Computerized Loan Origination Systems  

For many years real estate brokerage and computerized loan originations were seen as activities best performed by separate parties, a view now beginning to shift because of new rules and changing technologies.

Under the 1974 Real Estate Settlement and Procedures Act, known generally as RESPA, realty brokers are not allowed to make so-called "naked referrals." In essence, these are deals where the realty broker tells a lender that buyer Smith needs a loan and gets a fee in return. To this day naked referrals -- a cute term for kickbacks -- are banned by RESPA.

But what would happen if they performed services needed for the production of a loan? Unlike a naked referral, actual work is being done in such cases.

In 1984, HUD determined that under RESPA brokers could be paid fair value for the use of their facilities while in 1986 HUD said realty brokers could charge for loan origination services. In 1992 HUD added disclosure requirements and an obligation to offer loans from a variety of sources and by the mid-1990s lenders could place CLOs -- computerized loan origination systems -- in broker offices.

The catch was that to this point, HUD said only borrowers could pay real estate brokers for lending services -- it didn't say lenders could pay such fees. In 1996, however, HUD agreed that brokers could be compensated for loan origination services by lenders if certain conditions were met.

Today it's possible for brokers to earn computerized loan origination system fees when they provide something of value, perhaps the use of a facility or the provision of goods and services. Such CLO payments, however, must reasonably reflect the value of what the broker contributes to the lending process.

What services can be compensated? HUD lists 14 specific items, but they generally can be boiled down into five categories.

  • Discuss loan options with consumers and prequalify applicants. 
  • Take the loan application and submit loan packages for underwriting. 
  • Verify employment, credit, and other data as underwriters require. 
  • Order appraisal and title services. 
  • Schedule closing and attend settlement.

 While there was once a time when computers were exotic -- think of those CLOs -- that's not the case today. The Internet allows brokers and consumers to check rates and look for mortgage programs on thousands of sites. Checking the marketplace today, the rules for brokers who now want to offer mortgage services look largely like this:

 Naked referrals are forbidden.

 Reasonable fees for services are allowed. The broker's activities as a loan originator must be fully disclosed. Consumers must have a choice of loans and lenders -- the more the better. A buyer cannot be required to use a given lender or loan source as a condition of purchasing a property. 

 One buyer cannot be given preference over another because of the decision to obtain or not obtain financing from a broker. State rules may impact the ability of brokers to provide services and collect fees. 

 For details, speak with legal counsel. Combine changing rule interpretations and the emergence of the Internet with new technologies and the result is that realty brokers have a growing ability to generate computerized loan origination systems or CLO. For consumers, access to more loan sources should be seen as a positive advance. And for buyer/borrowers who want "one-stop" shopping, such arrangements can hold value. Also new is the emergence of software which allow many loans, but not all, to be processed more-or-less automatically. If you have good credit and need conventional, portfolio, VA, or FHA financing the computerized loan origination systems and CLO process is much faster than in the past because of such technology.