I’ve heard said, “We are a planet of stories. Listen.” Plenty of lenders with builder or real estate office relationships are listening to this week’s CFPB action.
Chicago-based mortgage banking attorney Brian Levy, who offers RESPA training, had this to say about the recent Consent Orders involving Prospect Mortgage. “These Orders have huge direct implications for agreements with referral sources such as MSAs, lead sharing, desk leases, internet co-marketing and the like that rely on the 8(c)(2) exception to RESPA’s referral fee prohibition. After taking some time to consider their impact as regulatory interpretations (as Director Cordray notes, it would be compliance malpractice not to do so), it is apparent that while a few of the lessons in the Orders can be addressed by making some changes to your agreements, there is a deeper undercurrent of organizational compliance understanding that needs to be addressed as well. If you have these kinds of arrangements, you need to make sure your compliance house is in order, and that means your entire organization (and your referral sources) clearly understand what they are and are not.
“The Orders are more examples of the CFPB’s efforts to provide regulatory interpretation through enforcement with all of the problems identified in my prior writings with that approach. Still, while the CFPB has placed a high bar for compliance, they again did not declare these relationships illegal. No doubt, certain identified practices in the Orders are going to result in new scrutiny (such as pre-qualification requirements or exclusive web marketing relationships). On the flip side, for some of these arrangements, the Orders may have provided industry with some actual ‘how to’ guidance as to what might be a compliant structure. In that regard, consider carefully language in the Orders that says something to the effect, ‘Prospect did X, instead of Y.’ Although not exactly a reliable legal precedent, CFPB is essentially telling us that X is what they did wrong, but Y is something you can do.
“I’m sure the contracts used by Prospect in these relationships were prepared by some of the best attorneys in the business (no, it wasn’t me). I can also assume that Prospect’s lead share, MSA, and office lease agreements all relied on the 8 (c)(2) ‘services rendered’ exception to RESPA, yet, remarkably (but probably due to the ongoing PHH litigation), the Orders have no mention whatsoever of 8(c)(2) and very little mention of the applicable contracts. Clearly, what happened in implementation and the totality of the relationship(s) is what mattered to CFPB even more than what the agreements said.
“Illustratively, the evidence offered by the CFPB against Prospect was largely reflective of how the salespeople, in fact, interacted with each other. Looking at the coupling of payments with referral activity, CFPB determined all of the various 8 (c)(2) dependent agreements were really a guise for payment of referral fees. CFPB used several alleged comments made by Prospect’s staff and their realtor referral sources about the relationships to support their case. The CFPB appears to be telling us (just as they did in PHH) that they think any time you couple a payment for services with an expectation of referrals you will have the burden to prove that the payment was really for something other than the referrals.
“As I highlight for my RESPA trainees, you must know and be able to articulate the narrative of any relationship with a referral source to decouple the services, goods or facilities purchased from the referrals received. If true, however, the statements by various Prospect employees and, worse, the allegations of blatant payments to agents by the realtors for referrals, would be extremely damaging, if not fatal, to any narrative that these kinds of relationships were just about purchasing goods, services or facilities.
“Accordingly, beyond structuring contracts for these kinds of relationship(s) with referral sources to be legally compliant (including paying no more than reasonable market value for services and managing a compliance system to verify compliance), these Orders reinforce the need to make sure that your leadership, sales team and their business sources all understand and can articulate the basis of those relationships separate and apart from any referrals that may be obtained; i.e., everyone needs to understand what these kinds of relationships are and are not. This guidance about knowing your narrative is old news for anyone who has heard my RESPA training, however, I must admit, I was pleasantly surprised that CFPB finally took action against realtors involved in alleged RESPA violations.” (Brian is with Katten & Temple, LLP.)
Pete Mills, SVP of Residential Policy and Member Engagement with the MBA, wrote, “Rob – as you know, the CFPB issued 4 concurrent consent orders on January 31 dealing with alleged Section 8 violations. While certain aspects of the orders are routine and would have raised concerns under HUD’s ‘traditional’ interpretations of Section 8, others raise new questions about the CFPB’s evolving application of RESPA to common industry arrangements through the enforcement process. The bottom line is that it is clear that RESPA generally, and business arrangements with parties in a position to refer business, remain a supervisory and enforcement priority for the CFPB. The MBA believes these arrangements entail very significant CFPB enforcement risks. And the MBA continues to urge the CFPB to provide further guidance – until they do, MBA strongly urges members to proceed with the utmost caution on such arrangements.
While we’re on the topic, real estate agents are often home buyers’ most important source of information about new homes after the Internet. Last year, 33% of buyers learned about their new homes via a real estate agent. Agents’ influence is not declining despite consumers’ use of the Web, and for most new home transactions, Americans still prefer to have a real estate agent. Last year, 87% of buyers purchased their home through a real estate agent or broker—a share that has steadily increased from 69% in 2001, per the National Association of Realtors. While many of them compliment builders for doing a great job even during tough economic conditions, they also have strong opinions about what building pros could do better. Unfortunately, I don’t recall where I found this list, but here are 15 of the top things agents wish builders did differently.
