It isn’t uncommon for a homeowner to feel the effects of scrupulous mortgage lending practices. With foreclosures on the rise, and more homeowners seeking loan modification, the lending industry has become increasingly in need of regulation. The Truth in Lending Act was passed to protect borrowers from their lenders, real estate agents and contractor colluding to make a ‘kickback’ from the purchase of your home.
For a time, it was a fairly commonplace practice for a mortgage lender and a real estate agent to collude to overvalue one or more of the transaction costs associated with the purchase of a home. If the borrower used one of their services, he or she would be offered a big discount on their home loan or the fee assessed by their real estate agent. In the end, however, the third parties involved would “get you” somewhere through the contract and closure phase.
The first type of kickback was a ‘hard’ kickback where your lender insists you use this or that title insurance company. The associated cost with that title insurance company would be thousands more than a fair, market driven price. The insurance company and lender would then split the dividends.
In a ‘soft’ kickback, real estate agents or contractors may hard sell you on a particular lender and make big claims about its reputation and rates. In the end, the mortgage company pays those third parties for their references.
These practices are illegal now—even soft kickbacks in the form of references. Importantly, you should be aware that banks are partially immune of this legislation as long as they provide “Good Faith Estimate” on their profit margins when you refinance. This means you may not be getting the best deal, because banks are accountable to the same standards and practices other lenders are.