The RESPA Violation You Keep Committing
While browsing for recent real estate info & news to share on the blog, I came across THIS ARTICLE on the website Searchlight Crusade written by Dan Melson about the most violated law in real estate and it blew my mind. I see it almost every day and most agent's don't even know they're doing it.
Let's start with the basics: What is RESPA?
Many agents hear the term thrown around & are trained to be fearful of it, but what is it exactly? RESPA stands for Real Estate Settlement Procedures Act and it's meant to protect Buyers & Sellers by improving the disclosure of settlement costs & to eliminate abusive practices in the settlement process. It's actually been in effect since 1975 but was revamped when enforcement & oversight responsibility shifted in 2011 from HUD (Department of Housing & Urban Development) over to the CFPB (Consumer Financial Protection Bureau).
You can find a brief overview of RESPA in plain English HERE.
So what does a law meant to corral bad practices by lenders have to do with a real estate agent? It has to do with one word: steering.
Here's an example:
An agent is getting frustrated that escrows keep cancelling on his listings because Buyers said they were pre-qualified, but in the end, couldn't make the deal happen. In an effort to save time & added frustration, he makes sure to include in the agent notes on the MLS (Multiple Listing Service) the following terms: Buyer must be cross-qualified through So And So Lender with Blah Blah Bank. After all, this agent has had success with this lender & trusts their expertise.
Another example I see all the time is in the actual contract on a Counter Offer. The Buyer submits their offer, provides proof of funds & a pre-qualification letter from their lender of choice. The Seller and/or Listing Agent has never heard of this lender or maybe has heard bad things about this lender & wants a second opinion. So they write in a counter offer: Buyer to be pre-qualified with So And So Lender with Blah Blah Bank.
Well obviously the agents are just looking out for their Seller. And no one is forcing the Buyer to use that lender. So what's the violation?
To quote RESPA Law:
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.
Let's break that down. No person shall give/accept ANY THING OF VALUE. It's a pretty broad definition that could easily be applied to the practice of requiring or "steering" a Buyer towards a certain lender. If all you're asking for is a thumbs up from a lender you trust, where's the value? The value is in the lead itself. In order to pre-qualify the borrower, the lender will need their contact information & credit details & when it's all said and done, they now have a new business relationship.
And now that the Buyer has doubts in their head about their current lender's ability, who will they reach out to if it comes time to make a switch? After all, this new lender already has all of their info and they said they would be good to go. Seems pretty valuable to me...
So what's the solution? How do you protect your Seller & your sanity without violating the law? Well, Melson makes a great suggestion in his article after pointing out that a pre-qualification is in no way a guarantee. It's a lender looking over the basics and saying, "Yeah, probably."
Here's the fix:
That lender you want every Buyer to cross qualify with? If you trust them so much, ask them to tell you the things to look for in a qualified buyer. Melson has developed a form for the Buyer's Agent asking for credit score, late payment history, income info, etc. Nothing personal or identifying. Then, armed with that information, you ask your preferred lender to review & sign off. That will give you a pretty good idea of what the buyer is capable of.
So what if you're on the Buyer side? What if it's written into the contract or spelled out on the MLS? Ignore it. Maybe, "I thought that might have been a mistake seeing as how that's a RESPA violation." Maybe offer the Listing Agent the option to talk directly with the Buyer's lender to easy their concerns. But don't allow your clients to be vulnerable to this type of steering.
Stop writing "Seller's choice of all services!" This is another RESPA violation by forcing the Buyer to utilize title insurance provided by a company of the Seller's choosing. We all know the Seller's A) Don't care or B) Don't know the difference. The instruction is coming from the agent that has a relationship with their own preferred title company that maybe gave them farms or leads or other incentives.
Typically when a Buyer (new owner) has title insurance with the same carrier that holds the lender's insurance, they get a discount. Not allowing for negotiation on those terms, is a RESPA violation. Do you know why these vendors are your preferred contacts? Is it because their fees & services are in the best interest of your client? Or are they in the best interest of your own business?
We'd love to hear your thoughts & feedback on this topic so leave us a comment below!