Kickbacks rearing their heads again
WASHINGTON — 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, "inflated the financial burden of homeownership for consumers" by raising their mortgage premium charges. The firms admitted no wrongdoing as part of their settlements.
Many large real estate brokerages and homebuilders have 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 firm or builder, reduce competition and raise costs to consumers.
His advice to home buyers: Always shop for title insurance and settlement service alternatives to the in-house deals you're offered. Ask your 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.