You asked: "Is it legal for a listing agent to force a buyer to use their preferred lender as a term of the purchase contract?"
The answer is NO and the proof is in the standard CA purchase contract, RPA-CA, Paragraph 18:
"SELECTION OF SERVICE PROVIDERS: ...Buyers and sellers may select ANY providers of their own choosing."
As a tactical move, if you believe the listing agent will make the decision based on the lender, start with that lender but change later. They should have no leg to stand on...but I am not an attorney nor do I play one on TV.
Dennis Smith, ABR, SRES, e-PRO, CDPE, RealtorÂ® Lic #00476662
Certified Distressed Property Agent
RE/MAX By-the-Sea, Carlsbad CA
Most agents are so inexperienced and incompetent that all they can do is complain. They don't bother to go and find great loan officers to work with. They would let their buyer, who buy maybe 1 or 2 houses their entire life, dictate which loan officer to use. These agents don't know how to qualify their buyers. They don't know how to qualify their buyer's chosen loan officer, who may be a certified idiot... These agents would submit offers out of desperation, hoping the deal would stick while possessing no knowledge or control to make the deal close...
And they would expect sellers like me to accept their client's offer. You would not believe how many times I'd been burned by these agents and buyers and their loan officers just in the past 6 months... Just last week, a loan that I thought would close ended up falling apart because the loan officer kept saying the borrowers are well qualified. Turned out he forgot to ask the borrower to file for their 2011 tax return at the beginning of the loan process. He dragged the deal on and on for 40 days. After we got sick of him, I asked the borrower to use my preffered lender. Well, borrower's mid credit score was only 620 all along... Step in my shoes and the borrower's shoes and think about that for a moment.
If you're a great agent, then stop complaining. Write a nice letter explaining your level of qualification and the qualification of your buyer and the loan officer. Explain within the letter how confident you are and the exact reasons why you are confident. Submit such letter along with your offer. And if the seller still insists your client using his preferred lender, then take some time to quickly research the preferred lender. See if there's anything weird going or perhaps the seller simply just doesn't want to let a\his deal drag on for weeks while turning away perfectly qualified buyers... Stop complaining. Educate yourself. Prepare yourself. Be the great agent that your buyer supposedly hired.
However, it is permissible for the seller to require it. It may not have been wise, but it's certainly permissible. Legal and ethical. Understand where the seller is probably coming from: There are lots of online lenders who promise all sorts of things to buyers. But when it comes time to deliver, they don't. You've probably run into them yourself. In my office, Realtors hate that sort of thing . . . when a buyer is supposedly pre-approved by some lender no one's ever heard of and who is based thousands of miles away. So we strongly encourage buyers to talk to a group of lenders (several different companies) that we deal with and know are professional and reputable. If the buyer chooses not to, that's his/her decision.
So, we can't force a buyer to use a particular lender. Nor can a listing agent. But the seller can. It's not always the wisest move. Maybe that selected lender isn't the best, or doesn't have a program that best fits the buyer. Still . . .
As a side note, the same issue comes up a lot with investors. Investors, in particular, like to be in charge of the entire process. They prefer that buyers use their lenders and their settlement companies because the investors have confidence in them. They want to be in control, not at the mercy of some "professional" they've never dealt with before.
I understand your concern and frustration. But the buyer was fully entitled to specify the lender to use.
If your question had said "Is it legal for the SELLER to force a buyer to use their preferred lender" the answer would be no. Either party can request which service providers are used as part of the negotiations.
All of that being said, if the lender had competitive rates and terms, charged no extra fees and provided comparable service to your client AND your client is agreeable, they have no other choice if they want to buy the property.
For example, if you are writing an offer on a B of A REO you will receive preferential treatment if the buyer is using B of A for their loan.
I've NEVER done this practice on my own because the contract and conditions of sale are between the buyer and seller. If my seller makes such a request on his/her own merit then that's different. Agents SHOULD NOT be putting in their own conditions as part of the contract and I highly doubt that an average seller would be making such a request on their own. They are doing so at the direction of their agent and that's where I personally think it muddies the water ! I've even seen agents request a higher commission in the purchase contract!!! WOW!!! Since when does a buyer request a higher commission for their agent as part of a condition of the sale??? Another topic for another day!
