Specifying a Lender. Steering? Illegal? Or just Stupid?

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There was a “featured” post on Active Rain (a real estate blogging platform) today that discussed real estate listing agents placing certain requirements into the Multiple Listing Service (MLS). The article, titled Can the Listing Broker Specify the Lender?, (must be a logged in Active Rain member to access) expressed concern with what appears to be a growing practice of inserting into the MLS statements along the line of:

Buyer must pre-qualify for a loan through lender XYZ to submit an offer

In the 120 some-odd comments that followed, many agents expressed outrage at this practice. Some went on to offer the following arguments against it:

  • It’s illegal (a Fair Housing violation) because it is Steering
  • The seller has no right to dictate these terms
  • The listing agent has no right to dictate these terms
  • The listing agent is doing this without the seller’s permission
  • It doesn’t matter what lender performs the buyer’s pre-qualification because all lenders in Arizona are licensed, and held to the same standards

Let’s examine each of these arguments…

Requiring a pre-qual from a specific lender is steering

Steering is illegal based on the Fair Housing Act. What is steering? Typically it is defined as:

The illegal funneling of home buyers to a particular area based on the desire to keep the makeup of that neighborhood the same or intentionally change it (source).

There are many definitions of steering out there, but this is the gist of it.

Requesting a buyer to be pre-qualified by a specific lender is hardly steering as a Fair Housing violation. Just because a buyer may feel “steered” toward using a specific lender, that doesn’t mean it qualifies as illegal steering.

The seller has no right to dictate these terms

Sure they do. It is their home, they can dictate pretty much whatever they feel like (within legal limits of course). A seller can dicate that they will accept only cash offers. Heck, they could dictate they will only accept a sack of nickels if they really wanted to. A seller can dictate that they will only accept a full price offer printed on pink paper. If a seller wants to dictate that a buyer must be pre-qualified with a specific lender, so be it. They aren’t specifying the buyer has to get a loan from the specific lender, only that they want the buyer pre-qualified by that lender.

The listing agent has no right to dictate these terms

This is probably correct. A listing agent could advise their client to restrict buyers to pre-qualifying with a specific lender, but they shouldn’t dictate that term. Personally I think that would be poor advice, more on that later…

The listing agent is doing this without the seller’s permission

Really? And you know this how? Unless the MLS states, “I the listing agent never got my seller’s permission to say this but…” then you are merely speculating that the agent hasn’t discussed this with their client. Speculating on other’s intents and actions is ill-advised. There’s no point in it. Just stop it.

It doesn’t matter what lender performs the buyer’s pre-qualification because all lenders in Arizona are licensed, and held to the same standards

This argument, simply put, is a load of hooey. It’s absurd to think that because lenders hold a state issued license that they are all equally competent. Agents that feel all lenders are the same because they are licensed apparently feel all real estate agents are the same too. After all, real estate agents must also be licensed by the state.

Some commenters on the post mentioned that because there is a standard pre-qual form, all pre-quals are the same.

Another load of bovine fecal matter.

Sure the form is standardized (in Arizona) but that doesn’t mean all pre-quals are created equal any more than all real estate purchase contracts are created equal.

The Bottom Line

The practice of forcing buyers to pre-qualify with a specific lender (or use a specific title company for that matter — something we see far more frequently) is not “steering” and it’s highly unlikely that it is illegal (hey, I’m not an attorney so I can’t say with 100% certainty that it is a legally allowable practice. I’ll go with 99.99% certainty, but not 100%).

Don’t get me wrong. I think it is a ridiculous practice. It’s annoying as hell. Making buyers jump through extra hoops to put on offer on your home is dumb. I know for a fact some buyers simply walk away from houses for sale where this demand is in place. How that benefits the seller is beyond me. I also know agents that will just roll over and accept the demand on their client’s behalf.

