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A summary of requirements under the Real Estate Settlement Procedures Act.

The federal Real Estate Settlement Procedures Act (RESPA) prohibits both the payment and receipt of fees or other things of value for the referral of consumers to mortgage lenders, mortgage brokers, title insurance companies, settlement companies, attorneys, and other real estate settlement service providers. Violations can result in civil and criminal monetary penalties, prison terms, and the loss of your real estate agent’s license.

The United States Department of Housing and Urban Development is actively enforcing RESPA. The focus is the receipt of impermissible referral fees by real estate agents. HUD regularly receives tips about real estate agents and others who may be receiving referral fees, and it often follows up on the tips. Texas authorities also may enforce RESPA. Your own customer may sue you under RESPA if you receive an impermissible referral fee.

Although real estate brokers and agents commonly split real estate commissions, which is permissible, RESPA generally prohibits the splitting of fees for other real estate-related settlement services and the payment of fees for the referral of customers who use such services. To avoid civil and criminal penalties, a prison term, and the loss of your real estate license, you must refrain from accepting any impermissible referral fees.

This article shows you how real estate agents may unknowingly violate RESPA prohibitions against the receipt of referral fees.

Scenario 1

Q. Modo, a real estate agent, refers a number of his customers to Bell Tower Mortgage Company. To thank Mr. Modo, Bell Tower pays him $100 for each customer referred.

Result: Both Mr. Modo and Bell Tower have violated RESPA.

Scenario 2

The same facts as Scenario 1, except that the $100 payment is disclosed on the HUD-1 and does not increase the customer’s loan fees.

Result: The result is the same. The disclosure of an impermissible referral payment, and the fact that the payment is not directly passed on to the borrower, does not make the payment legal. Both Mr. Modo and Bell Tower have violated RESPA.

Scenario 3

Q. Modo, a real estate agent, helps his customers select lenders and mortgage loans once they have entered into a contract to purchase a home. Bell Tower Mortgage Company offers to pay Mr. Modo $200 to advise his customers about Bell Tower and its mortgage loan products, and to take a mortgage loan application from the customers. The payment would be made for each loan that closes.

Result: If such a payment is made, both Q. Modo and Bell Tower will violate RESPA. The mortgage loan-related services are not sufficient for Mr. Modo to receive, or Bell Tower to pay, compensation for such services in addition to the compensation that he will receive for his real estate agent services.

Scenario 4

Cleo Patra, a real estate agent, refers a customer to Sphinx Mortgage Broker. Sphinx processes the customer’s loan application and delivers it to Nile Mortgage Company, which makes the loan. Sphinx receives one point from Nile for its mortgage brokerage services, and pays one quarter of the point to Ms. Patra.

Result: Cleo Patra and Sphinx have violated RESPA. Ms. Patra may not receive a split of a settlement service fee for referring a customer to Sphinx, and Sphinx may not pay Ms. Patra for the referral.

Scenario 5

Same facts as Scenario 5, except Sphinx makes Cleo Patra an employee. The only "task" that Ms. Patra "performs" for Sphinx is the referral of customers to Sphinx.

Result: While RESPA permits a mortgage lender, mortgage broker, or other employer to compensate an employee for referring a consumer to the employer, if the employment arrangement is not bona fide, the referral payment may violate RESPA. Cleo Patra most likely is not a bona fide employee of Sphinx and, therefore, both Ms. Patra and Sphinx most likely have violated RESPA.

Scenario 6

Nile Mortgage Company sponsors a contest in which a real estate agent gets one entry in a drawing for a trip to the Bahamas for each customer referred to Nile. Cleo Patra receives four entries in the drawing, but does not win the trip.

Result: Both Nile and Ms. Patra have violated RESPA. Even the chance to win a trip in return for the referral of a customer by Ms. Patra to Nile is considered an impermissible referral payment.

Scenario 7

Congenial Mortgage Company sponsors a seminar to inform real estate agents and other real estate professionals about its mortgage products and pre-qualification program. Complimentary coffee and snacks of a nominal value are provided, and coffee mugs of a nominal value with Congenial’s logo are available free of charge for attendees. There is no requirement or conditional understanding that conference attendees will refer customers to Congenial.
Q. Modo and Cleo Patra attend the seminar, accept complimentary coffee and snacks, and take a coffee mug.

Result: Congenial, Mr. Modo, and Ms. Patra have not violated RESPA. Normal promotional and educational activities that are not conditioned on the referral of business are permissible.

Scenario 8

Cleo Patra is a top-producing real estate agent and has referred many customers to Mort Banker, a loan officer with Nile Mortgage Company. Mort regularly places advertisements in local papers promoting his loan services. Ms. Patra and Mr. Banker agree that Mort will include a recommendation in the advertisements that people select Cleo as the agent to find their dream home.

Result: Ms. Patra and Mr. Banker violate RESPA if Cleo does not pay Mort the fair market value of the portion of the advertisements that promote Cleo.

Scenario 9

Cleo Patra maintains a business checking account at Omnipotent Bank. Omnipotent waives the standard account fees as long as Ms. Patra refers some of her customers to Omnipotent to obtain a mortgage loan.

Result: Both Ms. Patra and Omnipotent are in violation of RESPA. The discounting or waiver of standard fees in return for the referral of settlement business is considered an impermissible referral payment.

This article was reprinted with permission from the Maryland Association of REALTORS®.

Photo © PhotoDisc.

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