Agent’s Referral Fees Boost Mortgage Costs

Buying a house these days might cost you an extra $500 or $1,000 if your real estate agent refers you to a lender. Being aware of these controversial fees could help you avoid them, or at least make sure you receive real services for your money.

The use of referral fees--critics call them kickbacks--affects only a small percentage of home loans today but appears to be growing, sparking a hotly contested regulatory battle pitting mortgage bankers against realtors.

Under this practice, lenders offer cash, free vacations, gifts or other incentives to realtors who refer home buyers to a lending institution. Lenders may build the cost of those benefits into your loan. Or realtors may charge you a fee directly.

Such fees can amount to as much as 0.5% or 1% of the loan amount, according to the Mortgage Bankers Assn., a chief critic of the practice. Or, the lender may charge you a slightly higher mortgage rate, says the group, which is mainly composed of non-bank institutions that originate mortgages. All members of the organization may not necessarily oppose the practice.

The practice technically was prohibited by the Real Estate Settlement Procedures Act of 1974. But lenders and realtors have gotten around it through loopholes in subsequent regulations issued by the Department of Housing and Urban Development or by lax enforcement, critics say. HUD, under Secretary Jack Kemp, is considering rewriting the rules to clarify what’s illegal and what’s not. But how it will rewrite the regulations is anyone’s guess, as it is being lobbied by both sides.

No one is certain how much consumers pay nationwide through this practice. But critics, led by the Mortgage Bankers Assn., charge that Citicorp Mortgage, one of the nation’s largest mortgage lenders, has used an indirect version of a referral fee to obtain a larger share of the U.S. mortgage market.

Critics argue that referral fees encourage realtors to steer home buyers to lenders offering those fees, even if those loans aren’t best for the consumer. Such practices also represent a conflict of interest, because realtors by definition represent sellers and not buyers, contends Brian Chappelle, a vice president for the Mortgage Bankers Assn., whose members are understandably worried about growing competition from Citicorp and other national lending giants.

Thus, realtors don’t deserve any additional fees beyond the normal 6% commission paid by the seller, Chappelle argues. Two of three consumers queried in a recent survey on behalf of the Mortgage Bankers Assn. said real estate agents and brokers are already compensated through their commissions for directing a buyer to a lender. Referral fees simply raise the cost of home buying to consumers already strapped by today’s rising home prices, Chappelle says.

He contends that realtors who are part of Citicorp’s highly successful “Mortgage Power” program may ask borrowers to pay extra fees. Under the program, realtors can offer Citicorp loans to borrowers that are priced below the cost that individuals would have to pay on their own; the realtors are not required to offer Citicorp loans exclusively. They don’t deserve the fee, Chappelle argues, because while they help borrowers with loan applications, they don’t really shop around for the best mortgage terms.

“The work they are doing at most is clerical,” he says. “No work is done in selecting a lender.”

A Citicorp Mortgage spokeswoman contends that most realtors don’t charge the fees and are not obligated to use Mortgage Power. If they do use the program and charge, it is for work actually performed, she adds.

Proponents of referral fees, led by the National Assn. of Realtors, agree that realtors don’t deserve an extra fee for “naked” referrals, in which the agent doesn’t help borrowers shop for and apply for loans.

But many realtors legitimately earn these fees when they act like mortgage brokers and help borrowers fill out loan applications and other forms and obtain mortgages, argues Norman Flynn, a Madison, Wis., realtor and president-elect of the National Assn. of Realtors.

In some cases, he adds, borrowers may pay the extra fees to get faster and more convenient loan processing.

And even if realtors don’t perform any work to earn referral fees, borrowers in many cases will pay the same amount for their loans anyway, Flynn contends. That is because lenders include fees in loan costs, much like airline tickets, he says. If you order a ticket from a travel agent--like arranging a loan through a realtor--the fare is still the same, except that the travel agent gets a commission from the airline.

He also contends that it would be counterproductive for a realtor to brazenly refer a borrower to an inappropriate or above-market loan just to collect a referral fee, because realtors earn far more through their 6% commissions. They cannot afford dissatisfied home buyers since they rely so heavily on word-of-mouth recommendations from buyers.

“There is not enough money in a referral fee to justify losing business,” Flynn says.

However the controversy is resolved, there are some steps you can take to avoid getting ripped off:

- Insist on full disclosure. If your realtor offers to find you a loan, ask if he or she is charging or receiving a referral fee. Ask how much the fee is.

- Make sure you get something for the fee. If your realtor is charging you, or the fee is built into the loan cost, make sure the realtor earns it. He or she should be contacting numerous lenders, finding you the best deal and helping you with the loan application process.

If he or she is not, you don’t have to accept the referral. Refuse it and think twice about using that realtor again.

- Shop around for a loan yourself. If you deal directly with a lender, you avoid the fee entirely. Consider getting a pre-approved mortgage even before you begin shopping for a home. Many lenders offer these mortgages, telling you in advance what you can afford to borrow. Some lenders can provide pre-approvals in less than a day.

Even if you end up using your realtor’s referral, shopping around yourself at least helps you know whether the loan is competitive in the marketplace.