The Real Estate Settlement Procedures Act (RESPA) provides consumers with improved disclosures of settlement costs and to reduce the costs of closing by the elimination of referral fees and kickbacks.
RESPA was signed into law in December 1974, and became effective on June 20, 1975. The law has gone through a number of changes and amendments since then, all with the intent of informing consumers of their settlement costs and prohibiting kickbacks that can increase the cost of obtaining a mortgage.
RESPA covers loans secured with a mortgage placed on one-to-four family residential properties. Originally enforced by the U.S. Department of Housing & Urban Development (HUD), RESPA enforcement responsibilities were assumed by the Consumer Financial Protection Bureau (CFPB) when it was created in 2011.
Applying equally to all settlement service providers, RESPA does not distinguish among different types of settlement providers based on their role in the real estate sales transaction. A settlement service generally includes any service provided in connection with a real estate settlement including, but not limited to: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, home warranty companies, services rendered by a real estate professional, the origination of a federally related mortgage loan, and the handling of the processing and closing or settlement.
While the CFPB is generally excluded from exercising authority over real estate brokerage activities, the CFPB does have authority under RESPA over agents and brokers engaging in offering or providing financial products or services. Real estate agents and brokers must comply with RESPA and are prohibited from receiving anything of value in return for the referral of settlement service business. Violators of RESPA are subject to penalties, including damages, fines, and imprisonment.
Prohibition against Kickbacks and Unearned Fees
One of the primary ways real estate agents and brokers are concerned with RESPA compliance relates to relationships with other settlement service providers and potential kickbacks or payment of referrals that may result from those relationships. Section 8 of RESPA generally prohibits any person from giving or receiving any "thing of value" in exchange for the referral of settlement service business. However, there is an exception under RESPA that allows brokers and agents to exchange reasonable payments in return for goods provided or services performed by other settlement service providers, so long as those arrangements are carefully structured to comply with the law and regulations.
The CFPB has been increasing scrutiny of settlement service provider relationships and activities under RESPA in recent months, resulting in growing uncertainty for the real estate industry. Below are some examples for real estate professionals to follow when engaging in activities with other settlement service providers related to marketing, referral fees, and affiliated business arrangements.
Co-Marketing : A real estate broker and a mortgage lender agree to jointly place a full-page advertisement in a local newspaper. Each company gets exactly one-half of the page to advertise its services. Each company pays one-half of the cost of the advertisement.
This is not a violation of Section 8 of RESPA as long as the advertising costs paid by each party are reasonably related to the value of the goods or services received in return (i.e., the amount of advertising). If one party is paying more than a pro rata share for the advertisement, the additional costs could be viewed as a disguised payment for referral, resulting in a RESPA violation.
Sponsorships of Events : A real estate agent is sponsoring an open house for other agents. A local title agency reimburses the real estate agent for the cost of the luncheon and the title agency does not market its title services at the open house.
Because the title agency does not market its title services at the open house, both the real estate agent and title agency could be found in violation of RESPA. By reimbursing the real estate agent for the cost of the luncheon, the title agency has given the real estate agent a thing of value in consideration for the referral of business. If, however, the title company attends the open house to make a presentation or to otherwise market its services, such payments may be lawful under RESPA.
A settlement service provider can sponsor an educational event as a way to promote its services, so long as the costs associated with the event do not defray expenses that the real estate agent would otherwise encounter and are not conditioned on the referral of business. Note, however, that a rule of reason should be applied. An educational event hosted by a mortgage lender that was held at a local hotel and provided a lunch would be different from an educational event held in Hawaii in which one hour was dedicated to education and the remainder of the event was directed toward recreation.
Marketing Service Agreements : A real estate broker and a title agent enter into a marketing service agreement (MSA), where the real estate broker charges the title agent a disproportionate share for the marketing materials developed and distributed to consumers - an amount that is in excess of the fair market value of the of the marketing services actually performed.
This would be in violation of RESPA, where the excess payments for the services could be deemed a payment for referrals. RESPA permits the marketing of other settlement services by another settlement service provider so long as the payments made for these services represents the fair value for the services provided. Fair market value should be based on what a non-settlement service provider would pay for the same services by another.
