RESPA and REFERRAL FEES

I. INTRODUCTION

Referrals are generally considered a mainstay of a REALTOR®'s business.  Yet, as soon as a real estate agent gives or receives some sort of payment in exchange for a referral, that agent could run afoul of the law.  To exacerbate matters, the laws surrounding referrals are complicated and confusing.

This legal memorandum provides REALTORS® with general guidance on referral arrangements.  The first part of this memorandum sets forth the federal and state laws involving referral arrangements.  The second part of this memorandum discusses specific referral arrangements commonly contemplated by REALTORS®.

You are highly encouraged to familiarize yourself with the laws surrounding referrals.  By doing so, you can confidently use referrals and referral arrangements to optimize your business opportunities, without exposing yourself or your company to potential legal jeopardy.

Q: 1.  Can a REALTOR® pay or receive a referral fee?

A: It depends.  Whether a real estate agent may pay or receive a referral fee depends on the specific circumstances surrounding that particular referral arrangement.  A real estate agent engaged in the residential real estate business will generally not be allowed to pay or receive referral fees, but there are some important exceptions as discussed below.

II. FEDERAL AND STATE LAW

Q: 2.  What are the laws pertaining to referral arrangements?

A: Both California and federal laws regulate referral arrangements.  The primary body of law regulating referral arrangements for real estate agents is the federal Real Estate Settlement Procedures Act (RESPA).  If, however, a referral arrangement is acceptable under RESPA, it may still be prohibited under California law (and vice versa).  REALTORS® must comply with both federal and state law.

Q: 3.  What is RESPA?

A: RESPA is federal consumer-protection legislation enacted by the U.S. Congress in 1974.  RESPA aims to, among other things, protect consumers from paying unnecessarily high settlement costs, such as by eliminating kickbacks and referral fees that increase the cost of settlement services.  RESPA is administered by the United States Department of Housing and Urban Development (HUD).

Q: 4.  What transactions fall under RESPA?

A: RESPA generally applies to most residential transactions.  More specifically, RESPA applies to transactions involving residential real property (including condominiums and cooperatives) with one to four units, and a “federally related mortgage loan.”  A “federally related mortgage loan” is defined as any of the following:

• A mortgage loan made or insured by a federal governmental agency, such as FHA and VA loans.
• A mortgage loan made by a lender whose deposits or accounts are insured by a federal governmental agency (such as the Federal Deposit Insurance Corporation or FDIC).  For example, a mortgage loan made by Bank of America is a federally related mortgage loan, because Bank of America is insured by the FDIC.  To check if a lender is insured by FDIC, you may go to the  FDIC's website .
• A mortgage loan intended to be sold by the originating lender to federal institutions, such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae).  Because most conforming loans are sold in the secondary mortgage market to Fannie Mae or Freddie Mac, the bulk of residential transactions fall under RESPA.

(12 U.S.C. § 2602(1).)

Federally related mortgage loans include, without limitation, first trust deeds, junior trust deeds, purchase money loans, refinances, lender approved assumptions, property improvement loans, equity lines of credit, reverse mortgages, and certain construction loans.  Other transactions covered under RESPA include time shares if the lender's interest is secured by a lien on residential property, and manufactured homes and mobilehomes if located on real property on which the lender's interest is secured by a lien.

Q: 5.   How does RESPA regulate referral arrangements made by real estate agents?

A:  For a transaction involving one-to-four residential units with a federally related mortgage loan, a real estate agent cannot either give or receive referral fees.  More specifically, the statutory language provides that “no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person” (12 U.S.C. § 2607(a) also commonly known as Section 8(a)).  Some of the key terms used in this rule are defined below.

RESPA also prohibits anyone from giving or accepting “any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed” (12 U.S.C. § 2607(b) also commonly known as Section 8(b)).

Q: 6.  What is a “referral” under RESPA?

