RESPA Controls Indirect Kickbacks

For the prior installment in this video series covering the penalties for improper kickbacks under the Real Estate Settlement Procedures Act (RESPA), click here.  

No second service, no second fee

The mere referral-steering of a client is not a service rendered in exchange for a kickback, but is a service owed the client to care for, protect and give them advice in the sales transaction.

Any payment between brokers or agents and third-party service providers, over and above the fee received from the seller on the sales transaction, may only be received in exchange for performing a significant portion of the services rendered by the provider paying the agent an additional fee. However, brokers and agents rarely perform services on behalf of service providers beyond the referral (which was done on behalf of the client, not the provider), and therefore cannot receive a referral fee – the kickback.

Referral fees are not the only form of kickback which violate RESPA.

Indirect kickbacks commonly provided by third-party services in exchange for referrals from brokers and agents include:

  • entry into a “referral contest” drawing for referring a lead;
  • paying for sporting events or theater tickets;
  • throwing a party for anyone who referred business;
  • paying the admission to a real estate seminar/education;
  • paying for real estate listing advertising; and
  • paying for subscriptions to 800 numbers and call-capture numbers.

However, promotional and educational activities are allowed when:

  • they are not conditioned on the referral of business; and
  • they do not involve the payment of expenses (rent, IT services, supplies, equipment, etc.) incurred by a broker or agent in a position to refer business. [12 Code of Federal Regulations §1024.14(g)(vi)]

Another classic example of kickbacks is found in so called “closed offices,” where brokers ban third-party service providers from competing legitimately for business with their one chosen service provider – their “preferred” lender or title insurer.

In addition, lenders may not pay a fee to a real estate broker representing a principal in the sale the lender is to finance, unless the broker has performed a significant service on behalf of the lender. For instance, a broker may receive a second fee, the so-called referral fee, if they render significant mortgage origination services.