Mortgage Contingency Clause
Avoid Appearance of Limiting Competition
By Ray J. Michalowski, Esq.
The redesigned mortgage contingency clause in the new Standard Agreement for the Sale of Real Estate (AS-R) is a substantial improvement over the prior version. The addition of the mortgage lender identification option has given agents and their clients the power to clarify the meaning of the mortgage contingency. But like any powerful tool, this clause must be used with care.
Last month this column discussed how to avoid individual misuse of the lender identification option. Serious consequences can also occur when real estate licensees collectively use this clause that results in limiting competition in the mortgage marketplace.
In one scenario recently described to PAR counsel, a listing noted that the seller would only entertain offers with mortgage contingencies that identified “local lenders.” Admittedly, this listing by itself cannot be considered a substantial restraint of trade since an individual seller rarely has the ability to significantly affect the lending market.
But if numerous sellers working with the same broker had placed the same limitation in their listings, would the practice be more suspect? Absolutely. It would appear that the broker is coercing clients to exclude non-local lenders in their listings. The important question here is whether the broker’s actions are limiting competition in the mortgage market. Another equally important question is whether the broker is essentially forcing buyers to use lenders affiliated with the listing broker. The first question helps determine if an illegal restraint of trade is occurring; the second helps establish whether the Real Estate Settlement Procedures Act (RESPA) is being violated.
Suppose this broker believes that specifying “local lenders” has increased his number of successful sales contracts. Sharing this idea with fellow brokers may entice them to institute the same kind of policy. When the perceived “success” of this practice is shared and copied like any other seemingly good idea, the practice may evolve into a blatant case of restraining competition in the local mortgage market. Such a practice invites investigation and prosecution by the Federal Trade Commission (FTC) and the Department of Justice (DOJ). While any restraint of trade will invite interest from these agencies -- and from affected trade associations -- the use of the word “local” to limit acceptable lenders is a lightning rod for trouble. The FTC and DOJ strongly view Internet-based businesses, including mortgage lenders, as valuable sources of competition and lower-cost services that benefit consumers.
The moral of this two-part series is that REALTORS® should use the lender identification option only for its plain purpose: to identify the lender to whom the mortgage contingency applies in a specific transaction. This alone is a tremendous improvement that removes much of the ambiguity possible under the prior mortgage contingency clause. While answering general questions on mortgage lenders is permissible, REALTORS® should provide information that is derived from objective sources like accrediting and rating agencies. They should avoid any appearance that they are steering sellers toward or away from a specific lender or class of lenders. While a seller may make such a choice on his own, he should never make this choice based on the undue influence of his real estate agent.
Mr. Michalowski is a member of the law firm of Caldwell & Kearns in Harrisburg. In addition to serving as general counsel to PAR, Caldwell & Kearns represents brokers and salespersons in various legal matters. Mr. Michalowski represents and defends real estate agents and brokers in all types of civil law suits and licensing claims across the Commonwealth. He is also one of the voices of the Legal Hotline.