A:     A “referral” includes “any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident” thereto (24 C.F.R. § 3400.14(f)(1)).  A referral “also occurs whenever a person paying for a settlement service or business incident thereto is required to use . . . a particular provider of a settlement service or business incident thereto” (24 C.F.R. § 3400(f)(2)).

Q: 7.  What is a “thing of value” under RESPA?

A: A “thing of value” is broadly defined to include “any payment, advance, funds, loan, service, or other consideration” (12 U.S.C. § 2602(2)).  It also includes, without limitation, monies, things, salaries, commissions, credits, stock, dividends, the opportunity to participate in a money-making program, discounts, sales, rentals, or services at special or free rates, trips, and payments of another person's expenses (24 C.F.R. § 3500.14(d)).

Thus, even if you pay or receive something of value other than money, you still fall within the purview of RESPA.  You also do not avoid RESPA by merely labeling a referral fee as something else, such as a “finder's fee.”

Q: 8.    What is a “settlement service” under RESPA?

A:  A “settlement service” is defined as “any service provided in connection with a real estate settlement.”  Settlement service providers include, but are not limited to, the following:

• Real estate agent or broker;
• Escrow agent;
• Title insurer;
• Lender;
• Credit reporting agency;
• Appraiser;
• Pest inspector;
• Property surveyor; and
• Attorney.
  
  (12 U.S.C. § 2602(3).)

Hence, as a settlement service provider, a real estate agent is prohibited under RESPA from giving or accepting a referral fee incident to the real estate business, whether the other party to the referral arrangement is a settlement service provider or not.  For example, under RESPA, a real estate agent cannot receive a referral fee for real estate service from a credit repair service, because the real estate agent is a settlement service provider.  It does not matter whether the credit repair service is considered a settlement service provider or not.

Q: 17.   Does a real estate agent have a duty to disclose the receipt of a referral fee?

A: Yes.  If a referral arrangement is legal under both federal and state law, a real estate agent who receives a referral fee should disclose that fee to his or her principal.  California licensing laws prohibits a real estate agent from claiming or taking “any secret or undisclosed amount of compensation, commission or profit or the failure of a licensee to reveal to the employer of such licensee the full amount of such licensee's compensation, commission or profit under any agreement authorizing or employing such licensee to do” licensed acts (Cal. Bus. & Prof. Code § 10176(g)).  Furthermore, a real estate agent owes his or her client a fiduciary duty of utmost care, integrity, honest, and loyalty in their dealings (Cal. Bus. & Prof. Code § 2079.16).

Q: 9.  What types of transactions are exempt from RESPA?

A:  Transactions exempt from RESPA are listed directly below.  However, even if RESPA does not apply, the referral arrangement must still pass legal muster under California law as further discussed below (see Question 16).  Transactions exempt from RESPA include, but are not limited to, the following:

• Apartment buildings with 5 or more units;
• Commercial buildings (12 U.S.C. § 2606(a)(1));
• Agricultural properties (12 U.S.C. § 2606(a)(1));
• Business opportunities (12 U.S.C. § 2606(a)(1));
• Vacant land (but certain construction loans fall under RESPA);
• Leases and rental agreements;
• All-cash transactions;
• Seller carry back financing;
• Payments for goods or services actually rendered (see Question 11);
• Affiliated business arrangements (see Question 12);
• Normal promotional and educational activities (see Question 14).
• Referral arrangements between real estate agents and brokers (but not mortgage brokers) (see Questions 18 and 19);
• An employer's payments to its own employees for any referral activities (24 C.F.R. § 3400.14(g)(vii)).  According to HUD, this exemption is not applicable to real estate agents if they are independent contractors; and 
• Transactions involving loans to government or governmental agencies (12 U.S.C. § 2606(a)(2)).

Q: 10.  How is a real estate agent supposed to know, at the time the agent receives a referral, whether any ensuing transaction will have a federally related mortgage loan, and thereby falls under RESPA?

