Published 29 March 2020
It was a beautiful day in Las Cruces. A first-time buyer was out shopping for her new home — and I mean brand new home. The young lady had already met with two builders that week — let’s refer to them as Builders A and B — and found herself at Builder C’s model-home sales office. During the sales pitch that accompanied the model-home tour, the builder’s representative mentioned that the builder was offering a closing cost incentive.
Sound familiar? It should, because builders routinely offer closing-cost or upgrade incentives to help move their inventories or gain an edge over their competition. 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 the builder’s “preferred lender.” A preferred lender is typically a bank or mortgage company that strikes up an affinity relationship with a particular builder or developer. In some cases, the lender can be a subsidiary or corporate partner of the builder or its representative.
One of the main reasons builders and lenders enter into these relationships is that it is economically beneficial for 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 can be called into question, however, if they come at the expense of a consumer or competitor.
In industry jargon, these types of scenarios are referred to as “tie-ins.” According to the Federal Trade Commission, “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 competing lender is offering more favorable terms? First, try to reason with the builder or lender. Perhaps he or she will acquiesce and provide the incentive anyway. Another possibility is that the preferred lender will agree to match the competing lender’s offer. And then there’s the option of casually dropping a copy of the federal law onto the builder or lender’s desk.
The Consumer Financial Protection Bureau is interested in hearing from consumers who have experienced mortgage-related issues. Complaints can be submitted online at https://www.consumerfinance.gov/, by phone at 855-411-CFPB (2372), or by mailing to Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, IA 52244.
We are fortunate to have a passel of skilled, honest and trustworthy builders and developers living and working among us. As a group, they typically do all they can to make sure their customers, who are our friends, family and neighbors, receive all the benefits and choices that best practices and the laws have to offer.
See you at closing!
Gary Sandler is a full-time Realtor and owner 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