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Home arrow Real Estate News arrow General News arrow Ralph Roberts Urges Realtors and Consumers Know Lending Laws
Ralph Roberts Urges Realtors and Consumers Know Lending Laws Print E-mail
Thursday, 07 September 2006

Ralph R. Robert says it’s illegal to inflate home values in order to obtain cash-back monies from lenders. 

Unfortunately, cash back at closing schemes are illegal and potentially damaging to the lender, who is fooled into making a risky loan. Lenders aren't the only losers he warns. Buyers can be tricked into buying more house than they can afford.

Housing values in the area are artificially inflated, making housing less affordable and raising property taxes. Honest real estate agents lose business to dishonest agents who offer cash back deals. And neighborhoods begin to buckle when homeowners default on the inflated loans and their properties end up in foreclosure. That's why cash back at closing is illegal.    

He says it's easy for agents and consumers to get fooled. "On first glance, cash back at closing looks like a win-win situation. The buyer pays a little more for a property than it's worth, and the seller agrees to return the surplus cash to the buyer, who can then use it to pay off outstanding debt or renovate the property," explains Roberts. "The seller gets close to or better than the asking price, the real estate agent gets a bigger commission, the loan officer chalks up another successful loan, and the lender scores a larger loan and stands to earn more interest over the life of the loan."

Roberts cites the Uniform Residential Loan Application (known as Form 1003) that every home buyer signs when applying for a home loan. "The 1003, which is authorized by Title 18 of the United States Code, Section 1001, is one of those documents that has small print that lawyers always tell you to read before signing on the dotted line," Roberts says. "It says it is illegal to provide false information on a loan application or any other document related to a real estate transaction. So if a buyer, appraiser, real estate agent, loan officer, or another party provides a false statement of a property's value on a 1003 or any other document, they're breaking the law. If you go along with the scheme, you become an accomplice, subject to prosecution."

Roberts urges home buyers, sellers and real estate professionals to know the law, to act in accordance with it, and to abort any deals designed to dupe anyone involved. "Watch for warning signs," he says, "such as a buyer offering significantly more than the asking price, an inflated appraisal, or a situation in which neither the buyer nor the buyer's agent has seen the property. Often the buyer or buyer's agent claims that the extra money will be used for home repairs or renovations or paid to a contracting company to handle the repairs or renovations."    

Roberts notes that cash back at closing can be legal if a broker is giving back a portion of his or her commission, but this would be rare occurrence. "If agents want to rebate part of their commission back to the purchaser, I would call this 'commission back at closing,'" Roberts says. "While this is not illegal, it should be done only with the broker's knowledge and approval, and it should not be cash, as it could be considered income and have tax ramifications. I would check with an accountant."

Edwina Baniqued

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