A:  The real estate agent generally will not know at the onset whether any ensuing transaction involves a federally related mortgage loan.  For example, Rick Referring proposes to give Leslie Listing, in exchange for a finder's fee, the name and phone number of Rick's cousin who is interested in selling his home.  If Leslie took a listing for that cousin, and the eventual buyer pays all-cash for the home, the proposed referral arrangement would be legal.  However, if the buyer obtains a federally related mortgage loan to buy the property, as is commonly the case, the referral fee arrangement would violate RESPA.

Q: 11.   What is the “payments for services actually rendered” exemption to RESPA?

A: Although RESPA prohibits referral fees, it allows a “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed” (24 C.F.R. § 3500.14(g)(1)).  A payment, however, must be reasonably related to the value of the goods or services rendered.  HUD may scrutinize high prices to see if they are the result of a referral fee.  If a payment for goods or services rendered bears no reasonable relationship to the market value of such goods or services, then the excess is not for goods or services rendered.  The value of a referral is not to be taken into account in determining whether the payment exceeds the reasonable value of such goods or services.  Also irrelevant is whether the party making the payment increases his or her charges to consumers.  (24 C.F.R. § 3500.14(g)(2).)

Q: 12.  What is the “affiliated business arrangement” exemption to RESPA?

A:  Although RESPA prohibits referral fees, it allows affiliated business arrangements.  An affiliated business arrangement generally involves a person (or that person's associate) who gives referrals to an affiliated settlement service provider.  This arrangement is permissible under RESPA only if the following conditions are met:

• The person making the referral is affiliated with the settlement service provider, or owns over 1% of that settlement service entity;
• The person making the referral properly provides an Affiliated Business Arrangement Disclosure Statement, including, among other things, a written estimate of charges or range of charges for the settlement service (see Question 13);
• The client is not required to use any particular settlement service provider (with certain exceptions for lenders requiring credit reports and appraisals); and
• The only thing of value received by the person making the referral is a return on that person's ownership interest or franchise relationship.

This rule is set forth at 12 U.S.C. §§ 2602(7) and 2607(c)(4), and 24 C.F.R. § 3500.15.

Q: 13.   What is an Affiliated Business Arrangement Disclosure Statement?

A:  As discussed above, an Affiliated Business Arrangement Disclosure Statement is required whenever a person, subject to RESPA, gives a referral to an affiliated settlement service provider.  The written disclosure statement must be provided on its own separate piece of paper.  For face to face referrals or referrals made in writing or by electronic means, the written disclosure must be made at or before the time of referral.  For referrals made by telephone, the written disclosure can be made within 3 business days, as long as, at the time of referral, the affiliated business arrangement and the fact that a written disclosure will follow within 3 business days are verbally disclosed.  (24 C.F.R. § 3500.15(b).)

HUD provides a sample Affiliated Business Arrangement Disclosure Statement.

Q: 14.  What is the “normal promotional or educational activity” exemption to RESPA?

A:  A thing of value falls under this exemption to RESPA if it meets the following three requirements:

• It is a normal promotional or educational activity;
• It is not directly conditioned on the referral of business; and
• It does not defray expenses that otherwise would be incurred by the referring party in the real estate transaction.

(24 C.F.R. § 3500.14(g)(vi).)

Let's say, for example, a mortgage broker offers to provide refreshments at a real estate agent's open house.  Even if this offer is not conditioned on the referral of business, it may violate RESPA if it defrays an expense that the real estate agent would otherwise have incurred.  This arrangement is less likely to violate RESPA if the mortgage broker and the real estate agent equally share the cost of some light refreshments, as well as put forth their own distinct marketing and promotional efforts at the open house.

Q:15.   What happens if someone violates RESPA?

