It is essential that Real Estate Brokers have an understanding of the Real Estate Settlement Procedures Act (RESPA). RESPA is a federal law governing real estate transactions involving residential properties.
The Act not only applies to real estate brokers but any ‘settlement service providers’. RESPA defines this as real estate brokers and agents, mortgage loan personnel, title personnel, home inspectors, insurance and homeowner’s warranty personnel, and others providing related settlement services.
Understanding RESPA
RESPA is a federal consumer protection law originally passed in 1974 that regulates real estate closings. It applies where the sale of a residential property of one to four family units, that is to be buyer-occupied, has a federally-related mortgage loan. A Federally related mortgage loan could include loans made by federally insured lenders. It could also include loans that are meant to be sold to a federally-owned corporation such as Freddie Mac or Fannie Mae.
RESPA aims to ensure that the cost of real estate settlement services to consumers isn’t unnecessarily inflated by kickbacks and referral fees.
Sections 8 and 9 of RESPA are of main concern to real estate brokers:
- 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 8(b) prohibits splitting any charge made or received for settlement services except for services actually performed. Regulation X adds that “duplicative fees” are unearned fees and violate RESPA. Section 9 prohibits the seller from requiring that the buyer purchase title insurance from any particular title company.
RESPA Exceptions
RESPA doesn’t apply to cash sales, seller carrybacks, vacant land, or commercial real estate sales. It also doesn’t apply to property management. However, it is still good practice for real estate licensees who offer property management as a service to disclose any referral fees.
Permitted Payments
RESPA permits certain payments, including:
- Commission splits between or among real estate licensees who are parties to a sales transaction.
- Referral fees between or among real estate licensees where there is a written broker-to-broker or broker-to-sales-agent referral fee arrangement.
- An employer’s payment to its own employees for referrals. This doesn’t extend to real estate agents who are independent contractors or franchisees.
- Returns on ownership interest (dividends, profits, etc.) in settlement service providers and returns on franchise interests (royalties)
Key RESPA Considerations for Brokers:
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Referral Fees & Gifts
Referral fees (taken off the top of the commission) may be paid to a real estate licensee when there is a written referral fee agreement. Referral fees may be paid just for the referral of business in this case, but must go through each licensee’s real estate broker.
Under RESPA there can be NO REFERRAL FEE (or financial benefit) to a non-licensee.
That means no “finder’s fees”, referral contests, or other activities where a referral fee may be paid to a non-licensee. Your state may allow a nominal “thank you” gift when you receive a referral from a non-licensed person, so check your state regulations.
Real estate brokers should consider that non-cash items of value and gifts are also considered to be kickbacks. This includes things such as:
- Golf outings, sports tickets, food, beverages, prizes (unless settlement service provider branded), transportation, or other items to real estate agents or brokers.
- Food, beverages, or prizes for an agent’s Open House (where the agent doesn’t pay for their pro rata share of costs, and the settlement service provider is not actively marketing its products and services to the public).
- Food, beverages, online advertising of the event to other agents, prizes, raffles, or other things of value at a Brokers-Only or Agents-Only Open House or House Tour.
Any referral in exchange for monetary gain, gifts, or expected future business is a clear-cut violation of RESPA.
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Promotional and Educational Activities
Real estate brokers can cross-promote another business if it’s not conditioned on the referral of business and there’s no agreement to do so. Likewise, sharing brochures or flyers for other businesses with clients as long as there is no implication of those businesses being ‘preferred providers’ is also permitted. Brokers should avoid the term ‘preferred provider’ altogether when providing information about settlement service providers. Using this terminology can give the impression of endorsement, violating RESPA requirements.
Preferred provider lists for companies such as lenders, mortgage brokers, escrow agents, home warranty companies, insurance providers, home inspectors, termite companies, builders, or contractors, signal the possibility of a kickback or other gains by the broker recommending them.
If a real estate broker does offer vendor recommendations to clients, they should include in writing that it is the client’s responsibility to review vendors and select one that best fits their needs. Any recommendations or information about vendors should make it clear that clients are not required to use specific vendors and they have freedom of choice. Requiring clients to use specific vendors, or even implying that a specific vendor is required is a violation of RESPA.
Real estate brokers can have advertising on their websites for a provider for a fee. However, brokers should include a notice that the vendor paid a promotional fee, and have an independent valuation by a third-party CPA or valuation company. A standardized rate sheet should be applied consistently to all who wish to advertise on the website.
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Affiliate Business Arrangements
Any affiliate business arrangements could be problematic for real estate brokers. If you have 1% or more ownership interest, you should disclose, disclose, disclose, disclose. Be transparent about any affiliate business arrangements and how you benefit from that relationship. Your affiliated business disclosure should include:
- The range of charges from your affiliate
- Any financial interest you have in the affiliate
- A notice that advises customers they are not required to use the affiliate
If you receive an annual dividend from an affiliated title company based on the amount of business you referred, you are in violation of RESPA. 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. That amount will directly correspond with your ownership share (so if you own 50% of the business, you get 50% of the profits).
Tips for Real Estate Brokers for RESPA Compliance
Review Service Provider Relationships
Brokers should regularly evaluate any relationships with settlement service providers and ensure they align with RESPA’s requirements. Ensure that any affiliated business arrangements are properly disclosed and monitor compliance with RESPA regulations on an ongoing basis.
Maintain Detailed Records
Brokers need to keep records of all transactions, including receipts, contracts, and communications related to the settlement process. These records can be used as evidence of compliance and will be useful if you need to defend a lawsuit because of an alleged RESPA violation.
Educate and Train Staff
As a broker, you should ensure all of your team have the knowledge and expertise they need to navigate RESPA compliance. Conduct regular education and training sessions, include RESPA compliance as one of your induction topics for new hires, and ensure you keep everyone updated if any new legislative changes will affect their work.
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