Attention New Home Buyers
Attention New Home Buyers:
For a long time, builders have offered appealing financing incentives for you to use their lender such as covering title policy or $1k-$2k towards closing costs. There is a new RESPA rule that says they can no longer limit that to only their lender and they have to pay the same incentives to the buyer no matter where they get their financing. How nice. Now you have more financing options when building a new home. Call us to discuss and see the article below.
Developers Beware: New RESPA Limitations on Homebuilder Incentives will Require Changes to Procedures and Contracts
Prepared by the law offices of Greenberg Traurig, December 2008
For many years, it has been common for homebuilders and developers of condos and other residential real property to offer incentives to buyers to induce them to use preferred or affiliated title agencies and affiliated mortgage companies. Sometimes, these incentives were substantial, exceeding $10,000 or more. However, developers that offer those incentives after January 16, 2009 will violate the federal Real Estate Settlement Procedures Act (12 U.S.C. §§ 2601 et seq.), commonly known as RESPA. These RESPA violations can result in civil penalties as well as criminal prosecution.
On November 17, 2008 the U.S. Department of Housing and Urban Development (“HUD”) published substantial amendments to its Regulation X (24 CFR Part 3500) implementing RESPA. 73 Fed. Reg. 68203 (November 17, 2008). The final rule including these amendments is available online at forms of the Good Faith Estimate and the HUD-1/HUD-1A settlement statements that become effective January 1, 2010. As a result, the changes to the required use provisions affecting homebuilder incentives have not received much public attention.hsg/sfh/res/finalrule.pdf. Most of the amended rule applies to changes in the http://www.hud.gov/offices/
Required Use Changes
The changes to the definition of “required use” in the new rule will effectively eliminate the ability of homebuilders to provide incentives to buyers for using a preferred or affiliated title agency, affiliated mortgage company or other affiliated settlement service provider. The changes also prohibit the use of disincentives if a buyer does not use a preferred or affiliated settlement service provider. These changes to the required use rules take effect sooner than the other RESPA rule changes, specifically on January 16, 2009. This impending deadline will require developers to quickly change their contracts and procedures to avoid violations of the new rule. The “required use” prohibition is found in two distinct provisions of RESPA:
Section 8: RESPA includes prohibitions against kickbacks, referral fees and unearned fees in Section 8. One of the important exceptions to this rule applies to “affiliated business arrangements.” Among the requirements of this exception is that the use of an affiliated settlement service provider, such as a mortgage lender, is not required. An “affiliated entity” under RESPA is very broadly defined and includes any entity that has more than a
1% direct or beneficial ownership interest in the other entity or is under common ownership or control. Violations of Section 8 are subject to a civil penalty equal to three times to cost of the settlement service. Section 8 violations can also give rise to criminal sanctions of up to $10,000 and/or imprisonment for not more than a year.
Section 9: RESPA prohibits a seller of real property financed with a RESPA covered loan from directly or indirectly requiring the buyer to purchase title insurance from a particular title company. This prohibition applies to any title company or title agency, whether or not affiliated with the seller. Section 9 violations are subject to a civil penalty equal to three times all charges for title insurance. In the final rule, HUD modified the definition of “required use” so that incentives may still be offered, but only by “settlement service providers.” Since HUD takes the position that homebuilders do not qualify as settlement
service providers, this means the new rule prohibits homebuilders from offering incentives to buyers to use their affiliated companies. Senior RESPA officials at HUD have informally confirmed that this is an intended result. They have expressly stated that HUD wants incentives for using affiliated settlement service providers eliminated from homebuilders’ purchase contracts in order to promote comparison shopping by buyers.
Action Must be Taken Now!
With the January 16, 2009 deadline fast approaching, homebuilders, developers and other sellers of residential real property must take action now, including:
• Review of contacts. Homebuilders’ contracts must be rewritten, if necessary, to eliminate any buyer incentives for use of affiliated mortgage companies or other affiliated settlement service providers. They must also eliminate any incentives for the use of preferred title agencies, whether or not the title agency is an affiliate.
INCENTIVE PROVISIONS CANNOT BE USED IN ANY CONTRACT ENTERED INTO ON OR AFTER
JANUARY 16, 2009.
• Sales training and procedures must be implemented quickly. Sellers must ensure that buyers are not led to believe it will be more costly for them if they don’t use an affiliated or preferred title company or affiliated mortgage company.
• Advertising that will appear after January 16, 2009 must be reviewed and altered to eliminate references to these impermissible incentives.
Some Incentives Have Survived
The revised RESPA rules do not outlaw all incentives by homebuilders. Developers and homebuilders can still:
• Offer incentives to buyers as an inducement to buy homes or condos.
• Provide incentives for buyers to use non-affiliated mortgage companies and other settlement service providers other than title companies and title agencies.
• Offer incentives to use affiliated mortgage companies and title agencies on non-RESPA transactions. These include sales to investors and cash purchasers.
• Provide incentives to buyers that sign their contract prior to January 16, 2009, even if the sale closes after that date.
© Julie Nelson and The Nelson Project at Keller Williams Reatly, 2008-2010. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Julie Nelson and The Nelson Project at Keller Williams Realty with appropriate and specific direction to the original content.