If you are an agent and your buyer client is opposed to getting pre-qual’ed with a certain lender, then submit your offer without that qualification. If the seller counters they want their lender to pre-qual your client, counter back with NO. Could your client “lose” the home? Sure, if the seller stands pat on their demand. That’s a decision and risk assessment your client will have to make.

But consider this — we’ve had at least three buyer’s that I can recall that said they weren’t wasting their time pre-qualifying with the sellers choice of lenders. And you know what? Turns out once the seller had that offer in their hand using their specified lender wasn’t so important after all…

 

 Photo Credit: kevin dooley on Flickr. CC Licensed.

 

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About the Author
Jay Thompson

I'm a real estate broker in Phoenix, Arizona and the publisher of the Phoenix Real Estate Guy blog. I tend to drive too fast and scream at the University of Texas and Denver Broncos football teams. My two kids are smarter than most adults I know and my wife is simply amazing.

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  1. Dane Briggs says:

    I think it is a poor selling practice for seller’s to do so, but feel it is in their right. I have helped plenty of buyers purchase fantastic homes that sat one the market for an extended period of time because they required a pre-qual from a certain lender. Well they got the pre-qual and used their own lender and purchased the home for much less than market. I still think the reason they were able to buy the homes for such a cheap price was because the lender restriction moved buyers to other homes.

    With that though, it is not uncommon for our sellers on flips to present two different counters to buyers. One for the buyer using their lender, and a more generous counter if the buyer uses a lender they have had good experience with. This mostly stems from the number of bad lenders out there that have burned our investors with promises that they would have no problems lending on flipped homes. Only to have the lender issue a denial letter days before the close of escrow date because they couldn’t get a flipped property through underwriting. For the seller it is sometimes worth a counter of a few thousand less for the security of knowing it will be through a lender that can get the deal done, thus saving the seller money in the long run. We would never restrict it in the mls though as what is the point in restricting the offers that would come through. It may have worked for the banks during the mini-boom at the end of the first time home buyer credit, but it doesn’t work now.

    And for the agents out there that require the buyer uses their best friend unbeknownst to the seller…. well you will eventually get what is coming to you.

    • Jay Thompson says:

      Great comment Dane. Can’t really argue with a single word!

      • laurie says:

        @Jay Thompson
        Jay, there is no issue with stipulating a lender prequal at the same bank that has the house listed. What IS a violation of respa is to award listings to brokers based (in part in whole) on a “capture” rate, as they are receiving an incentive for the referral. Because this is a policy at some banks with their preferred reo agents, it’s a problem- unless the referring broker discloses the “carrot” to potential loan candidates at the selected bank, in writing, it’s potenitally a big problem for the broker.

  2. Bob Bemis says:

    Jay,
    RE: “(or use a specific title company for that matter — something we see far more frequently)”…
    The ARMLS Rules committee grappled with this issue this past summer. It is not uncommon in our system for the listing to specify the title company for the closing. But in doing so, some might interpret such a statement as implying that the buyer must use that same title company for the buyer’s title policy. Such a stipulation would be contrary to the RESPA guidelines.

    Before taking any action, ARMLS asked the NAR Policy Department what their take on this issue was, and to what degree ARMLS could be held liable if it allowed an illegal statement to remain in the Remarks (public or private). Here’s the response we received:

    Section 9 of the Real Estate Settlement Procedures Act (RESPA) provides that sellers of a property that will be purchased with the assistance of a federally related mortgage loan may not require either directly or indirectly, as a condition of selling the property, that title insurance be purchased by the buyer from any particular title company. Consequently, direct or implied requirements such as you have described could involve the MLS in illegal activity. For that reason, a general MLS rule prohibiting the listing broker from including such conditions in the remarks section of the MLS would
    not be contrary to NAR policy. That said, MLS’s have no authority to dictate the terms of a listing contract. If there is a concern that listings taken by some Participants may potentially violate RESPA regulations, the MLS should consult with MLS legal counsel concerning methods (articles, seminars, etc.) of educating Participants concerning state and federal laws.

