How many times have you seen this: Buyer clients are excited to tour a house, you encourage them to get a preapproval letter from a mortgage lender to show that they are serious, and the clients turn to you for a recommendation?
Your job is to help your clients navigate the homebuying and selling process. At the same time, in a profession built on relationships and problem solving, you don’t want to inadvertently run afoul of a federal law called the Real Estate Settlement Procedures Act (RESPA).
What Is RESPA?
Enacted in 1974, RESPA was designed to give consumers a clear picture of settlement costs in the purchase of real estate. The law bans kickbacks that may increase the costs of securing a mortgage or other settlement services. It applies to any transaction involving a federally related mortgage loan, which is the vast majority of loans.
Section 8a of RESPA explicitly bans someone from receiving "a thing of value” for business referrals for settlement services.
“So, real estate brokerage services, mortgage broker, mortgage lender, title insurance, escrow and closing, appraisal, credit report—basically, any service that you see itemized on a settlement statement when you're closing a loan would be considered a settlement service,” says Holly Bunting a partner at Mayer Brown and RESPA guru.
There’s an exception, however, if the fee paid is for a service actually performed.
“So, if a real estate broker is providing goods or services, they can be paid fair market value for those goods and services by a lender,” Bunting says.
If a broker is paid above fair market value (for a service), that’s an example of an illegal referral fee, Bunting says. A simple referral of business is not considered a service, according to the law.
“This is often where we see parties try to put together a compliant arrangement, but they're not necessarily dotting the I's and crossing the T's,” she says. “They put something together that is well in excess of fair market value, or they create a services arrangement where the services are not really real. They're just trying to paper over a services agreement to try to take advantage of the exception, and when you poke holes in it, it doesn't really hold up.”
Importantly, RESPA, enforced by the Consumer Financial Protection Bureau, does not prohibit referral fees between real estate licensees.
Section 8b of the law bans someone from giving or accepting any portion, split or percentage of any fee for a settlement service other than for services actually performed.
The Consumer Financial Protection Bureau provides more exceptions to RESPA Section 8 on its website.
What Are Examples of RESPA Violations?
In terms of illegal kickbacks, “a thing of value” can take the form of payment, dinners, tickets to an event, trips or services for free or at special rates.
It can even be a chance to gain a thing of value.
“Folks will just say, you know, ‘send three new customers to me this weekend, we'll enter you into a drawing for a brand-new iMac,’” Bunting says. “The opportunity ... to win that laptop is a thing of value and would be problematic under RESPA.”
It doesn’t need to be expensive either; even a $5 coffee giftcard is considered “a thing of value” under RESPA, NAR's legal team notespdf.
For illegal splitting, Bunting gave the example of a mortgage lender splitting its origination fee with a real estate broker.
“That fee split is prohibited unless the lender is specifically paying the real estate broker to perform services in return for that split,” Bunting says. “This component of Section 8 does not require a referral, although you will generally find that if a fee split is proposed, it is usually with a party that refers business.”
Best Practices to Avoid RESPA
Bunting’s top tip to remain RESPA-compliant? If you’re in the habit of giving or receiving referrals to other settlement service providers, don’t think about what’s in it for you.
“Create relationships based on customer service, where you know that these people will do a good job for your customers, not because you’re looking for any sort of compensation,” she says.
If you are considering an arrangement where you benefit, Bunting says ask yourself two questions:
- Am I doing something other than making a referral, like performing a service or providing a good that I can be paid for?
- Is the compensation that I’m going to receive fair market value?
If the answer is no to either one of those questions, you’re probably not in compliance.
To help members navigate the law and avoid violations, please check out resources from the National Association of REALTORS® which include RESPA FAQs and RESPA Do’s and Don’ts for Co-marketing, Social Media and Other Web-Based Marketing Toolspdf.
