In January, a U.S. District Court of Appeals supported and reinstated a section of the Real Estate Settlement and Procedures Act (RESPA) that prohibits payments for business referrals connected to real estate settlement companies. The case stemmed from a $109 million fine the Consumer Financial Protection Bureau leveled against mortgage company PHH Corp. in 2016 for entering into an agreement with mortgage insurers related to customer referrals. The issue had implications for real estate professionals who enter into marketing service agreements with mortgage lenders and other settlement service providers.
As a result of the ruling in the PHH case, there’s been a renewed interest around marketing and advertising activities among settlement service providers. Phil Schulman, a partner at law firm Mayer Brown in Washington, D.C., spoke at the Business Issues Committee on May 16 during the REALTORS® Legislative Meetings & Trade Expo, explaining lawful business arrangements with settlement service providers that don’t cross the line as kickbacks.
The PHH decision doesn’t mean anything goes in regard to RESPA. “It’s not a ‘get out of jail free’ card,” Schulman said. Real estate professionals are still required to comply with section 8(c)(2). Attaching improper referrals to/or making them a condition of the arrangement is still a problem.
For example, if a mortgage company approaches a broker and asks to lease office space, the arrangement is lawful if it’s for reasonable market value, Schulman said. So, if market value for that office is $1,200, but the mortgage company pays $2,400, it could be seen as a kickback to your brokerage if you’re referring business to that mortgage company, he said. “Go to an independent third party to figure out what that fair market value is,” Schulman said. You can receive payments for office space even if you’re referring business to that mortgage company, as long as they’re paying fair market value for the workspace.
If you do a desk rental, make sure you have a written agreement, Schulman said. But you can’t enter into an exclusive agreement saying that no other lenders are writing loan applications at your brokerage, and you may need to license your location as a branch if loans are written there. Ensure the space is actually used for the activity intended, Schulman said. “Use some common sense,” he advised. For example, if the service provider has an office across the street from your brokerage and the provider also is renting office space or a desk from you, that will raise issues.
When it comes to marketing and advertising activities with another settlement service provider such as a lender or bank, you can co-advertise by taking out an ad or billboard together to target the general public, but you can’t target individual agents or consumers. Each party must pay their fair share for the advertisement, Schulman said. Also, a settlement service provider can pay you for advertising their products to the general public by putting a banner ad on your website, for instance, but they can’t market to your individual agents or clients, he said. You should also get an independent third party quote for what a banner ad should cost on your site so you know what to charge, he recommended.
“Don’t enter into exclusive arrangements,” Schulman said. Brokers don’t want language on their website that lists “preferred providers” for lenders, title companies, appraisers, or closing attorneys because they are settlement service companies, and therefore, it would be a RESPA violation. You also need to make sure there is no pressure on agents to steer business to a certain provider and that there are no quid pro quo arrangements.