June 21, 2010 Newsletter
What is a CBA? CBAs (Controlled Business Arrangements) arose as a result of the 1974 Real Estate Settlement Procedures Act, and the subsequent regulations promulgated by the government in the early 90’s. Basically the Real Estate Settlement Procedures Act (RESPA) was passed to set guidelines to protect consumers and establish standards of conduct for realtors, lenders and settlement providers. It was a not uncommon practice in the “old” days, prior to RESPA, that a realtor or builder would guide the buyer to a particular lender and title company, and in exchange for that, receive ”kickbacks”. While that system worked well for the realtor or builder, it became apparent that the providers who were compensating the realtor or builder for the referral were increasing their fees to the consumer in order to cover the cost of the referral fee paid. The consumer being unfamiliar with the real estate industry was not savvy enough to realize that he or she was paying in excess for the services rendered them.
As a result of RESPA it was deemed illegal to give or receive these referral fees. SO, builders and realtors formed a joint venture with a lender and or a title company. RESPA allows that as long as it is disclosed. The rub for the consumer is whether the CBA title company or lender is charging more in order that the realtor or builder partner gets a monetary benefit. The other question for the consumer is whether such a relationship creates a conflict of interest. If the title company detects a title defect or potential issue, can the realtor/builder partner influence the decision as to whether or not to close? Although there are many CBA entities, the wise consumer should question whether such a relationship is in their best interests, or should they select a lender and title company independent from the broker or builder who sold them the house.
RESPA was also responsible for the Truth in Lending and Good Faith Estimates (GFE) documents we see prior to closing. The idea behind it was to make the buyer an informed consumer and less likely to be scammed into thinking they were getting something other than what they expected. The Annual Percentage Rate (APR) tells the consumer that the actual yield the lender is making is often greater than the rate set forth in the Note. For example in today’s world you may be quoted a mortgage rate of 4.75% which is how your payments are calculated. But if you are paying points, origination fees, or other processing fees to your lender, the APR could be well over 5%.
It has taken the government years to refine the original ideas as presented in 1974, and just this year the HUD-1 is now incorporated with the GFE, yet it still confuses many consumers. If you have questions as to how a CBA might impact you or whether a loan you have applied for is really what you think, give us a call.
Our annual tennis tourney for Shock Trauma raised almost $6000.00. Thank you for everyone who played or contributed. A special thanks to Heather Dull who sponsored her entire tennis team.
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