TUCSON, Ariz. (AP) -- A federal auditor's report alleges that failed Tucson mortgage lender First Magnus Financial Corp. paid illegal fees to real estate companies and builders to secure business and stifle competition.

The report by the U.S. Department of Housing and Urban Development Office of Inspector General said the firms referred $937 million in mortgages to First Magnus as a result. The report recommended administrative sanctions against First Magnus executives.

Paying companies to refer customers to lenders is a fairly common practice, said Lawrence Jacobson, a Beverly Hills, Calif., real estate attorney.

But the payments violate the federal Real Estate Settlement Procedures Act, and HUD is cracking down on them more aggressively, HUD official Joan Hobbs said.

The law forbids mortgage lenders or other parties involved in real estate transactions from giving or receiving "any fee, kickback or thing of value" in exchange for referring business.

Former First Magnus executive Karl Young said in an e-mail to the Arizona Daily Star newspaper on Friday that "First Magnus did not believe the relationships with the builders and real estate companies referenced in the report to be a violation of RESPA."

The Aug. 4 report said First Magnus paid more than $753,000 in marketing and non-competition fees from 2003 to 2006 to real estate companies Long Realty Co. and Realty Executives as well as to builders T.J. Bednar and Santa Anna Homes.

Long CEO Rosey Koberlein said in a statement that her company is "unaware of the substance of the allegations in the Inspector General's audit report. We have only recently obtained a copy of the report and are reviewing it."

Realty Executives Southern Arizona CEO Anthony Azar did not return a call for comment. Calls to Tucson builder T.J. Bednar also were not returned Friday.

Mason Cave, chief financial officer for Peoria-based Santa Anna Homes, said he could find no evidence that First Magnus paid referral fees or other incentives to his company.

HUD issued a similar report last month that said First Magnus also paid illegal fees to mortgage brokers from 2003 to 2006.

Both reports focused most on violations involving Federal Housing Administration-backed loans, but RESPA applies to all mortgages, said Hobbs, HUD's regional inspector general.

RESPA is intended to help preserve consumers' rights to choose their own mortgage companies, Hobbs said.

"Who knows if First Magnus isn't gouging the customer?" Hobbs said. "The customer needs to have an opportunity to select from a variety of sources, not just one."

Although sanctions were recommended against First Magnus executives, the report did not refer to any possible actions against the real estate and building companies.

First Magnus collapsed and filed for liquidation bankruptcy last August, one of many mortgage companies caught up in a nationwide credit crunch.

Young and other former First Magnus executives have since started a new lender called StoneWater Mortgage, which operates in First Magnus' former headquarters in Tucson.

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Information from: Arizona Daily Star, http://www.azstarnet.com

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