A lawful MSA should contain the following elements: (1) the real estate professional can perform services for other companies in the same field of business (i.e., the agreement is not exclusive); (2) the compensation is not based on the volume of business, but rather on the value of the services provided by the real estate professional; (3) a written contract between the parties that documents the services to be provided pursuant to the agreement; and, (4) a written disclosure is provided to the consumer describing the real estate professional's role in selling the third-party service.
Office Rentals : A settlement provider conducts real estate closings in the conference room of the real estate broker with the expectation that the real estate broker will refer closing business to the settlement agent. The settlement agent pays fair market value to rent the conference room for each closing.
This appears to comply with RESPA. A settlement service provider may rent a conference room or other office space from another settlement service provider, as long as it pays fair market value to rent the space. Fair market value should be based on what a non-settlement service provider would pay for the same amount of space and services in the same or a comparable building.
Promotional Materials : A homeowner's insurance company gives a real estate broker marketing materials, such as desk calendars, pens, and notepads, all of which promote the homeowner's insurance company's name.
Distribution of such materials is compliant with RESPA because the regulations provide an exception to Section 8 for normal promotional and educational activities that are not conditioned on the referral of business. Such materials must also not defray expenses that otherwise would be incurred by persons in a position to refer settlement service business.
Brokers' Payments to Agents : A real estate broker pays its real estate agents $20 for each referral the agents make to the real estate broker's affiliated mortgage company.
This is a violation of RESPA. Although RESPA provides an exception for payments made from an employer to its employees, payments between a real estate broker and its salespeople do not qualify for this exception. Real estate professionals are considered independent contractors, rather than employees of the real estate broker. As a result, the $20 payments constitute payments in return for the referral of business in violation of RESPA.
Payments between Settlement Service Providers : A licensed broker pairs buyers with real estate professionals in different geographical areas based upon information received from consumers and from participating real estate professionals. Referral fees are then paid from the other broker when a deal settles. This model is then expanded to pair real estate agents with mortgage brokers and a fee is collected.
This arrangement would violate RESPA. Section 8(c) of RESPA contains exceptions to RESPA's prohibitions on kickbacks that allows for cooperative fees to be paid between real estate licensees, including referral fees. However, no such exception exists for payments made to mortgage brokers and therefore would be in violation of the law.
Agent Incentives : A mortgage lender devises a contest among local real estate agents where the real estate agent who refers the most customers to the lender will receive a vacation cruise to Alaska.
This is a violation of RESPA because the vacation cruise is a thing of value in exchange for the referral of business, violating the law's anti-kickback provisions. Both the mortgage lender and the real estate professionals can be held liable for RESPA violations.
Meals : The owner of a title agency meets the owner of a real estate brokerage firm for dinner to discuss future marketing opportunities. After the discussion has ended, the owner of the title agency pays for the real estate broker's dinner.
This complies with RESPA because the purpose of the dinner was business related and was not a payment for the referral of business.
Affiliated Business Arrangements
Affiliated Business Disclosure : A real estate broker refers business to its affiliate title company and provides its customers with an affiliated business disclosure. The disclosure lists the range of charges that the title company will charge for its services; the financial interest in the title company; and notifies the customer that he or she is not required to use the title company for services.
This is compliant with RESPA, as the referrer of business to an affiliated entity is required to provide a written disclosure to each consumer that identifies the affiliated relationship, provides the charges or range of charges that the joint venture generally charges, and notifies the consumer that he or she is not required to use the affiliated business.
Payments Based on Referred Business : A real estate broker and a title insurance company create an affiliated title agency that pays dividends to both the real estate broker and title insurance company in proportion to the amount of business that each refers to affiliated title agency during the year.
This is a violation of RESPA because an affiliated business may only pay its partners or investors a proportionate share of the profits based on their ownership interest in the affiliate. Thus, if the partner owns 50 percent of the business, they may receive 50 percent of the profits in annual dividends, based on the amount of stock held. RESPA prohibits the payment of dividends based on the amount of business referred or expected to be referred to an affiliated business.
Consumer Discounts : A prospective buyer's credit union has told her that in order to qualify for a special package of services, she must use certain settlement service providers, including specific real estate professionals. Additionally, the real estate professionals are then required to rebate a portion of their commission to the buyer through this program .
