It's Back: Does 'Required Use' Inflate Appraisals, Lower Standards?

One of the sticking points last year to HUD's proposed changes to the Real Estate Settlement and Procedures Act (RESPA) was a proposed change to the prohibition against "required use" that would have limited or prevented a builder from offering incentives such as a finished basement or free upgrade to buyers who used the builder's affiliated lenders and/or settlement companies.

The National Association of Home Builders (NAHB) quickly brought a lawsuit against HUD, asking the Court to prohibit HUD from changing those prohibitions against "required use." The conflict was avoided when HUD agreed to withdraw the proposed change. It was clear, though, that the agency intended to return to the issue in the future.

Fast forward to today. Early this month HUD announced it is requesting information, including personal experiences, empirical studies and other data that specifically address "incentivized" affiliate referrals and penalties, in an effort to strengthen and clarify RESPA's prohibitions against "required use."

HUD is seeking data that will allow it to assess claims that builders' incentives have lead to artificially inflated appraisals and lower underwriting standards or that has created situations where home buyers are at greater risk for being "upside down." The agency wants to tailor its prohibition of "required use" so that it further reduces the schemes that increase buyers' settlement costs without prohibiting beneficial discounts or packages.

There are three specific questions HUD is asking:

  • Are the values of the incentives offered by builders too difficult for consumers to quantify, thereby limiting their ability to effectively shop for mortgages?
  • Are consumers required to commit to use a builder's affiliated lender so early in the process that consumers never have an opportunity to compare the loan terms offered by the builder against other lenders?
  • Are builders pressuring consumers to commit to a contract before the consumer has time to consider alternatives and to comparison shop?

The issues of "incentivized" referrals and penalties are frequently raised by REALTORS® across the Commonwealth. If this is an issue that motivates you -- and if you have facts, statistics or empirical data that you can offer in support of your position -- now is the time to bring it to PAR's attention.

Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. He may be reached at