Compensation for a referral by or between brokers under RESPA

For the prior installment in this video series covering prohibited indirect kickbacks from third-party service providers, click here.

Referral fees are allowed between two brokers when the broker receiving the referral fee is not providing another service in the home sales transaction such as financing, insurance, escrow, or similar service.

Compensation for a referral permitted by or between brokers under RESPA includes:

  • payments to the buyer’s broker by the seller’s broker, and referral arrangements between real estate agents and brokers;
  • payment to any person of a bona fide salary or compensation or other payments of goods or facilities actually furnished or for services actually performed; and
  • an employer’s payment to its own employees for any referral activities. [Calif. Business & Professions Code §10177.4; 12 United States Code §2607]

However, brokers and agents need to adhere to specific California Department of Real Estate (DRE) rules and codes when paying or accepting referral fees from other brokers or agents.

Agents are prohibited from accepting a fee or other benefit from any person other than their employing broker. Agents are also forbidden from paying a fee to any other broker or agent without first directing the payment through the agent’s employing broker. [Bus & P C §10137]

Most importantly, as a fiduciary matter, brokers and their agents need to advise their clients of the dollar amount of any compensation received from service providers related to the real estate transaction in which their client is involved. If the compensation (monetary or otherwise) is not disclosed, agents and their employing broker are subject to their client recovering all fees received, as well as license suspension or revocation. However, fees prohibited by RESPA cannot be legalized by disclosure or consent of the client. [Bus & P C §10176(g)]

Bottom line: referral fees are prohibited between brokers and third-party providers with one exception. In order for a broker or agent to receive a referral fee when they are receiving a fee on a home sales transaction, a tangible service besides the referral needs to be performed for the business paying the referral fee.