• Gary Sandler
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    Published 24 July 2022

    The following is a true story. It was a beautiful day in Las Cruces. A first-time buyer was shopping for her new home. She had already met with two builders that week (let’s refer to them as builders A and B) and had just arrived at builder C’s model-home sales office. During the sales pitch that accompanied the tour, the new-home representative mentioned that Builder C was offering a closing cost incentive.

    Sound familiar? It should, because builders routinely offer closing-cost or upgrade incentives to help move their inventories. What was troubling about Builder C’s offer was that it came with a string attached; the only way to cash in on the incentive was to obtain a loan from one of the builder’s “preferred lenders.” A preferred lender is typically a local bank or mortgage company that strikes up an affinity relationship with a particular builder or developer. In some cases, the mortgage company is a wholly-owned subsidiary of the builder or its representative.

    One of the main reasons builders and lenders enter into these relationships is that it is economically beneficial to each of them. Lenders will often give a developer a good deal on construction loans in exchange for the builder directing as many buyers as possible to the lender. In some cases, it’s a sheer volume thing. Either way, the lender has an easier time monitoring sales activity and the prospects of future loan revenue or construction loan repayment, and the builder has more control over the loan process and timing.

    Relationships between builders and lenders are common and generally good business practice. The legality of those relationships are called into question, however, if they come at the expense of a consumer or competitor.

    These types of scenarios, called “tie-ins” in industry jargon, may violate federal antitrust laws, according to the Federal Trade Commission’s website, www.ftc.gov. According to the FTC, The sale of one product on condition that a customer purchase a second product, which the customer may not want or can buy elsewhere at a lower price, is a tie-in. Requirements such as these are illegal if they harm competition.”

    How do tie-ins harm competition? The FTC says “the practice is illegal because it both increases the buyer’s borrowing costs and prevents the buyer from choosing a lower-cost financing alternative — thereby harming competition.”

    Don’t get me wrong. A builder’s preferred lender may indeed offer their product at a competitive price. But what if a different lender is offering more favorable terms? First, try to reason with your builder. Perhaps he or she will acquiesce and provide the incentive anyway. If not, there’s always the possibility that the preferred lender will match the competing lender’s offer. And then there’s the option of simply walking away.

    The Consumer Financial Protection Bureau is interested in hearing from consumers who have experienced mortgage-related issues. Complaints can be submitted online at www.consumerfinance.gov, by phone at 855-411-CFPB (2372), or by mailing to Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244.

    We are lucky to have a passel of skilled, honest, and trustworthy builders, developers and lenders working among us who do all they can to make sure their customers, who are our friends and family, receive all of the benefits and choices the laws allow.

    See you at closing!

    Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.

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      Gary Sandler