Most American home builders don't need new problems at the moment, but they just got one: Federal regulators confirmed last week that they are aggressively investigating allegations that builders around the country are pressuring or requiring purchasers to use their mortgage financing affiliates illegally.

Under the federal Real Estate Settlement Procedures Act (RESPA), builders and realty brokers are prohibited from requiring customers to use their own affiliates or subsidiaries for mortgage, title or other settlement-related services. They can recommend affiliates -- provided they also disclose the relationship -- but they cannot force consumers to use them.

Enforcement officials at HUD, which has regulatory oversight of RESPA, have begun looking into widespread allegations that some builders:

• Increase the prices of homes when purchasers decline to use their affiliated mortgage companies.

• Present $10,000 to $30,000 "incentives" -- upgrades to kitchens, "free" finished basements or "free" settlement costs -- as true discounts, when in fact the incentives are built into the cost of the house.

• Require the use of an affiliated lender in order to qualify for incentives when they know their affiliates' mortgage programs carry intentionally inflated fees or interest rates to cover the incentives in whole or part.

• Refuse to go to settlement when buyers change their minds and decline to use the builder's affiliated or wholly-owned mortgage company. In one case, a builder declared an $11,845 good faith deposit forfeited when the customer switched to an independent, nonaffiliated lender.

HUD officials spoke on background and declined to identify specific builders since some cases are still being put together or legal settlements may be pending. But the officials confirmed that in a number of instances, the department intervened directly on buyers' behalf and obtained substantial cash refunds.

In one case, a buyer complained to HUD's "RESPA police" -- its enforcement staff on settlement-related issues -- when a builder offered an "incentive package" of $13.450 for a customized "morning room," but only if the buyer got his mortgage from the builder's affiliated lender.

The builder insisted that the in-house mortgage affiliate's rates and fees were "very competitive" with others lenders in the area. But the loan deal carried a $5,400 origination fee -- far beyond fees charged by competing lenders and brokers. HUD investigators contacted the builder, warned of possible RESPA violations on required use, and got the deal changed. The buyer got his mortgage without the $5,400 fee, plus got the $13,450 morning room add-on.

HUD investigators say they also obtained $32,400 in refunds from a condo developer to 200 condo unit purchasers. The developer acknowledged that it charged each of the purchasers $162 for a property survey that never was required by the mortgage lender and constituted an "unearned fee" under RESPA.

Officials said active investigations are now underway into other alleged builder misconduct. For example, one builder allegedly is requiring home buyers to use only a specified title company. In addition to violating RESPA's required-use rule, investigators believe "the builder established a sham title company for the purpose of receiving kickbacks and unearned fees from the title insurance company." Officials say the same builder apparently has created a sham mortgage company for the same purpose.

How can consumers deal with strong-arm pressure from builders on choice of mortgage lenders? HUD recommends that buyers check out prevailing local market interest rates and fees, compare them to the builder-controlled lender's offer, and then tote up the true costs. Prudent buyers should also thoroughly study prices for comparable new houses in the market in order to spot fake "discounts" -- where the costs of incentive packages have merely been tacked on to the sale price of the house.

Published: November 13, 2006

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.