Such arrangements could be legal under Section 8 of RESPA. The credit union can offer the consumer a package of settlement services at a reduced cost to the consumer if the consumer elects to use certain settlement service providers for settlement services, even if those providers are affiliates of the credit union. The credit union also could require a consumer to use a particular provider for settlement services without the offering of a discount, as long as the credit union and settlement service provider are not affiliates. However, the credit union cannot require the consumer to use an affiliate settlement service provider.
The credit union's offering of a package of services at a discount tied to the use of an affiliate provider is not considered required use, as long as the consumer is notified of his/her option to shop for settlement services and the discount is a true discount to the consumer that is not made up elsewhere in the cost of the transaction. A real estate professional can also agree to rebate a portion of his/her commission to a consumer. However, some states have laws prohibiting the payments of rebates to unlicensed individuals, making such a practice illegal in those jurisdictions.
Consult with a RESPA attorney to ensure compliance with any and all applicable laws, as some state and local laws prohibit or otherwise restrict activities that may be permissible under RESPA. For resources on specific issues under RESPA, see the additional guidance below.
None at this time.
What is the fundamental issue?
Recent regulatory actions have called into question whether marketing agreements are legitimate under the Real Estate Settlement Procedures Act (RESPA), and if so, what is the right way to do one.
I am a real estate professional. What does this mean for my business?
Actions by the Consumer Financial Protection Bureau (CFPB) have departed from longstanding prior interpretations of the Real Estate Settlement Procedures Act (RESPA), calling into question whether and under what circumstances real estate professionals can receive money for marketing other settlement services and service providers. This has led to much confusion in the industry and numerous lawsuits.
NAR believes that real estate professionals and brokers should be able to be compensated for services performed and marketing done. NAR supports improved guidance from the CFPB and specifically rejects the contention that the marketing of settlement services is a mere referral.
Responsibility for enforcement of RESPA transferred from HUD to the CFPB in 2012. NAR and its industry partners have long disputed a 2010 HUD ruling that the sale of home warranty contracts by real estate agents for compensation was a per se violation of RESPA. NAR believes HUD erroneously limited the ability of real estate professionals to market home warranty products to the detriment of consumers who benefit from such products. Legislation has been introduced over the years to exempt home warranty companies from RESPA, which NAR has supported.
The CFPB has also previously embarked on a broader effort to prohibit the use of marketing service agreements (MSAs). In addition to engaging in various enforcement actions, on October 8, 2015, the CFPB issued Compliance Bulletin 2015-05 addressing MSAs, which offered little additional guidance on the CFPB’s insight for enforcement actions. NAR has since advocated for removal of this problematic guidance.
On June 4, 2015, the CFPB issued a decision against PHH Corporation and a number of other defendants for violating Section 8 of RESPA by paying for referrals when there is a federally related mortgage. CFPB Director Cordray’s decision in this instance called into question a number of practices relating to reinsurance arrangements and attempted to expand the agency's statute of limitations authority. As a result of the CFPB's action, on July 30, 2015, Wells Fargo and Prospect Mortgage joined a growing number of lending institutions to discontinue participation in MSAs with real estate agents and brokers. The PHH case was litigated at the U.S. Court of Appeals for the District of Columbia, which NAR filed two amicus, or “Friend of the Court,” briefs defending properly implemented MSAs in this case.
On October 11, 2016, the D.C. Circuit Court held in favor of PHH and stating that payments for bona fide services provided and made at fair market value do not violate RESPA. The court also held that the unilateral authority of the CFPB vested in a single person (the Director of the CFPB) was unconstitutional. The CFPB appealed the decision (issued by a three-judge panel) to the full bench (“en banc”) of the D.C. Circuit, which reheard the case on May 24, 2017. The en banc court issued a decision on January 31, 2018, reinstating the panel’s decision that PHH did not violate Section 8(c)(2) of RESPA. The court also held the CFPB's structure was constitutional, where the for-cause removal by the President gave the CFPB director independence while also giving the President ample oversight authority.
