Do you or your team members ever pay referral fees? Do you have a list of preferred contractors that you give to clients? Do other companies to whom you might refer business provide refreshments (or other gifts) at your events? If so, you may be violating The Real Estate Settlement Procedures Act (RESPA).
As a real estate licensee, you must have a good understanding of RESPA and ensure you comply. At its core, RESPA was created to provide consumers with greater transparency and accountability throughout the real estate settlement process. It ensures real estate professionals are held accountable to high ethical standards.
What is RESPA and Who Does It Apply To?
RESPA is a federal statute regulated by the Consumer Financial Protection Bureau, a regulatory agency that oversees consumer products and services. RESPA was enacted to protect consumers by putting an end to kickbacks, unearned fees, and unscrupulous activities in real estate settlements. By regulating referral fees, promotional activities, commission splits, and improving disclosures about settlement costs, RESPA is helping to protect consumers and ensure they are not exploited.
RESPA applies to all residential real estate transactions involving one to four family units, that are to be buyer-occupied and have a federally related mortgage loan. This includes loans made by federally-insured lenders and loans that are meant to be sold to a federally-owned corporation such as Freddie Mac and Fannie Mae.
RESPA does not apply to cash sales, seller carrybacks, vacant land, or commercial real estate sales.
RESPA affects both parties who PROVIDE and those who RECEIVE money, gifts, or items of value, for referrals. All settlement services providers must comply with RESPA. That includes:
- Real estate brokers
- Real estate licensees
- Mortgage loan personnel
- Title personnel
- Home inspectors
- Insurance and home warranty personnel
- Anyone else involved in providing settlement services
RESPA does not apply to property management as there are no federally related loans in property management. However, to ensure best practice and ethical conduct, licensees should disclose any referral fees in property management as well.
Learn more about RESPA Compliance for Real Estate Brokers
RESPA Violations – What Are The Penalties?
If you are not in compliance with RESPA, violations come with serious consequences. Penalties can include hefty fines of up to $10,000 for each violation, as well as potential criminal charges and jail time. There are also civil penalties, and real estate settlement providers can be banned from working in the industry for serious violations. Additionally, RESPA violations can create a public relations nightmare for your real estate business and lead to significant damage to your personal reputation.
Navigating Referrals and Promotional Activities
When it comes to navigating referrals and promotional activities, Sections 8 and 9 are key areas of RESPA that real estate licensees should take note of:
- Section 8(a) prohibits the payment or receipt of any fee, kickback, or other thing of value for the referral of business as part of a settlement service.
- Section 9 prohibits the seller from requiring that the buyer purchase title insurance from any particular title company.
Learn more about the specific requirements of RESPA.
What referral and promotional activities are permissible?
Co-Advertising
You can co-advertise to the general public with another settlement service provider as long as the cost to each party is commensurate with the ad space used by each party. Keep in mind when co-advertising that consumers cannot be required to use the co-advertising partner for settlement services. At the end of the day, consumers must have the freedom to choose. Learn more about avoiding a RESPA violation when co-marketing a listing
Informing Consumers
Real estate licensees can inform clients about settlement providers where there is no referral fee paid. As above, there can be no requirement that the client use the settlement provider you inform them about. They must have the freedom to choose. Learn more about suggesting providers to your clients while avoiding RESPA
Cross-promotional Opportunities
You can participate in cross-promotional activities with other businesses just as long as it’s unconditional (with no requirement or agreements in place to refer business).
Website Advertising
You can sell space for advertising on your real estate website for a fee. However, you should include a notice that this is paid advertising and the service provider has paid you a promotional fee. It’s also best practice to create a standardized rate card that is applied consistently to everyone who wants to advertise on your website.
Branded promotional activities not conditioned on referrals
Promotional activities not conditioned on referrals are permissible. For example, a service provider could distribute notepads to real estate licensees with their name and logo and this does not constitute a RESPA violation. Likewise, a real estate licensee could distribute branded notepads to a mortgage lender or other settlement service provider and that would be permissible as long as it’s not conditioned on referrals.
Promotional activities that don’t defray normal expenses
Promotional activities directed to those who may generate referrals to a service provider cannot include covering expenses those generating the referrals would normally pay. For example, a lending company could sponsor a real estate education seminar for licensees and brokers. However, attendees could not receive continuing education (CE) credits for that event without paying for the CE. If they were given the CE credits for free, this perk of attending would then contravene RESPA.
Distribution of company marketing materials
It’s okay for settlement service providers to distribute their marketing materials to real estate professionals. However, there must be no compensation to the real estate businesses, brokers, or licensees for this, and there must not be any referral agreements.
Use caution if suggesting service providers
Real estate licensees should avoid using the term ‘preferred provider’ as this is considered an endorsement that would violate RESPA. Preferred provider lists that include lenders, mortgage brokers, escrow agents, home warranty companies, insurers, home inspectors, builders, pest control companies, or other contractors can signal the possibility of kickbacks to the person suggesting the company.
Consumers need to be reminded they have freedom of choice and are not required to use anyone suggested by the real estate licensee. Ideally, licensees should use a disclaimer if providing information about service providers and have this signed by the client to acknowledge they understand.
Any referral in exchange for cash, gifts, or expected future business is a clear violation of RESPA. Requiring clients to use specific service providers in the settlement process is also a violation.
State-based laws and regulations
Keep in mind there may be other regulations and laws in your state that apply to payments between settlement service providers that you need to comply with as well.
Commission Splits
When two real estate licensees work on a transaction together (for buyers or sellers), it is normal practice to do a commission split. If you’re working on a transaction that comes under RESPA, commission splits are only allowed when the party does work that requires a real estate license as part of the transaction.
Referral fees taken off the top of the commission may be paid to a real estate licensee where there is a written referral agreement but must go through each licensee’s broker.
Protect Yourself and Your Clients
Given the complexity of RESPA, seeking legal advice from an experienced real estate attorney can be useful. With CRES E&O + ClaimPrevent®, you will have access to our team of real estate attorneys who can provide you with advice whenever you need it. CRES is a real estate Errors & Omissions insurance specialist with more than 25 years of experience.
Let us find you the best coverage for the best price.As part of one of the largest insurance brokers in the world, we have unparalleled access to more E&O options than just about anyone else (especially smaller insurance brokers). Contact the CRES team at 800-880-2747 for a confidential discussion today.
