Packaging incentives: negotiated discounts
Posted in RESPA reform By Matt Carter, Monday, March 31, 2008.HUD proposes to allow loan originators and third-party settlement service providers to negotiate volume-based discounts, as long as savings are passed on to borrowers.
Sue Johnson, executive director of the Real Estate Services Providers Council Inc. (RESPRO) — a trade group representing affiliated businesses — says HUD would also ban companies from offering incentives for purchases of affiliated services, unless they are offered as part of a package of services, and the overall price for the package is less than if the services were purchased individually.
K&L Gates attorneys Phillip Schulman and Holly Spencer worry that the rule refers only to discounts negotiated and passed through to borrowers."Does this mean that sellers are not able to take advantage of negotiated discounts, particularly when sellers often pay the majority of a borrower’s closing costs?" they ask. If a lender negotiates a discount on a service for which the consumer does not pay (such as the cost of an appraisal conducted with a "no-cost" loan), does the lender have to pay full price? "The language of the rule seems to suggest that if the negotiated fee is not passed through to the consumer (regardless of whether the seller or the lender pays for the service), the discount is not excluded from the definition of thing of value" under RESPA, they note, leading to worries about Section 8 violations.
What do you see as the positives, negatives and (unintended?) consequences of permitting negotiated discounts?
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Submitted by Diane Cipa on April 4, 2008 - 2:50pm.
Well, I think HUD has to draw the line somewhere and allowing volume discounts that are only passed onto the borrower is one place to draw that line. It's fair enough.
In the case of a seller assist wherein the seller pays for a charge on behalf of a borrower, it seems to me that this would be allowable.
I expect that the disclosure of seller assists might change anyway on the HUD-1 form. The new form seems more conducive to a flat credit from the seller rather than the itemized pulling of individual fees from the buyer to the seller side with asterisks.
Submitted by Robert Franco on April 24, 2008 - 10:14am.
The Section 8 exemption from RESPA for Affiliated Business Arrangements has been devastating for some small agents. I know of one that has lost its two biggest customers to a new AfBA and they are in danger of closing their doors. The proposed rule allowing "volume discounts" will make the problem worse. This will allow big companies to establish more favorable fees for "some" clients (affiliated partners) that they do not have to offer other customers. Smaller agents, who rely on relationships with smaller companies, will not be able to offer discounts on a selective basis. They will be forced to lower their prices for all of their customers (which is probably not feasible) or find themselves unable to compete for business.
If this passes, there will be many small agents that will not be able to keep their doors open. In the end the consumers will wind up with fewer choices for their settlement service providers. If the goal of RESPA reform is to reduce costs for the consumer, what sense does it make to allow "volume" discounts, but not allow a discount for a consumer that chooses a small lender that cannot negotiate volume pricing? All this really accomplishes is to restrict the best deals to large companies and force the consumers to select mega-lenders who have the market power to negotiate better prices.
For a more indepth view, see Here Comes The Bus. (http://www.sourceoftitle.com/blog_node.aspx?uniq=310)
Submitted by Dave Wirsching on April 24, 2008 - 10:49am.
Don't expect ALTA or the big underwriters to fight it either. If you look at ALTA's talking points it's heavy on the objections to the closing script and VERY light on the impact to smaller (and mid-size) agents that volumne discounts will bring.
Suits the underwriters - they would love the supply chain to be a vertical oligopoliy - then they can behave however they wish and charge whatever they want. They'll only have to bully a few toothless regulators to run roughshod over the consumer.
The proposal is touted to be pro-consumer, but its defintely anti-competition. In the end, without a viable competitive marketplace, the consumer will lose.
The only hope is that this mess withers on the vine. Maybe the next administration can figure out a solution at will really work.