In 1974, Congress passed the Real Estate Settlement Procedures Act (RESPA) to regulate and monitor the real estate industry. Since that time, RESPA has mystified more than one real estate professional. Now that RESPA is being enforced by the Consumer Financial Protection Bureau (CFPB) instead of HUD, activities that may have been allowed in the past may no longer be considered legal.
In an effort to close gaps and provide further insight into RESPA, the NAR has published a FAQ list on their website – RESPA FAQ. It is a long and thorough list. To save you time, we have distilled the most pertinent parts of this FAQ sheet for you.
Referrals: Who Pays for What and Why?
If you go to dinner with an owner of a title agency to discuss business, can they pick up the check? Who is the best person to cover the cost of a luncheon at an open house when more than one real estate entity is present? Can you pay for referrals? Can you hold a contest for referrals and offer a cash prize?
When working in conjunction with other real estate professionals, brokers, and lenders, the cross marketing and self-promotion can get pretty confusing when it comes to referrals. Part of what RESPA, and specifically Section 8, aims to prohibit is this confusion and kickbacks. When looking at the FAQ on the NAR website, you will find multiple examples of interactions detailing when RESPA has been followed and when it has been violated. A shorthand version of this is:
- Making referrals in exchange for monetary gain, gifts, or expected future business is a violation
- Referral contests where the prize has a monetary value are a violation
- Picking up the check for a meal or catering when business is not discussed or a presentation has not taken place is a violation
- Cross promoting another business is permissible when it is not conditioned on the referral of business
Splitting Fees: Who Gets What?
Fees can and are split based on the circumstances. The quick rule of thumb is that if a real estate professional did not do the work, they should not get the fee. For example, if a real estate licensee receives a loan application and does nothing more than pass it on to the loan officer, he or she may not receive a fee. However, if the real estate licensee provides at least five additional services regarding that loan application, a fee may be paid. According to II. RESPA Policy Statement 1999-1, these services include:
“(a) Taking information from the borrower and filling out the application;
(b) Analyzing the prospective borrower’s income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;
(c) Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;
(d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);
(f) Initiating/ordering requests for mortgage and other loan verifications;
(g) Initiating/ordering appraisals;
(h) Initiating/ordering inspections or engineering reports;
(i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;
(j) Assisting the borrower in understanding and clearing credit problems;
(k) Maintaining regular contact with the borrower, real estate licensees, lender, between application and closing to apprise them of the status of the application and gather any additional information as needed;
(l) Ordering legal documents;
(m) Determining whether the property was located in a flood zone or ordering such service; and
(n) Participating in the loan closing.”
Marketing Services Agreements (MSA) are very tricky and should be approached with caution. CFPB has been heavily involved in investigating MSAs and issuing violations. Before you enter into a third-party service, make sure you have all of the necessary documents correct and in place.
Affiliated Business: Disclose (Almost) Everything
As long as you provide a written disclosure to your client stating that you have monetary gain with an affiliated title company and that they, the customer, are in no way required to use that title company, you are likely in the clear.
If you receive an annual dividend from an affiliated title company based on the amount of business you referred, you are in violation. However, if you receive a “proportionate share of the profits based on [your] ownership interest in the affiliate”, you are not in violation of RESPA. The amount will directly correspond with how much of the business you own (so if you own 50% of the business, you will share in 50% of the profits).
Associations, Settlement Service Providers and RESPA
When working with an association, split your costs wisely. Some advertising and catering costs may need to be split between the association and the settlement service provider, while in other situations they may be paid for entirely by one side or the other. Sponsorship of any kind needs to be regarded as a thing of value that could be interpreted as a kickback. If it could be read as such, then the action is likely in violation of RESPA.
For more information, and to review even more questions regarding RESPA, visit http://www.realtor.org/topics/real-estate-settlement-procedures-act-respa/respa-faq to learn more.