I think it's interesting here that many agents are screaming this practice is ILLEGAL, yet they don't reference any legal statue. However, one agent (Dennis S.) referenced paragraph 18 of the RPA, but if there is a counter issued and the seller counters out that section (just like anything else countered out), it will supersede that requirement (if agreed upon by all parties). Another agent (Anna M.) referenced RESPA 24 CFR 3500.15, but I don't believe it applies here because that section pertains to AFFILIATED Business Agreements and a seller is more than likely not going to have an affiliation with a lender unless he/she owns the mortgage company, at which point it must be disclosed. Another person, investor (rbui75) makes some great points with regards to being the SELLER making certain request with regards to conditions of sale with HIS property(ies). Another agent (Phyliss M) said she spoke to her Broker and was told it's DEFINETLY illegal, yet never mentioned any statue that the Broker may have made reference to...We all work together in an industry where I think there is a lot of uneducated agents, Brokers, Managers and alike who just say it's something is illegal or unethical because someone else told them so, and don't take the time to really research the matter or call for legal advise.
I've been in this business for over 10 years, a Manager/Broker for six of those years and I am not afraid to say, "I don't know, but I'll look into it" if I don't know something to be certain. I'm currently doing some research on this topic because it's becoming a common practice in this market and my next step is to call the C.A.R. legal hotline to get a more direct answer from an attorney. After all, we pay our C.A.R and N.A.R. dues for a reason and this is a great resource for us to use, yet most don't. They run to their Broker/Manager (or another agent) to look for an answer instead of doing their own due diligence. Not to say Broker/Manager or senior agents are not a great resource, but what if they were given wrong advise or information. AND, if you do go to these people and they give you an answer of "It's definitely illegal or unethical", ask them to reference the statue so you can read it for yourself and get more educated.
I will not say something is illegal or unethical without something to support it. AND so far, I've not seen ANYTHING outlined in RESPA, Fair Housing Act or any other resource to indicate this practice is illegal.
To my fellow agents, Broker, Managers, etc.: Let's take a more proactive and professional stand with regards to our industry standard and get more educated on the laws under which we operate. We are already looked at by many consumers as a profession that requires VERY LITTLE education, training to do what we do, yet we are in a profession with an unlimited income opportunity and are dealing with probably one of the most complex legal contracts/guidelines/statues of any state. We are not considered by most out there to be in a true professional career, however we are required to maintain a state license to practice our business, which qualifies us as a professional industry.
First off, I'm in California so not sure if something might be different in another state, so check with your local legal support.
First: It's NOT...I repeat NOT illegal for a seller to require a buyer to use a specific lender as a condition of the sell as long as the seller is not getting any type of compensation for such use. IF the seller has ANY affiliation (business relationship) with the mortgage company/lender, then it must be disclosed to the buyer, but they can still make such a request. This is outlined in RESPA 24 CFR 3500.15
IF the listing agent is making this request in a counter offer and it's not really coming from the seller's wishes, then the agent could have some ethical and due diligence matters to address if reported. This may be hard to prove seeing as the request is in the form of a counter, which is being generated by the seller and signed by them as well, so they SHOULD know what they are signing. It would be tricky, but if the buyer or buyer's agent suspects that the agent is behind this tactic and it's not really coming from the seller directly, then the buyer would have to address this matter with the seller personally and that probably will not be happening or at least it's not a common practice for the seller and buyer to communicate (in most situations).
So to sum up, if you receive a counter offer and the seller is requiring your buyer to use a specific lender as a condition of the sale, IT"S TOTALLY LEGAL (At least according to a California attorney) as long as the seller is not getting any type of compensation for such use. IF the listing agent has an arrangement for using that preferred lender and is getting some type of kickback latter, well that's another matter all together and falls under "kickbacks" within RESPA guidelines and may be grounds for disciplinary action against the lender and agent.
Note to all: Pick up the phone and call the FREE LEGAL HOTLINE when you are unsure about a matter such as this. It would have caused A LOT of agents within this post to not write some of the things they wrote...AGAIN, I'm speaking on behalf of California and legal advise from a California C.A.R. attorney....Other states may vary.
I hope some of these Brokers/Managers who gave their agents BAD ADVISE reads this OR at least researches it on their own.
Short answer is no. No one can legally "force" anyone to do anything.
The seller may want the buyer to be crossed approved by their preferred lender, but by no means can they " force" a buyer to use their lender. Buyer has the right to work with the lender they feel will offer them the best terms, conditions and customer service.
