If two recent actions by the nation's consumer watchdog are any indication, kickbacks are edging their way back into real estate transactions.
Beware. What could appear to be friendly referrals from one company to another could end up adding thousands of dollars to a home buying transaction.
A kickback is a payment made from one entity to another who has facilitated a transaction. Real estate transaction kickbacks are illegal because they are under the table deals that inflate costs and hide those costs from the housing consumer.
In April, the Consumer Financial Protection Agency (CFPB) filed a complaint and consent order to stop kickbacks from four national mortgage insurance companies and to collect $15.4 million in penalties from them.
The order charges Genworth Mortgage Insurance Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation with providing kickbacks to mortgage lenders by purchasing captive reinsurance from those lenders. In exchange, the mortgage insurers received referrals from the lenders to sell mortgage insurance to mortgage borrowers.
The order awaits the signature of the United States District Court for the Southern District of Florida's presiding judge.
"Illegal kickbacks distort markets and can inflate the financial burden of home ownership for consumers," said CFPB Director Richard Cordray.
"We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade. The orders announced today put an end to these types of arrangements and require these insurers to pay more than $15 million in penalties for violating the law," Cordray added.
More recently, Texas homebuilder Paul Taylor, of Paul Taylor Homes, complied with a CFPB order to surrender more than $118,000 in kickbacks received from Benchmark Bank and Willow Bend Mortgage Company. The kickbacks were funneled through sham operations Taylor, the bank and the mortgage company created and jointly owned.
The problems with kickbacks
Kickbacks don't just increase the financial burden on consumers by adding to the cost of financing a home. The practice diverts consumers from shopping around and that curbs competition.
For example, a lender advertising a home loan offers a 3.75 percent interest rate, but when a home buyer applies for a loan the lender says the buyer must use the lender's affiliated title insurance company.
The lender's affiliate charges $4,000 for the service (and passes some or all of that fee onto the lender as a kickback), but had the consumer shopped around he or should could have found the same service available for half as much or less.
Also, over time, large volumes of kickbacks insidiously hurt the housing market by creating scores of homeowners with unnecessarily expensive mortgages.
Kickbacks were a common practice leading up to and contributing to the financial crisis that tanked the housing market and took the economy with it.
Long before the housing crash, in 1974, kickbacks were outlawed by the Real Estate Settlement Procedures Act (RESPA.
While mostly known for making the HUD-1 Settlement Statement more transparent and inclusive of all real estate transaction charges, RESPA was created because lenders, real estate agents, home builders and title insurance companies often engaged in undisclosed kickbacks that inflated real estate transaction costs and obscured competition.
The U.S. Department of Housing and Urban Development (HUD) originally administered and enforced RESPA, but in 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) transferred oversight to CFPB.
Unpaid referrals from one real estate entity to another are not illegal and can be helpful provided they come from trusted real estate professionals who disclose those affiliations. The companies must also disclose to housing consumers they are not bound to use those referrals.
Nevertheless, consumer advocates argue there's an inherent conflict of interest among affiliate arrangements.
Consumers' best approach to the most expensive transaction they'll ever complete is to exercise their right to shop around.
That includes shopping around for real estate agents, mortgage lenders, title companies, home insurance companies, inspectors and other professionals and costs that come with buying or selling a home.
Removing competition rarely, if ever, reduces costs.