You could be participating in a violation of Regulation Z – and harming your buyers.

You probably have a favorite mortgage loan provider – someone who communicates well with both you and your clients, solves problems, only makes promises they can keep, and gets the loans closed on time.

I know those are some of the reasons why so many real estate professionals refer their buyers to me. I appreciate their loyalty and support and work hard to live up to their expectations – and to maintain both their reputation and my own by following the terms of Regulation Z.

Regulation Z: Loan Origination compensation and Steering 12 CRF 226 is the Safe Harbors law that requires loan officers to give your clients the best interest rate they qualify for.

Unfortunately, far too many loan providers are still violating this law every day. If your favorite lender is one of them, you could lose your reputation (and future referrals) when your customers learn that they could have gotten lower rates if you had not referred them to an unethical lender. You could also be pulled into a nasty lawsuit.

You’d like to believe that your favorite lender is far too ethical to engage in illegal practices. We all want to trust and believe in the people we like. But are you sure?

If you have a long standing relationship with a lender, and if you advise your buyers to use that lender without checking with any others, it could lead to trouble. When a lender knows that clients you send are not going to be comparing his or her offering with those from any other lender, the temptation to cheat can be powerful.

Here’s how lenders violate the law:

Your good credit buyer qualifies for a rate of 3.87% from “Bank A”, but the mortgage lender puts them in a loan from a “Bank B,” whose best offering is at 4.25%. Why? Because Bank B just happens to offer a higher compensation to mortgage loan officers.

By simply offering the borrower a specific loan product and failing to mention a cheaper alternative, the lender makes more money. This IS against the law, but lenders are continuing to follow the practice, feeling that they won’t get caught.

After all, borrowers and real estate agents don’t have access to the long list of loan products available. How would they know that there’s something better unless they shop with more than one mortgage lender?

This practice goes on every day, and it appears to be especially prevalent within the new home building community.

Have you ever wondered why builders offer extra incentives to buyers – incentives that are ONLY available if the buyers use their onsite mortgage company? The truth is, the buyers who use those onsite companies are often paying dearly for those appliances and upgrades by paying too much for their home loans.

Keep your buyers safe and your reputation intact – tell them about your favorite lender and why you appreciate that lender. But encourage them to shop a little and compare rates before making a decision.

Mike Clover


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