Following the PHH litigation, the CFPB has continued enforcement actions with respect to payments tied directly to referrals. In January 2017, the CFPB issued multiple enforcement actions for RESPA violations against a mortgage lender, mortgage servicer, and two real estate brokers for accepting illegal payment for referrals related to lead agreements, marketing service agreements, desk-licensing agreements, and/or steering of consumers to pre-qualify for mortgages. The CFPB was also investigating a third party marketing platform for RESPA violations, however, this did not result in an enforcement action, ending the investigation.
At the end of 2017, CFPB Director Cordray left his position rather than serving his full term that was set to expire in July 2018, and the President appointed the Office of Management and Budget (OMB) Director, Mick Mulvaney, to serve as acting Director. This resulted in a legal challenge under the Federal Vacancies Reform Act of 1998 by CFPB Chief of Staff, Leandra English. Cordray appointed English to serve as acting Director before he left. The legal challenge was recently dropped when the President announced a nominee for the permanent director position and English resigned. In December 2018, Kathy Kraninger was confirmed as the new Director of the Consumer Financial Protection Bureau (CFPB). NAR supported Ms. Kraninger’s confirmation, which included spearheading a coalition letter to the full Senate prior to her confirmation vote.
In 2019, the CFPB announced a revised “No Action Letter” (NAL) policy designed to provide regulatory certainty, facilitate compliance, and promote innovation. HUD filed for No-Action Letter application with the Bureau on behalf of housing counseling agencies that expressed RESPA concerns about the agencies entering in arrangements with mortgage lenders for housing counseling services for consumers. In September 2019, the Bureau issued its first No-Action Letter under the new policy to the Department of Housing and Urban Development (HUD).
The Bureau explained in the No-Action Letter that it would not take any supervisory or enforcement action under RESPA Section 8 against the housing counseling agencies, if the arrangements with the mortgage lenders for counseling services met specified conditions. In January 2020, the CFPB issued another No-Action Letter to a mortgage lender interested in entering into funding arrangements with housing counseling agencies to provide counseling services to consumers.
NAR continues to work with the CFPB and industry partners to ensure that helpful RESPA guidance is provided to practitioners in the absence of clear direction from the agency. NAR published a list of Do’s and Don’ts for real estate professionals when engaging in MSA’s and co-marketing activities via social media and other web-based marketing tools. These educational resources are intended to help real estate professionals comply with RESPA when co-marketing with other settlement service providers. NAR will also work with Congress to ensure that any future legislative changes improve RESPA without imposing undue burdens on NAR members.
Business Issues Policy Committee
NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require a password.
Real Estate Settlement Procedures Act (RESPA) (Investopedia, May 6, 2019)
RESPA Class Action Dismissed (National Association of REALTORS®, Jan. 16, 2019)
RESPA FAQ — Answers to Common Questions about RESPA from Real Estate Professionals and REALTOR® Associations (National Association of REALTORS®)
Window to the Law Video: RESPA (National Association of REALTORS®)
Consumer Laws & Regulations: RESPA (U.S. Consumer Financial Protection Bureau, Aug. 2013) — PDF explains the history and provisions of the Real Estate Settlement Procedures Act.
RESPA - Real Estate Settlement Procedures Act (U.S. Department of Housing & Urban Development) — HUD’s archive of legal and regulatory updates, consumer information, and industry guidelines.
RESPA Products from the National Association of REALTORS®
Affiliated Business Arrangements Guide — Available as a digital download from the REALTOR® Store
RESPA Compliance Guide — Available as a digital download from the REALTOR® Store
RESPA Do's and Don'ts Card — Available as a digital download from the REALTOR® Store
RESPA Power Bundle Download — Available as a digital download from the REALTOR® Store
RESPA Do’s and Don’ts for MSAs — Available as a printed brochure or digital download from the REALTOR® Store
RESPA Marketing Service Agreements
Co-Marketing Program May Violate RESPA, Court Rules (Manatt, May 8, 2019)
How to Stay RESPA Compliant… A RESPA Attorney Unpacks Section 8 Rules & Regulations (Cook and James, Dec. 18, 2018)
Co-Marketing Tips for Following RESPA Rules (REALTOR® Magazine, Nov. 2, 2018)
Arrangements with Business Partners in Today’s Regulatory Environment (Mortgage Compliance Magazine, Sep. 18, 2018)
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