequalify through them. While it might seem reasonable, here's some relevant law from RESPA

Business referrals

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

They mean that "any thing of value" bit, if you peruse down to the definitions. It's defined very literally by about a paragraph of text that boils down to four words: ANY thing of value. You refer business to them, they give you approvals you can count on. It doesn't matter if you require "only" a prequalification - they now have the prospective borrowers information, including credit information and home telephone number. This means that even if there's no application fee, no deposit, not even a credit report fee, you have still given that loan originator a "business relationship" with the borrower. That makes for legal consideration on both sides of the equation, and both the originator and agent are guilty. This is just as hard a violation of RESPA as a fraudulent HUD 1 form. It hasn't been enforced much of late, but I believe that the State of California could probably put over half the brokerages and lenders in the state out of business over loan steering. I only counted four out of twenty actual explicit requirements to pre-qualify with a specific lender this time, while the last time I conducted the exercise it was eight. Maybe it's getting better, maybe it's not, but twenty percent of a representative sample of listings having an explicit violation of the law right there for everyone to see is not something agents should be proud of. When it comes to holding someone responsible for their representations, pre-approval doesn't mean anything. If you're a real estate agent who doesn't do loans, talk to a lender you trust about necessary information to determine whether a loan is doable. I've created a special form that I send to agents making offers on my listings. Nothing in the way of personally identifiable information except the borrower's name - no social, no contact information - but it does have credit score, late payment history, income information, etcetera, to the point where I can tell whether or not I could do the loan on the terms necessary to make the transaction fly. Furthermore, it does require the loan officer to sign a representation that they aware that a decision as to whether or not to grant credit - in the form of agreeing to enter escrow - will be made based upon this information. They don't need to make representations of opinion - all I'm asking for is verified facts. Armed with those facts, I have a pretty darned good idea if this borrower is capable of consummating the transaction. Doesn't tell me whether they will or not, but that's not what wanting a prequalification or preapproval is about.

But when I'm a buyer's agent, which is most often, I simply ignore these requests that violate the law. Furthermore, this puts me in rather a strong negotiating position if the listing agent repeats the request or brings it to my attention. Now they've compromised their client's interests, by giving the other side (me) a concrete legal issue to aim at them. Game, set, match. As I said, four out of the first twenty listings in a random ZIP code explicitly violated RESPA right in the listing, without counting the ones that say "Contact us prior to making an offer," where that's usually what they want. Four out of twenty where there is precisely zero doubt that they're violating the law.

Actually, that wasn't the most common violation, either. That goes to "Seller to select all services," at six out of twenty - thirty percent. Also from RESPA:

Sec. 2608. Title companies; liability of seller

(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.

(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

Even though in California the seller usually buys the title insurance for the buyer, I've had more than one lawyer tell me that failure to negotiate is construed as a violation of RESPA by the courts. It works like this: In the case of simultaneous owner's and lender's policies from the same company, there's a discount for the lender's policy, essentially requiring the lender's title insurer to be the same as the owner's title insurer. Since this happens on every purchase transaction where there's a loan, you have the requirement to negotiate. Seller and buyer negotiate until they come to a mutually acceptable compromise. Neither one of them gets to dictate to the other. Furthermore, failure to consider the best bargain for the client is a violation of fiduciary duty for the agent. It's not the sellers who want to choose services. Other than corporate owned property - lender owned and corporate relocation properties - there just isn't a reason for many sellers to care. The only reason is if they're employed by a title or escrow company, and their fringe benefits include free title or a free escrow. I've seen that once in the last four years.

What's really going on here is title insurance companies providing free farms, or subsidized mailings, or any number of other freebies they use to attract real estate agent business. Or the brokerage has a captive escrow company they're required by the broker to use, despite the fact that failing to negotiate this point is a violation of the law. I've had agents or their idiot assistants tell me that they get "discounted service" even when I've got a lower quote from the competition. Furthermore, the interplay of title company and escrow company is important. If there's no common ownership between the two, the title company will charge a "subescrow fee" that I've seen be anywhere from $100 to $450 (usually about $350) because they're the ones who are actually set up to accomplish some things that are legally the escrow company's responsibility. For instance, recording. What this means is that even if the actual quote is lower from unaffiliated companies, the clients are quite likely better off choosing escrow and title companies where there is common ownership, even if the quote is a little higher - because there won't be subescrow fees, and quite likely not messenger fees between title and escrow. To paraphrase an common saying, $350 is $350, even when there's a half million dollar deal happening. Make certain you get a guaranteed total fee for services quote based upon the actual escrow and title relationship to each other. I'm quite sorry for independent escrow companies - I have no reason to believe they're any less competent or charge anything more than title company affiliated ones - but they're competing at a disadvantage because the title company wants to charge more to work with them, and this is quite reasonable given that they will be performing services that are the escrow company's responsibility. They waive subescrow for their own affiliated companies simply because, one way or another, they're responsible for the work.

I've also heard all sorts of nonsense about competence of title and escrow officers. The fact is that most of them are perfectly up to your transaction. Even corporate owned relocation properties, where there may be some complex tax issues, aren't significantly more complex than your garden variety individual buyer - individual seller, and don't get me started about 1031 exchanges, which are perfectly straightforward from escrow's point of view. Any good agent's agenda is very simple - competent service providers for the lowest total price. The vast majority of the time, this means a title and escrow company with common ownership. Note that I don't care which title company and affiliated escrow company. I'll do business with anyone that hasn't hosed a client, and even if they have, I'll simply require a different title or escrow officer - just because John has a recto-cranial inversion doesn't mean Jane, another officer at the same company, does. Even lender-owned property will negotiate service providers if you approach it right - which is how it should be. Oh, you'll end up with their choice of providers most of the time, but you can get them to pay for subescrow and messenger fees, and quite likely an allowance to meet your lowest quote elsewhere - meaning your client doesn't really have a reason to care. Essentially the same product at the same price to them. Why would most clients raise a fuss about that? Indeed, the only thing worthy of most clients raising a fuss would be if you didn't negotiate for that. Explaining the whys and wherefores of the whole service provider quandry has gotten me a seller or two working at cross-purposes to their listing agent, who had someone all picked out without informing their seller. When this happens, my buyer wins. How could I not use every weapon at my disposal?

The intent of Congress on steering is quite clearly spelled out:

TITLE 12--BANKS AND BANKING
CHAPTER 27--REAL ESTATE SETTLEMENT PROCEDURES
Sec. 2601. Congressional findings and purpose
(a) The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. The Congress also finds that it has been over two years since the Secretary of Housing and Urban Development and the Administrator of Veterans' Affairs submitted their joint report to the Congress on ``Mortgage Settlement Costs'' and that the time has come for the recommendations for Federal legislative action made in that report to be implemented.
(b) It is the purpose of this chapter to effect certain changes in the settlement process for residential real estate that will result--
(1) in more effective advance disclosure to home buyers and sellers of settlement costs;
(2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services...
(emphasis mine)


Whatever forms those kickbacks and referral fees may take, if your agent is violating this, do you really want to do business with them?

Caveat Emptor

Original article here

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This page contains a single entry by Dan Melson published on June 16, 2014 7:00 AM.

Racial Gap In Home Loans was the previous entry in this blog.

Sourcing and Seasoning of Funds is the next entry in this blog.

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