For years, builders have used "incentives" to persuade customers to use affiliated mortgage and title insurance companies. These incentives, which can total thousands of dollars, can include closing cost credits, design center upgrades, or discounted interest rates on mortgage loans.
The practice has been controversial for some time, and with the housing market in deep distress, regulators are coming down hard on anything that could inflate the purchase price of homes.
Federal housing regulators have agreed to delay for 90 days implementation of a rule change that would bar home builders from offering consumers incentives when they agree to use builders' affiliated mortgage and title insurance companies.
The new rule -- one of many changes to the Real Estate Settlement Procedures Act (RESPA) being phased in by the end of the year -- was set to take effect January 16.
The National Association of Home Builders sued the Department of Housing and Urban Development on December 22, saying the rule change arbitrarily applies to affiliated businesses operated by home builders. Affiliated businesses formed by settlement services providers like title insurers would still be allowed to offer discounts and settlement services packages.
In justifying the change, HUD said home builders were offsetting the cost of incentives such as home upgrades by charging a higher interest rate, increasing a home's price, or inflating closing costs. Rather than being true incentives or discounts, HUD said, such offers actually amount to penalties imposed on consumers if they choose not to use the builder's affiliated lender or title insurer.