    As a result of this guidance, ARMLS rules will change in the near future (not certain what date — we’re trying to cut down on the number of rules changes to just two or three per year, rather than what seemed like monthly in the past) to prohibit any absolute statement by Seller or Listing Broker that requires Buyer to use a specific title company for any policies required by the purchase or loan contracts.

    So statements like, “Closing will be at ABC Title” will be OK, because it specifies the location of the closing ceremony but does not mandate that the buyer purchase a policy from that same company. Most title companies will discount premiums when multiple policies are purchased at the time of closing from the same company, so there may be an incentive for the buyer to do so. But such a statement would not require the buyer to do so if she were not so inclined, and therefore is not in violation of either RESPA rules or MLS regulations.
    Bob Bemis, CEO, Arizona Regional MLS

  3. Mark Ciochon says:

    I see this all the time on Foreclosures with BOA- It took 4 days for BOA to get back to us and the “special” loan officer the list agent mentioned too never returned mine or the buyer’s calls. Of course it sold right away. BOA doesn’t have a real branch in Omaha NE. They ultimately sold the home but my buyer was a conventional 30% down buyer. I guess that program keeps the flakes from writing offers.

  4. Tia Hall says:

    My husband and I viewed a property in the Valley this past week that had a stipulation in the listing that stated we must use the lender of choice if we were to ask for any contingencies in our offer, as well as be pre-qualified with said lender. We were unwilling to put in an offer on a home not knowing terms with the lender and feeling as if we had no choice. So, our choice was to NOT put an offer in on the home. We were frustrated, as the inventory is so low at present, and this only further limits our choices. I am a mortgage professional, so I will be using my own company to secure a loan, saving me money on the transaction. This issue is something we see often in our search, but we recognize it is part of the market and we must work with it.

  5. I’m right on with Dane’s second paragraph. There are still too many lenders who do not understand their own underwriting standards. They will wait (and perhaps hope) until final underwriting to see if their loan will pass the mustard.

    Loan officers who do this can harm my listing agents by keeping their home “off the market” for several weeks only to fail at the end.
    Knowing we are dealing with a well qualified buyer and an experienced loan officer is really important in this market.

  6. This is common with REOs in our area with some of the larger lenders. It is permissible. They simply want the buyer to be vetted in-house prior to contract. They do get some loans from it but it is conceived as a means of preventing losing time with unqualified buyers.

    The banks, as sellers, are perfectly within their rights to stipulate this. Some regular sellers want buyers to be prequalified with a trusted source and in this climate I cannot blame them.

    I skip over posts like this on AR because I don’t have time for the righteous indignation.

    • I can understand if it’s an REO but some agents in my market have begun to do it on all their listings too. I’m not sure why and I assume it’s just an attempt to take care of their lender partners. I treat it just like I do non REO houses listed on the MLS as-is. I bring the offer the buyer wants to write asking for repairs and let the seller decided if they truly want to sell or not. Usually they back down.

  7. Marta Walsh says:

    “All offers must be faxed to 480-xxx-xxxx.”

    It’s 2011. Please don’t make me fax you the offer!

  8. Judi says:

    I would have to agree with Phillip on this one. Banks do have the right to cut to the chase with offers on REO properties.

  9. Ankan says:

    Nice Post Jay..

  10. Amy Simmons says:

    You are absolutely right Brett! You must work with someone in lending who makes it their 100% full time JOB to KNOW underwriting guidelines and what is actually working in the marketplace {and no, the two are not necessarily the same}.

    Every Pre-Qualification Form that isn’t worth the paper it’s written on just creates more and more doubt in the hearts of the Agents we send our Pre-Qualification Forms too…even when we do all of the hard work and diligence ahead of time to ensure it’s a valid Pre-Qualification that WILL close!

    Jay, excellent post…right on the money!

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