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No RESPA Violation for Closing Discount

judgeA federal appellate court has considered whether a developer violated the Real Estate Settlement Procedures Act (“RESPA”) when it offered a buyer a discount on closing costs if the buyer used an affiliate of the developer.

John and Eleanor Yeatman (The Buyers) agreed to purchase a home from D.R. Horton, Inc. (The Developer). The Buyers financed their purchase through an affiliate of the Developer, DHI Mortgage Co., Ltd. (The Lender). The purchase agreement stated that the Developer would pay some of the Buyers closing costs if the Buyers chose the Lender to finance the purchase.

The Buyers filed a lawsuit seeking class action status, claiming that the Developer had violated RESPA. The Developer and the Lender filed a motion to dismiss the lawsuit, arguing that the Buyers were not required to use the Lender to finance the purchase and the purchase agreement only gave the Buyers the option to choose to use the Lender’s services. The trial court agreed, and dismissed the lawsuit. The Buyers appealed.

The United States Court of Appeals for the Eleventh Circuit affirmed the trial court. Congress intended RESPA to provide consumers with improved disclosures of settlement costs and to reduce the costs of closing through the elimination of referral fees and kickback. The Buyers argued that “tying” the discount to use of the Lender essentially required the Buyers to use the Lender’s services.

The United States Department of Housing and Urban Development (“HUD”) has stated that RESPA is only violated if a purchaser is required to use a service provider; HUD allows the use of discounts by settlement providers to encourage use by consumers of affiliated settlement service providers. The only practice HUD prohibits is the required use of a service provider or if the purchase price is set artificially high so that the offered “discounts” simply lower the price to the actual value.

The court found that the purchase agreement gave the Buyers the option of using the Lender; it did not require that they use the Lender. Therefore, the court affirmed the trial court’s ruling in favor of the Developer and the Lender.

Many Boston Developments, such as The W, The Clarendon and Battery Wharf have their own preferred lenders, mostly to assure financing of a new construction development with less than 50% sold or under agreement condos. The buyer always get to choose who the lender will be and the developer may ask, just in case that the buyer’s lender cannot obtain the loan, to apply with the developer’s preferred lender. In my opinion, it is a win-win situation for both the buyer and the developer; the buyer gets the unit he wants (and sometime a discount) and the developer gets a peace of mind knowing that financing will go through with no problems.

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