Our readers consistently agree undisclosed fees paid to brokers and agents for referring clients to home warranty companies constitute unlawful kickbacks.
The consensus is damning but unsurprising. Brokers and agents know kickbacks — the practice of accepting referral fees from third-party services like title insurers or mortgage lenders — are unlawful under the Real Estate Settlement Procedures Act (RESPA).
Kickback basics
But why are kickbacks against the law, anyway? Aren’t licensees just getting a cut for sending valuable business to another company?
Sure — but they’re really getting two cuts for the price of one. RESPA expressly precludes agents from collecting a second fee for no or nominal services when the fee is split with another service provider in the transaction. The law does not consider recommending a service provider a service deserving of a fee.
An unlawful kickback occurs when:
- a real estate licensee accepts a fee in a transaction for services rendered to a client;
- the licensee refers the client (or other participant) to a provider of a service related to the same real estate transaction;
- the client pays a separate fee to the referred provider for the service; and
- the provider pays a cut of that fee, fixed or percentage, to the licensee.
Here, the real estate licensee has been paid twice without providing any additional services in the transaction. Although the fee went through another service provider, the client has still been charged twice.
The RESPA rule does not prohibit fee-splitting, i.e. a broker receiving a fee as a cooperating broker for initially referring the buyer to the seller’s broker (or vice versa) in a sales transaction.
Related article:
The trouble with HWCs
Prior to a 2011 lawsuit brought against American Home Shield Corp., the question of these rules as they relate to HWCs was a contentious issue. In spite of consistent HUD rulings, trade unions such as the National Association of Realtors® (NAR) argued the issuance of home insurance policies was not, in fact, a settlement service under RESPA.
NAR contended these brokers do provide a substantial service — namely, “counseling” the homebuyer about the pros and cons of purchasing a home insurance policy. In reality, services like this are already expected of California brokers and agents as duties owed to their homebuyer clients in a transaction.
But NAR’s erstwhile argument may contribute to the minor but persistent notion that RESPA does not apply to HWCs or the insurance policies they dole out.
In spite of NAR’s refutations, however, kickbacks are kickbacks. Regardless of the product it sells, a business involved in the closing of a home sale may not pay brokers and their agents a referral fee of any type when the broker already receives a fee on the sale for broker services they render on behalf of the buyer or seller, unless the broker performs significant services on behalf of the third-party provider — and this doesn’t include counseling.