A:  Failure to comply with RESPA's prohibitions against referral fees and kickbacks could result in, among other things, a fine up to $10,000 for each violation, and imprisonment up to one year.  Furthermore, HUD, state Attorney Generals, and state insurance commissioners may bring an action to enjoin RESPA violations.  Aside from governmental enforcement, an individual consumer may file a civil lawsuit to recover an amount equal to three times the amount of any charge paid for a settlement service that violates RESPA, plus attorneys' fees and court costs.  (12 U.S.C. § 2607(d).)

Q: 16.  How does California law regulate referral arrangements made by real estate agents?

A: California law is generally less restrictive than federal law (see, for example, Question 20).  However, under California law, a real estate agent may not claim or demand “a commission, fee, or other consideration, as compensation or inducement, for referral of customers” to any of the following:

• Title insurer or underwritten title company;
• Escrow agent;
• Controlled escrow company;
• Structural pest control firm; and
• Home protection company.

Exceptions to the above rule are as follows:

• Bona fide payments for goods actually furnished, or for services actually performed, by a licensee;
• Providing documents, services, information, advertising, educational materials, or similar items, as long as such items are: (1) customary in the real estate business; (2) related to the product or services of the furnisher; and (3) available on a similar and essentially equal basis to all customers or the agents of the customers of the furnisher;
• Moderate expenses for food, meals, beverages, and similar items furnished to licensees or groups or associations of licensees within a context of customary business, educational, or promotional practices pertaining to the business of the furnisher; and 
• Other promotional items customary in the real estate business, and available on a similar and essentially equal basis to all customers, or the agents of the customers of the furnisher.

Unlike RESPA, this state law is not limited to one to four residential units.  It applies whenever a real estate agent claims or demands a referral fee from the specified service providers.

A violation of this law could result in, among other things, disciplinary action taken by the California Department of Real Estate, including suspension or revocation of the real estate agent's license.  This law is set forth as part of the Real Estate Law at California Business & Professions Code section 10177.4.

III. SPECIFIC REFERRAL ARRANGEMENTS

REALTOR® TO REALTOR®

Q: 18.  Can a real estate licensee pay a referral fee to another real estate broker?

A: Yes.  Both federal and state law allow real estate licensees to pay a referral fee to another real estate broker.  However, for RESPA transactions, this allowance does not extend to mortgage brokers (see Question 33).

Q: 19.  Can a real estate licensee pay a referral fee to another real estate salesperson?

A: No.  Although RESPA allows a referral arrangement between real estate agents, California law requires any compensation for a salesperson's licensed activities to be paid to that salesperson's employing broker (Cal. Bus. & Prof. Code § 10137).

UNLICENSED PERSON

Q: 20.  Can a real estate licensee pay a referral fee or finder's fee to an unlicensed person?

A: No, if the resulting transaction falls under RESPA.  RESPA generally prohibits a real estate agent from paying a referral fee to anyone.  However, a real estate agent may give someone a token of appreciation after receiving a referral (see Question 21).  Furthermore, a real estate agent may give a commission rebate to his or her client (see Question 22).

For non-RESPA transactions, such as the sale of commercial property or vacant land, California law allows a real estate agent to pay a referral fee to an unlicensed person for merely introducing a new client.  If, however, the unlicensed person goes beyond arranging an introduction, such as by negotiating the terms of sale on behalf of a principal, the real estate agent may not compensate the unlicensed person for performing licensed acts (Cal. Bus. & Prof. Code § 10138).

Q: 21.  Can a real estate licensee who receives a referral give the referring party a small token of appreciation?

A: Yes.  After a real estate licensee has received a referral, he or she may give the referring party a small token of appreciation.  However, this arrangement would violate RESPA if there was a prior agreement that the referring party would receive that gift in exchange for the referral.

Q:    22.  Can a listing agent or buyer's agent give a commission rebate to the seller or buyer?

