If you’re in the real estate business, whether a licensed salesperson, a broker, or working in the fields of title, escrow, or appraisal, you’re already aware that there are some very specific rules that need to be followed. In fact, RESPA – the Real Estate Settlement Procedures Act – prohibits a real estate salesperson, agent, or real estate broker from receiving consideration, i.e. a “thing of value” just for referring business to a settlement service provider (SSP). Those SSPs may be mortgage companies, appraisers, title companies, inspectors, or more.
RESPA also governs any unlawful fee-splitting arrangements for those settlement services.
This blog is just a discussion of some of the basics of RESPA, not a comprehensive guide or complete resource.
The best way to make sure you’re in compliance with RESPA, as well as any state laws and regulations, is by consulting your broker, look for professional education at organizations like the California Association of Realtors, National Association of Realtors, etc., and consult the legal hotline or your firm’s real estate attorney.
First off, to whom does RESPA apply? What entities are subject to its rules and regulations?
RESPA covers (among others):
• Real Estate Brokers
• Real Estate Agents
• Mortgage Bankers and Mortgage Brokers
• Title Companies and Title Agents
• Home Warranty Companies
• Hazard Insurance Agents
• Appraisers
• Flood and Tax Service Providers
• Home Inspectors
• Pest Inspectors
RESPA’s critical definition of settlement vs. non-settlement services:
Another guiding principle to what RESPA deems in bounds versus out of bounds is the difference between settlement and non-settlement services. Quite simply, settlement services for a real estate transaction occur at or prior to the legal purchase of that home (like during the escrow period). So, that includes title insurance, the appraisal, getting a mortgage loan, pest and home inspections, and the like.
But non-settlement services occur after the purchase has been consummated and finalized.
When doesn’t RESPA apply?
So, we see that non-settlement services usually also excludes (as long as they are after the purchase) these services and service providers:
• Moving Companies
• Gardeners
• Painters
• Decorating Companies
• Home Improvement Contractors
• Storage units
• Non-monetary closing gifts after the sale
How about commission splitting and paying finders fees?
Of course, the first thing we have to say about this legal landmine topic is to consult your attorney or broker.
It’s a little tricky because, under California law, commission splits and finders fees are allowable in some cases, but the Federal Real Estate Settlement Procedures Act (RESPA) may say differently.
Buyers and sellers may ask for a cut of the commission in some cases, but it’s not legal to share commissions with them – unless they are a real estate licensee or broker already.
How about a finder’s fee? Nope, because an unlicensed third party to the transaction cannot be involved in showing the property, negotiating a price or any terms, or offering any professional advice (per 78 Ops Cal Atty Gen 71).
However, licensed real estate brokers may exchange referral fees among themselves. The exception is when a federally insured mortgage is involved on an SFR up to a 4-unit property. When that kind of mortgage is in play, RESPA prohibits ALL consideration for referral fees or exchanges.
Here are some examples of situations that don’t violate RESPA:
A mortgage company or individual lender sponsor a hole-in-one contest at a local golf event, with their logo, company name, and contact info all over the hole’s flag, signs, and more.
A title agent brings a tray of cookies to an open house, with a sign that says the event was sponsored by the title company, as well as passing out brochures to each attendee.
A Realtor and mortgage broker share an advertisement in a local home and community magazine. (BUT only if each pays a portion of the cost for the ad that’s in relation to their prominence and visibility. So, a mortgage broker can’t pay 90% of the ad’s price if they are only mentioned in fine print at the bottom!)
A mortgage company hosts a lunch for real estate agents, in which education is provided as well as information about products by that company’s lenders.
A title company sponsors an event for real estate pros, including Realtors, mortgage lenders, and more. The title firm posts signs and hands out literature that include its role as the sponsor.
A rep from a hazard insurance company visits their local real estate office and hands out pens, coffee mugs, and paperweights with their company name on them.
A mortgage lender rents an office or use of a desk, etc. inside a real estate agent’s firm, which they use to prequalify purchase applicants, many of them referred from the Realtors there. (As long as they pay fair market rent/fee and not a nominal $1, for example, just to skirt the rules.)
So, what kind of arrangements and activities violate RESPA?
• A mortgage company takes a group of real estate agents out to dinner and drinks on the first Friday of every month.
• A mortgage company offers to pay for the lock boxes for any Realtor that refers them business.
• A title company rep takes a bunch of real estate agents out to dinner and a basketball game, where no business is discussed.
• An appraiser pays for a mortgage broker to go to a fancy dinner as a thank you for business, but the appraiser doesn’t attend the dinner.
• A mortgage lender provides lunch at an open house, but does not distribute brochures or display any marketing materials.
• A loan officer offers to pay any real estate agent who takes a loan application and collects documents from their clients who need purchase loans.
There are also some exceptions to RESPA, like for promotional and educational seminars or activities, payment for goods or services performed, and legal affiliated business arrangements.
However, I’ll reiterate that the best way to make sure you’re in compliance with RESPA, as well as any state laws and regulations, is by consulting your broker, look for professional education at organizations like the California Association of Realtors, National Association of Realtors, etc., and consult the legal hotline or your firm’s real estate attorney!
Please take RESPA seriously because the industry only needs lawful real estate pros who are playing by the rules!