REALITY CHECK: WHAT YOU DON'T KNOW ABOUT RESPA CAN COST YOU THOUSANDS
Part 2 of 2
In our last Reality Check quiz, we looked at the general provisions of RESPA, the Real Estate Settlement Procedures Act. You now know that RESPA rules cover residential transactions and settlement services that occur prior to closing.
With that under your belt, we'll now turn to RESPA's Section 8, which covers in-house settlement services and referrals. Confusion over this section results in a majority of RESPA violations, so choose your answers carefully!
Two companies that provide settlement services and have some degree of common ownership are considered affiliated businesses under RESPA. When there is a referral from one of these companies to the other, RESPA requires that the customer receive an affiliated business disclosure that contains specific information, including:
A. A statement that use of referred service is not required
B. Names of other providers of the same service
C. A statement that the property is pest-free
D. The commission is being paid by the property seller.
(A.) A statement that use of referred service is not required
The disclosure must state the existence of an affiliated business arrangement between you and the company to which you are referring your clients. As part of the disclosure, your clients must be provided a written estimate of the charge or range of charges made by the company to which the clients are being referred and information that makes clear that your clients are not required to use that company.
The affiliated business provision, which is an exception to the general RESPA rule regarding compensation for referrals, allows:
A. The real estate professional making the referral to receive a small referral fee
B. The party making the referral to receive a return on its ownership interest in the company receiving the referral
C. The buyer to avoid having to pay real property transfer tax
D. The seller to require buyers to use the seller's attorney.
(B.) The party making the referral to receive a return on its ownership interest in the company receiving the referral
The only thing of value that can be received from an affiliated business arrangement, other than the payments permitted under other subsections of Section 8 of the Act, is a return on the ownership interest. These payments cannot vary based on the volume of referrals to the joint venture company.
The affiliated business must be a bona fide, stand alone business with sufficient capital, employees, and separate office space, and must perform core services associated with that industry.
To combat higher costs in real estate transactions, Section 8 of RESPA makes it a criminal act for settlement service providers to pay fees for the referral of business. One exception to this rule allows a real estate professional to pay a referral fee to:
A. A mortgage broker who refers a buyer who has been pre-approved
B. A previous customer who refers a neighbor
C. Another licensed real estate broker who refers a buyer from another part of the country
D. A relative who overhears a customer saying he or she is moving.
(C.) Another licensed real estate broker who refers a buyer from another part of the country
Section 8(c) of RESPA includes an exception to the general prohibition on the payment of referral fees for payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate salespeople and brokers.
Another exception to the RESPA rules contained in Section 8 allows real estate professionals to receive compensation for:
A. Filling out a mortgage application
B. Telling the home inspector the address of the property to be inspected
C. The reasonable value of goods and services actually provided or performed
D. Doing the same thing they have been paid to do as a real estate professional.
(C.) The reasonable value of goods and services actually provided or performed
Section 8(c) of RESPA states that nothing in the section prohibiting the payment of referral fees shall be construed as prohibiting the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed. Payments may not be tied to the success of the real estate broker/agent's efforts (transactionally based), but must be a flat fee that represents fair market value.
The amount paid to a real estate broker or agent must be commensurate with the value of those goods and services. If the payment exceeds market value, the excess will be considered a kickback and violates RESPA.
The state of Virginia imposes an additional limitation on the receipt of transaction fees. Under the Virginia Mortgage Lender and Broker Act, a person may not receive a fee as both a mortgage broker and a real estate broker in the same transaction unless that person was licensed and regularly engaged as a mortgage broker in the state prior to February 1989.
RESPA allows title companies to provide real estate professionals:
$50 for every client referred to the title company by the real estate professional
An entry in a contest to win a car for every $1,000 in premiums paid by the real estate professional's clients
Tickets to a baseball game once a week for the entire season.
Notepads that have been imprinted with the title company's name and phone number.
(#4 is the correct answer!) Notepads that have been imprinted with the title company's name and phone number
The RESPA provision prohibiting the payment of a referral fee does not include normal educational and marketing activities that are not contingent on the referral of business. These activities must not defray the expenses that the real estate broker/agent otherwise would have had to pay and cannot be in exchange for or tied in any way to referrals.
Since the notepads were not contingent on the referral of business and are typical marketing materials for a title company, they are not prohibited.
Remember, HUD is stepping up its RESPA enforcement, and has made it clear that ignorance of the law will not be a defense. The anti-kick-back provisions in section 8 of RESPA may result in a fine of up to $10,000, up to one year in prison, or both. REALTORS® should speak with an attorney familiar with RESPA to ensure that their activities comply not only with federal regulations, but also with applicable state and local settlement laws.
For more information on RESPA compliance, please contact Mike Thiel in NAR's Legal Department at 312-329-8373 or MThiel@Realtors.org.