Numerous surveys have shown that consumers want to be able to do "one-stop shopping" when they engage in a real estate transaction. Moreover, many real estate brokers and agents would be happy to provide this experience. Not that the respective motives are perfectly aligned. Whereas consumers are attracted by perceived convenience, brokers and agents see the potential of additional profit centers.
Probably the most appealing element, to all concerned, of a one-stop shopping experience is the provision of mortgage services. Few would argue against the proposition that the loan process is the most painful and sometimes distasteful part of engaging in a real estate purchase. And while it can probably never be made fun, it certainly appears to be more bearable if it can take place in the office of, and sometimes actually with, the agent who has already guided the consumer through the home selection and negotiation process.
Basically, there are two ways to make this happen.
In the former case the brokerage may own a mortgage company outright, or, as is more common, it may have formed a joint venture with a mortgage company. Whichever, the mortgage company will be a separate business entity to whom business is being referred by the brokerage or the agent. In loan origination, the real estate agent also acts as an agent of the mortgage broker (technically, this may be done through the real estate brokerage). In this situation, the agent will interact with the client as a loan agent would. It is not a simple referral of business.
Inasmuch as either of these arrangements can be quite lucrative (and that does not presume that the client is being gouged), it is reasonable to ask: Why aren't these more prevalent? Why are they not the common experience of consumers? And it's probably fair to answer: Because of all the rules.
The rules are those of the Real Estate Settlement and Procedures Act (RESPA). RESPA is a consumer disclosure and anti-kickback statute that is enforced by the Department of Housing and Urban Development (HUD). It is a piece of legislation designed to help keep consumers for paying too much for the often-bewildering array of real estate settlement services.
Under RESPA, an Affiliated Business Arrangement is perfectly legal. But, as they say, certain restrictions apply. Many of the restrictions are directed at preventing shams. The AfBA must be a real business, with real capitalization, its own employees, etc.
Other restrictions are designed to prevent agents from steering their clients to the AfBA. Thus, an agent cannot be directly rewarded for referring business to the broker's affiliated business. (They may be indirectly rewarded, of course, in such fashion as the broker being able to maintain a nicer facility because he is more profitable.) The rules are quite strict about this, and over the years all sorts of creative dodges have been outlawed. The result, then, is that, because agents cannot legally be directly rewarded for bringing business to the AfBA, they don't have a lot of incentive to do so. Consequently, a lot of AfBAs fail for lack of support.
The option that does reward agents directly is where the agent acts as a loan originator. (Depending on state regulations and particular circumstances, the agent may have to be paid through the broker and subject to a "split".) But there's a catch here, too. The agent actually has to work for it! HUD has made it abundantly clear; there cannot be payment for merely token activities.
HUD has spelled out a detailed list of loan origination services, a portion of which must be completed by the real estate agent if he or she is to be paid as a loan originator. Most of these services involve tasks that real estate agents are neither equipped nor inclined to do.
While they don't dominate the landscape, there are still many AfBA and loan originator structures out there. Many of them are legal. Many are not. Penalties for the latter are severe. Brokers and agents who want to provide a one-stop shopping experience with respect to mortgage services need to be very, very careful.
