HUD’s New Consumer Incentive Restrictions
The following are Fact/Comment Scenarios involving how HUD’s new RESPA rules on “required use”
(scheduled to take effect January 16, 2009) may affect real estate broker/homebuilder incentives to
consumers who use their affiliated mortgage, title, and other settlement services. The comments are
provided by RESPRO®’s legal counsel, Jay Varon, Esq. of Foley & Lardner, LLP. Please keep in mind that
these are generic comments that could change depending on individual facts, circumstances, or
developments. They are not intended to replace consultation with your own legal counsel familiar with
1. Economic Incentives By Real Estate Brokers: A real estate broker offers any of the following services if
a buyer uses its affiliated mortgage, title, and/or other settlement service company:
• Payment of the 1% mortgage origination fee
• A $500 Lowes or Home Depot certificate
• A buydown of the buyer’s closing costs or interest rate
• Downpayment assistance
• A free home warranty
• Free moving services
Comment: The RESPA final rule would permit each of these kinds of incentives as long as the buyer can
separately purchase the various settlement service provider services and the cost of the incentive
offered has not been made up by raising the prices of the settlement services.
2. Service Guarantees By Real Estate Brokers: A real estate broker offers any of the following if a buyer
uses its affiliated mortgage, title, and/or other settlement service company:
• A guarantee that it will pay the difference if closing costs on the HUD‐1 Settlement Statement
exceed those on the Good Faith Estimate
• A guarantee that it will pay the buyer $250 if the title commitment is not delivered within ten
business days from the date the title order is received
• A guaranteed payment of $250 if the HUD‐1 Settlement Statement is not be delivered five days
prior to settlement
• A guaranteed payment of $500 if closing occurs later than the date mutually agreed upon
Comment: Unlike its proposed rule, HUD’s final rule appears to permit real estate brokers to offer
service guarantees as long as the offer is optional and there are not higher costs elsewhere in the
transaction to compensate for costs associated with the guarantee. This is because the final rule
expressly provides that a settlement service provider will not be considered to have “required the use”
of settlement service providers if it offers a combination of bona fide settlement services ‐‐ net of the
value of the discount, rebate, or economic incentive being offered— at a total price lower than the sum
of the individual settlement services in the combination. That should be the case if the services in the
combination are not priced differently when the consumer chooses not to use them and the only thing
that differs is the value of the economic incentive—here the service guarantee. Indeed, as long as the
guarantee is worth something ( even as little as a penny or a dollar) when that value is deducted from
the net price of the services in the package, it would be lower than the sum of the market prices of the
individual settlement services in the package.
3. Economic Incentives By Homebuilders: A homebuilder offers any of the following if a buyer uses its
affiliated mortgage, title, and/or other settlement service company:
• Payment of the 1% of mortgage origination fee
• A buydown of the buyer’s closing costs or interest rate
• Downpayment assistance
• $10,000 off the price of the home
• A free swimming pool
Comment: HUD appears to have written the new “required use” provision in the final rule so as to
preclude the builder from directly offering these incentives. The rule says that a “required use” will
exist when a person’s access to some distinct service, property, or incentive is contingent upon the
person using a referred provider of settlement services. Thus, the builder’s offer would appear to be a
“required use” that would disqualify it from using the affiliated business exemption. While HUD’s new
“required use” provision has an exception for settlement service providers offering a combination of
bona fide settlement services (net of the discount, rebate, or economic incentive), this exception would
not apply to the builder because it is not viewed as a settlement service provider. This does not appear
to make economic or legal sense, but it is what the rule appears to provide.
4. Builder‐Affiliated Company’s Discount Off Its Own Services: A lender or title company has an affiliate
relationship with a builder and offers that builder's customers a bona fide discount on its fees.
Comment: This would appear to fall within HUD’s general rule permitting affinity programs and
consumer rebates. In other words, this may be no different than permitting a lender to provide an
incentive to borrowers who are employees of a particular company, members of an alumni
organization, or customers of a particular retailer. Here, the affinity program could involve all
employees, customers and family members of employees or customers of Builder X getting a discount
from lender Y when they use Lender Y’s services. This would be consistent with HUD’s other rules on
affinity programs and seemingly would not be a “required use” because the lender or title company
would not be making a person’s access to a service, discount, rebate or incentive contingent upon the
persons use of a referred provider of settlement services; it would be contingent upon the person
having some described relationship with a particular organization or company.
5. Discount Off Home By Builder’s Affiliated Company: A mortgage lender that is affiliated with a builder
offers buyers of that builder’s homes who purchase its mortgage $20,000 off the price of the home.
Comment: This was probably not intended by HUD to be permitted, but literally may not be prohibited
in that the lender is not conditioning a person’s access to the benefit based on the use of a referred
provider of settlement services. Nevertheless, this scenario would appear to have some level of
uncertainty because there may be no valid business reason for the lender to pay $20,000 and in that
circumstance could give rise to various creative legal claims, especially if it appeared that the builder is
supplying the funds to implement the program.
6. Discount Off Home By Multiple Builder‐Affiliated Companies: A mortgage lender that is affiliated with
a builder offers buyers of that builder’s home $20,000 off the price of the home if the buyer purchases
its mortgage and title services from the builder’s affiliated mortgage and title companies.
Comment: The issue would be whether HUD would think that the $20,000 discount off the price of the
home is in effect being made up elsewhere in the settlement process – e.g., by making the price of the
home higher than it was intended to be in the first place. Query whether the price of the home is part
of the “settlement process”, but HUD may say that it is.
7. Builder Incentives for Use of Preferred Multiple Companies: A builder pays an incentive to consumers
who choose to use one of a “preferred” list of service providers. The preferred list of service providers
includes an affiliated business.
Comment: RESPRO® understands that HUD officials initially said this would be permissible, although
we had noted at that time that regulators could still have questions about whether the unaffiliated
lenders were competitive in terms of price and/or quality to ensure that the choice consumers make is
really legitimate. In fact, we now understand that HUD appears to have changed its initial position on
this issue and now is saying that having the incentive available in connection with the use of multiple
lenders, one of which is affiliated with the builder, is not permitted under its new "required use" rules.
We have been told that HUD may issue some further clarification of its position on this issue and
perhaps related issues in the near future. But at least for now, it has changed its mind on this question.
8. Builder Rate Buydowns: A builder purchases a forward commitment with its affiliated mortgage
company so the mortgage company can offer a long term lock/below market rate to the builder’s
Comment: Although it does not make sense, the new rule’s language seems clear that this would not
be allowed in that it defines “required use” as “a situation in which a person’s access to a distinct
service . . . or other economic incentive is contingent upon the person using . . . a referred provider of
settlement services.” Offering the consumer the result of the forward commitment (i.e., a buy down of
the rate) is a distinct service or economic incentive, and the consumer would need to use the affiliated
mortgage company from whom the buy down was purchased.
9. Builder Promotion of Affiliated Incentives: A builder says to its customers: “If you purchase a home
from us you will receive X, if you use our mortgage company you will receive Y, and if you use our title
company you will receive Z.” The respective companies pay for their promoted incentive and it is
stated in the promotion material that the consumer is not required to use all services to receive the
discount on one.
Comment: It would be preferable for the builder to say: “If you purchase a home from us you will
receive X, moreover, MMM mortgage company in which we have an ownership interest is offering Y
and if you use it you will receive that benefit; in addition, TTT title company in which we have an
ownership interest is offering Z and if you use it you will receive that benefit.” This is allowable because
each provider is permitted to offer its own incentives to consumers and nothing prevents a builder
from promoting those incentives, though it should provide the affiliated business disclosure form.