A: Yes.  Even though RESPA prohibits referral fees, it apparently does not prohibit a listing agent or buyer's agent from giving a portion of his or her commission to the seller or buyer.  Moreover, giving a commission rebate to a seller or buyer seems consistent with RESPA's goal of minimizing a consumer's settlement costs.  However, a buyer who intends to use a commission rebate as part of his or her down payment should first consult with the mortgage lender about the loan underwriting guidelines for that arrangement.

Q:  23.  Can a listing agent or buyer's agent pay for the seller's or buyer's transactional costs, or give a gift to the seller or buyer?

A: Yes.  Let's say, for example, a listing agent pays for a buyer's home warranty plan, or the buyer's agent gives a buyer a new doormat as a housewarming gift.  Again, as mentioned above, these activities are not only good business practices, but they seem to fall squarely within RESPA's goal of minimizing consumers' settlement costs.

TITLE INSURANCE COMPANY

Q:  24.   Can a real estate licensee demand or accept a referral fee from a title insurance company?

A:  No.  Under California law, a real estate licensee generally may not demand or accept a referral fee from a title insurance company (see Question 16 above).  This arrangement also violates RESPA for one-to-four residential units with a federally related mortgage loan.

Q: 25.   Can a seller or listing agent demand that a buyer use  and pay for a certain title insurance company?

A:  No, if it's a RESPA transaction.  Under RESPA, no seller “shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company” (12 U.S.C. § 2608(a)).  Any seller who violates this law “shall be liable to the buyer in an amount equal to three times all charges made for such title insurance” (12 U.S.C. § 2608(b)).  To be prudent, a seller should not require the use of a particular title company even if the seller pays for the title policy.

For non-RESPA transactions, such as the sale of commercial property or vacant land, California law does not expressly prohibit a seller from demanding that a certain title insurance company be used.

ESCROW COMPANY

Q: 26.   Can a real estate licensee demand or accept a referral fee from an escrow agent?

A:  No.  Under California law, a real estate licensee generally may not demand or accept a referral fee from an escrow agent (see Question 16 above).  This arrangement also violates RESPA.

Q: 27.   Can a seller or listing agent demand that a buyer use and pay for a certain escrow company?

A:  It depends.  Under RESPA, if a title insurance company provides escrow services, as is common practice in certain areas in California , the seller cannot require the use of a particular title company (see Question 25 above).  If, however, the escrow company is an independent company, or the transaction does not fall under RESPA, a seller and buyer entering into a sales contract can negotiate which escrow company to use.

There is a special rule for sellers who are real estate developers.  For the sale of a single family dwelling, a real estate developer cannot require that escrow services be provided by an escrow company if the developer owns or controls 5% or more of that escrow company.  A real estate developer who violates this law can be held liable for three times the escrow charges or $250, whichever is greater, plus attorneys' fees and costs.  ( Cal. Civ. Code § 2995.)

Q: 28.   Can a real estate broker compensate his or her own salespersons for referring clients to the broker's own escrow company?

A: No.  According to an informal opinion made by the Attorney General of the California Department of Justice, a California real estate broker cannot compensate his or her own salespersons for referring clients to a broker-controlled escrow company (Att'y Gen. Opinion No. 92-517 (1993); see also DRE Bulletin (Fall 1987)).  This arrangement also fails to comport with RESPA's exemption for affiliated business arrangements (see Question 12 above).

STRUCTURAL PEST CONTROL COMPANY

Q: 29.  Can a real estate licensee demand or accept a referral fee from a structural pest control company?

A: No.  Under California law, a real estate licensee generally may not demand or accept a referral fee from a pest control company (see Question 16 above).  This arrangement also violates RESPA.

Q: 30.  Can a seller demand that a certain pest control company be used?

A:  Yes.  The pest control company to be used is an item of negotiation between the seller and buyer.

HOME PROTECTION COMPANY

Q: 31.   Can a real estate licensee demand or accept a referral fee from a home protection company?