I see the cross approval requirement a lot with REO sales and short sales.But even in these cases the request is for a cross approval, the buyer is not being forced to use the lender of the seller's choice.
Best of Success to You,
Kawain Payne, Realtor
I mean Really? The seller countered to use a different lender???
To answer the ethical question. no, it's not ethical either. If you have the energy and time, you should pursue this.
On most REOs in this area I have noticed that the listing agent has a mortgage person in the confidential remarks in the MLS. He also states that any buyer MUST be pre-approved by that Motgage person, but doesn't have to use them. When I contacted one of these lenders she stated that she would give a break to the buyer (In closing costs) if the buyer used her services. Isn't that against RESPA?
Not only is this illegal, it is completely unethical. Many Listing Agents will request that a buyer get pre-approved by their preferred lender (which allows them the assurance that the buyer truly can qualify for a loan), but the ethical practice is to let the buyer use whatever lender they want to use! In my listings, I do ask that the buyers get the "blessing" from our preferred lender, but do allow them to use their own lender if they've already been pre-approved. I even go so far as to connecting the two lenders so that if a buyer's credit has already been pulled and paperwork started, our lender can review with the buyer's lender what the situation is. This way, the buyer doesn't have multiple credit inquiries. This is the only fair thing to do. This can bring business to the preferred lender on the listing, but the business that the lender gets needs to be completely voluntary!
Very unethical. I can completely understand a cross qualify to make sure the buyer is qualified and to have a back up direct Lender who can close in time should the Bank give a small window before the approval letter expires. I have actually had banks give us 2 days to close from the approval date, which is impossible when financing is involved.
Q #1: Is it legal/ethical for a seller to require a buyer to use a specific lender or one of the pre-approved list of lenders that seller provides?
According to the lenders who I spoke with and the CFPB (Consumer Financial Protection Bureau), it is not legal for a seller (or seller's Realtor) to require a buyer to USE a specific lender or to USE a lender from a specified pre-approved list of lenders. http://www.consumerfinance.gov/askcfpb/
to file a complaint that will cause them to answer you directly: http://www.consumerfinance.gov/complaint/#mortgage
Please note, I also strongly agree with Jeff Petsche's opinion below in which he stated that the listing or selling REALTORS should absolutely not interject their preferences in any contract negotiation between the buyer and seller as it creates them being a party to the contract and establishes legal liabilities that they are not licensed for nor supposed to be involved in. I understand after 40 years in this business that we all want to "protect" or "help" our client sellers, but we need to do so only in the actions for which we are Licensed. Need to keep that in mind at all times so we aren't practicing law or finance.
Q #2: Is it legal/ethical for a seller to require a buyer to get PRE-APPROVED by a specific lender?
Answer: Yes it is. Ask any long-term loan officer and they will tell you this. You can also check with the CFPB.
I'm not sure about the legality, but I certainly don't think it's very ethical.
If the seller has an affiliated business arrangement with the lender he is requiring your buyer to use, and the seller is making it a condition of the purchase, he could be in violation of RESPA Law and there may be a remedy of law. Consult an attorney if this is your situation. The applicable code to reference is RESPA Law CFR-2000-title24-vol5-sec3500-15.
at one time i had the actual wording from the good folks at HUD to back this statement.
agents are advised to seek specific answers to this question which i had explained to me personally by a HUD enforcement technician in 1996 when i asked the very question. THAT SAID...
the recent changes and the rise of the CFPB may treat this matter with specificity.
Financing is STILL an important part of any purchase offer. The seller can choose not to become a victim of the poor funding choices a buyer makes. There will be enduring, collateral damage suffered by the seller when the buyer is left at the alter by wells or chase.
This is a PRUDENT choice by the seller being driven my those SAME big banks.
Tammy Hayes, Realtor
Re/Max Palm Realty
They would not be strong armed into using the SELLER AGENT'S LENDER. That sounds
dubious in and of itself. Why not use the seller agent's appraiser as well.
Google RESPA. It is against FEDERAL LAW, plain and simple.
Get a great listing agent who knows what they are doing that can review an escrow and/or mortgage company to make sure they are OK.
Again, you can't violate FEDERAL law.
I have found that in several of these situations, the agent was unaware that forcing a lender was not allowed and they quickly allowed my buyers to use a lender of their choice.
Kindred Real Estate
CA DRE # 01402946