Realtors and RESPA: Are Realtors Getting Religion?
REALTORS® & RESPA: ARE REALTORS® GETTING RELIGION?
By Lawrence E. "Lem" Marshall, Esq., Counsel to Virginia Association of REALTORS®
Most REALTORS® are aware of the anti-kickback provisions of the Real Estate Settlement Procedures Act. "No man shall giveth, Yea, neither shall he receiveth, any thing of value pursuant to any covenant under the heavens that calleth for referrals of settlement services." Book of RESPA 8:4.
This well-known proverb articulates the received wisdom of Congress that referral fees unnecessarily add to the cost of settlements, and thus make housing less affordable for everyone.
The essence of Section 8 of RESPA seems to be that while the business expense of a targeted and highly effective referral fee paid by a lender to a referral source must be recovered by the lender in the form of higher loan costs, the highly inefficient advertising that replaces the referral source does not. However, we have to live with the RESPA prohibition against paid referrals as valueless acts that serve only to drive up costs.
Paying for Services (other than referrals)
RESPA acknowledges that it is legal to be paid for services actually performed, up to the value of the services, if the services are not referrals (which by definition have no value).
Because RESPA permits service providers to pay for service actually performed, some have tried - with varying degrees of success - to skirt RESPA by paying more than the service is worth, or for duplicative efforts, or even for only nominal - or no - service. These "disguised" referral fees are illegal and much despised by HUD.
It is legal to refer business to an entity of which you are an owner, as long as your compensation is based on your profit from the entity and not linked to the referral per se. And thereon hangs an interesting tale.
Lenders and other settlement service providers long ago discovered that offering a piece of the pie to sources of referrals made good business sense. Thus we have seen a proliferation of real estate broker-lender, lender-title company, broker-settlement agency joint ventures over the years. These couplings make great sense and afford the participants incentives to refer business to the joint venture partner. This type of relationship does not violate RESPA if the benefit accruing to the referral source is strictly according to ownership interest in the benefited entity, and the consumer to whom a referral is made is given the RESPA Miranda warning - basically that the person making the referral may benefit from it, that the service will cost a certain amount, and that the consumer might find the service cheaper elsewhere. These relationships are legal and ethical and can be quite beneficial.
Hiring Referral Sources as Employees
That brings us to a more recent phenomenon, the efforts of some mortgage brokers and lenders to avoid the strictures of RESPA by hiring referral sources as employees and paying them for work they do as employees. Of course, much or all of that work will be for clients referred by the employee, but if the employer/employee relationship is bona fide, and the salary is for - and commensurate with - services actually performed, the relationship can be legal. It's likely that HUD will apply something like the IRS test to determine whether the employee really is an employee, and virtually everyone acknowledges that merely giving the "employee" a W-2 and calling her an employee will not be enough.
We also need to be aware of another limitation imposed by Virginia law even when the labyrinth of RESPA has been negotiated. The Virginia Mortgage Lender and Broker Act provides in Section 6.1-422 that a person may not receive a fee as a mortgage broker and a real estate broker for services performed in the same transaction unless the person was licensed and regularly engaged in mortgage brokerage in Virginia as of February 1989. This resolution of a turf battle between mortgage and real estate brokers was weakened by a provision permitting real estate brokers (but not salespersons) who are owners of a real estate firm to own an interest in a mortgage brokerage and to profit from such investment and be compensated for services actually performed for those entities. But the prohibition on dual brokerage fees to non-grandfathered persons persists.
These are only a few examples from the veritable patchwork quilt of efforts to overcome RESPA's prohibition on referral fees. Perhaps what REALTORS® need most to be aware of is that HUD approaches what it sees as RESPA violations with a fervent zeal displayed few other places. If you are looking for a way to receive a fee for referring settlement business, look for another way to make a buck. If you're willing to work legitimately for a service provider and get paid for the value of what you do - and no more - there are opportunities out there awaiting you. Be wary of the "easy" ways around RESPA, and don't forget the limitations on real estate brokers and salespersons imposed by the Mortgage Lender and Broker Act.
And blest be he who maketh not the unclean referral, for he shall know salvation, even though he profiteth not, and loseth his shirt, and his donkey.