A:  No.  Under California law, a real estate licensee generally may not demand or accept a referral fee from a home protection company (see Question 16 above).  This arrangement also violates RESPA.

Q: 32.   Can a seller demand that a certain home protection company be used?

A: Yes.  The home protection company to be used is an item of negotiation between the seller and buyer.

MORTGAGE BROKER AND LENDER

Q: 33.  Can a real estate licensee demand or accept a referral fee from a mortgage broker or lender?

A:  No, if the transaction falls under RESPA.  However, a real estate agent may receive a bona fide payment for loan origination services actually performed.  HUD has issued guidelines for this type of arrangement.

First, HUD has set forth a list of 14 loan origination services:

• Taking information from a borrower and filling out the loan application;
• *Analyzing the borrower's income and debt and pre-qualifying the borrower to determine the maximum mortgage the borrower can afford;
• *Educating the borrower in the home buying and financing process, advising the borrower about available loan products, and demonstrating how closing costs and monthly payments may vary under each product;
• *Collecting financial information and related documents as part of the application process;
• Ordering verifications of employment and verifications of deposit;
• Ordering requests for mortgage and other loan verifications;
• Ordering appraisals;
• Ordering inspections or engineering reports;
• Providing disclosures (Truth-in-Lending, Good Faith Estimate, etc.) to the borrower;
• *Assisting the borrower in understanding and clearing credit problems;
• *Maintaining regular contact with the borrower, REALTORS®, and lender during the loan process to apprise them of the loan status and to gather additional information needed;
• Ordering legal documents;
• Determining whether the property is located in a flood zone or ordering such service; and
• Participating in the loan closing.

Next, HUD has stated that it would generally be satisfied if all of the following 3 conditions are met:

• The third party takes information from the borrower and fills out the loan application;
• The third party performs at least 5 additional items on the above list; and
• The fee paid is reasonably related to the market value of the services rendered.

*Note: If the 5 items performed are the counseling services asterisked above, HUD expressed concern that the fee paid could be construed as payment to steer a borrower to a certain lender.  Hence, under this specific situation, the third party must: (1) give the borrower the opportunity to consider products from at least 3 different lenders; (2) receive the same compensation regardless of which lender's product is ultimately selected; and (3) ensure that any payment made for the “counseling type” services is reasonably related to the services performed, and not based on the amount of loan business referred to the lender.

The above guidelines are set forth in HUD's Informal Opinion Letter No. 13 (February 14, 1995).

For non-RESPA transactions, California law does not expressly prohibit a real estate agent from receiving a referral fee from a mortgage broker or lender.

Q:34.   Can a seller demand that a certain mortgage broker or lender be used?

A    Yes.  The mortgage broker or lender to be used is generally an item of negotiation between the seller and buyer.

ATTORNEY

Q:  35.   Can a real estate licensee pay a referral fee to an attorney?

A   No, if the transaction falls under RESPA.  However, an attorney may receive attorneys' fees for legal services actually rendered (12 U.S.C. § 2607(c)(1)(A)).  For non RESPA transactions, an attorney may also receive a referral fee for a mere introduction.

Q:36.   Can a real estate licensee pay a real estate commission to an attorney?

A    No.  A real estate agent may not pay a commission to anyone for performing licensed real estate activities, other than a real estate broker (Cal.  Bus. & Prof. § 10138).  However, an attorney may receive attorneys' fees for performing legal services.

IV. ADDITIONAL INFORMATION

Q:37.  Where can I get more information?

A    For more information about RESPA, you may go to  HUD's website .  For copies of the California laws mentioned above, you may go to www.leginfo.ca.gov .

This memorandum is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at http://www.car.org . 

Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 a.m. to 6:00 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at 213.739.8350 to receive expedited service. Members may also fax or e-mail inquiries to the Member Legal Hotline at 213.480.7724 or legal_hotline@car.org .  Written correspondence should be addressed to:

California Association of REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles , California 90020