- New vs Existing: Realtors say builders undermine sales by not playing up their biggest advantage: New homes are preferred to previously owned ones. They urge builders to market the value of a new home, which comes with warrantees, energy efficiency, and up-to-date design that older homes don’t have. Buying a new home is especially ideal in markets where there’s a lack of inventory in certain price ranges, especially in entry level and move up categories.
- Model Homes: A model is often a prospect’s first impression of their future home, and it should entice them to visualize living there. Models need to be fully complete because ones that are not finished give a bad impression. Moreover, agents are dismayed to walk into a model with a client and find that it isn’t in working order or is dirty.
- Staging: Realtors say that no matter the style or size the model home, it should always be staged allowing homebuyers to picture themselves in that home, but use caution not to take staging too far because over-decorated models can look cluttered and confuse customers about what is standard and what is an upgrade. Offer some nice things in the basic package so everything is not an upgrade
- Price: The price of a new home can be a touchy subject between builders and buyer’s agents, who work to get the best deal for their clients. The biggest mistake builders make is that they price their homes based on their costs rather than on market conditions. The price of houses in new communities increasing quickly is off-putting to many of her clients who are young buyers or empty nesters on a budget.
- Multiple Listing Service: The multiple listing service (MLS) is one of a Realtor’s most powerful tools, letting them know when new houses come on the market and allowing them to see recent sales. But many builders don’t provide enough information in their listings about variations and options.
- Construction Updates: Once a house is under contract, builders must communicate with the Realtor about what is happening on the site. Information such as the hole is being dug tomorrow, the sticks start going up this week, the kitchen cabinets are being installed. Realtors don’t wish to be embarrassed in front of customers because they don’t know much about the construction process. Builders need to work with Realtors to educate them on how houses are built so that they are comfortable on site.
- Buyer Preferences: Real estate agents, who work intimately with their clients sometimes over decades-long periods, often have a better idea than builders what buyers are looking for. Savvy builders use them to follow local statistics and trends, and to understand the demographics of the market. For instance, they can help with design and layout decisions before a house is built.
- Baby Boomers: Realtors have noticed that many builders across the country are failing to connect with one of the largest group of buyers: baby boomers looking to downsize. There is a shortage of appropriate housing for this demographic, made up of older adults who prefer new, one-level construction to existing dwellings. New construction can be appealing for reasons such as all common areas maintained so there is no maintenance.
- Cultural Considerations: Builders often overlook the needs of foreign buyers. Marketing materials should be available in a variety of languages depending on the area and bilingual staff or interpreters should be on hand to assist potential buyers. It would be good for builders to research cultural preference, architecture and design to implement different aspects into their development.
- Closing the Deal: When it comes time to finalize a deal, there is one thing that Realtors agree on: Home buyers are turned off by overly forceful marketing tactics. They see deals falling through because of salespeople’s relentless calling and inflexible rules. For instance, it’s common practice for builders to tell buyers they must use a specific lender or title agency to get the pricing they want. Closing the sale will come as a result of a sensible process that adds value. Realtors can be indispensable in knowing what motivates a buyer.
- Contracts: Home buyers are sometimes shocked by builder’s contracts, Realtors say. They are put off by no option periods, non-refundable earnest money, and no hard close date. They are nervous when they see that builders giving themselves one to two years to complete the home and that they’re locked in to the contract no matter what the inspection shows.
- Working Together: Although Realtors help facilitate sales, they often feel as if they not a valued by builders. One of their biggest pet peeves is when a builder reaches out directly to their client. Realtors should be treated with the same respect as any other industry professional and have their calls returned promptly. Not answering a Realtor’s questions fast enough slows their own customer service. On the flip side, builders should consider using a selling agent to market and sell their homes. perhaps with a relationship akin to another subcontractor.
- Realtors Fees: Many builders do not work hard enough to partner with local real estate agents, and few include a fee for a Realtor in their sales process. Some even try to cut them out of the deal or don’t return their calls. It’s frustrating to the Realtors, because they may spend many hours in educating the buyers through showing existing homes and general questions about the process of buying.
14.Closing: Realtors often see builders do everything right in their sales process but then drop the ball at the eleventh hour by not having the home completed at closing. Everything should be ready at least a week before closing so that the builder and buyer can do a walkthrough. A buyer is always going to focus on things not done so create a list which should be completed prior to closing.
- Follow Up: Repeat business and referrals are the lifeblood of any home building business. The best way to achieve them is through excellent service before, during, and after the sale. Maybe manage buyers’ expectations with a follow-up service schedule for the first year. Check in with homeowners 90 days and 330 days after closing. These visits can be helpful for builders, too, as they are a chance to receive feedback on the design and livability of the home.
(Copyright 2017 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)
- Dec. 31: Rates, the Fed, world economies, affordability, and the shutdown – all tied together - December 31, 2018
- Dec. 29: FEMA reverses flood ruling; cybersecurity notes; observations on general housing trends - December 29, 2018
- Dec. 28: Doc automation product; FHA & VA changes around our biz; Agency deals continue to share risk - December 28, 2018