The Illegal and Unsavory Practice of Referrals and Kickbacks in the Real Estate and Mortgage Industry

The Illegal and Unsavory Practice of Referrals and Kickbacks in the Real Estate and Mortgage Industry

The Illegal and Unsavory Practice of Referrals and Kickbacks in the Real Estate and Mortgage IndustryThe one that bothers me a lot is the practice of paying referral fees to unlicensed people (friends, co-workers, family members, etc).  In most cases, this practice is illegal and for good reason.

As you know, buying a home and obtaining a mortgage is complicated and many consumers rely on real estate agents and mortgage brokers to help them through this process. Consumers trust their real estate agent or mortgage broker to assist them in getting the best and most cost effective settlement services available to meet their needs. Unfortunately, this does not always happen and consumers are often steered to higher priced settlement services.

RESPA (The Real Estate Settlement and Procedures Act) is an act that was passed by congress in 1974. It was created because various companies associated with the buying and selling of real estate, such as lenders, real estate agents, construction companies and title insurance companies were often engaging in providing undisclosed kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition by facilitating bait-and-switch tactics.

There are many examples of such prohibited practices, but the one that I am referring to is the following:

Real estate agents or mortgage brokers paying “finders fees” to friends and past customers for referring new business.

 

Other examples include:

  • Title companies, mortgage brokers, lenders offering real estate agents a free chance to win a contest or prize, such as trips, money, coupons and discount certificates.
  • Mortgage brokers, lenders, title companies offering to assist real estate agents promote themselves or their property listings, by providing such things as postcards, virtual tours, and marketing materials.
  • Mortgage brokers, lenders, title companies offering to pay or defray any costs that real estate brokers or agents would otherwise have to incur, such as providing continuing education or paying disproportionate costs for joint advertising.
  • Mortgage brokers, lenders, title companies providing “thank you” gifts to real estate agents for referring business.
  • Mortgage brokers or lenders paying real estate brokers or agents a commission for referring a loan.

 

Section 8(a) of RESPA prohibits giving and receiving any fee, kickback, or thing of value for the referral of settlement service business. A violation of RESPA carries the potential for up to a year in jail and a $10,000.00 fine for each involved party.
The highly regarded real estate law treatise by Miller & Starr,California Real Estate, citing RESPA, concludes, “The Act does not prohibit a cooperative brokerage and referral agreement between real estate brokers where one broker pays a referral fee to another broker. However, a broker cannot pay any consideration to an unlicensed finder even though such payment may be legal under state law.”

Also under California law, a broker can pay compensation only to another broker or to a duly licensed salesperson through the employing broker. Even if someone is otherwise entitled to a commission split, if they are unlicensed at the time the compensation is earned it is illegal to compensate that person. It is also illegal for a broker to employ or compensate an unlicensed person for acts that require a license.

 

I believe there are 2 key reasons for this law:

  1. Such referral fees obscure price competition. The unlicensed person has monetary incentive to refer any real estate professional to any client, regardless of what he/she really thinks of that professional’s ability to serve that person who needs the given real estate or mortgage service. In other words, it’s likely that they are basically referring people to that professional for the money that he/she has to gain (for the referral), rather than the ability or quality of the professional in question.  Also, unlicensed people generally lack the ability to judge who is a “good” or “appropriate” real estate professional for a given client since they themselves are not a professional in the industry.
  2. Such referral fees inflate the costs of real estate transactions and services. Since the Realtor or loan person knows that he/she would have to pay the referring person part of the commission he/she would be earning for the service, he/she may charge the client a higher amount for the service to make up for the amount that needs to be paid to the referring person.

 

While there are certain exceptions to the law (regarding unlicensed people receiving referral fees), I believe that it would be unwise to attempt to circumvent the law through these exceptions. As a Real Estate or Mortgage Professional, rather than even give the hint of doing something illegal, it would be better for you to protect your license that you have worked hard for, and not cross the line.  It’s not worth the risk!  Remember, it’s both an unsavory and an illegal practice and RESPA violations carry the potential for up to a year in jail and a $10,000.00 fine for each involved party. It’s also best for the parties involved (in the given transaction) to keep the unlicensed/non-professional referring person completely uninvolved in the transaction.  By receiving a referral fee, that person would inherently become involved in the transaction (and they don’t “belong” in it).

There have been many RESPA reforms to Real Estate and Mortgage Lending laws over the past several years.  These reforms were necessary to prevent Real Estate and Mortgage professionals from taking advantage of consumers to the extent that a real estate bubble can be created.  Illegal kick-backs and referrals are at or near the top of the list of the reforms.

Moving forward, the elimination of illegal referral and kick-back fees will help to create a more transparent, professional, and even playing field among real estate professionals in the industry. Real estate professionals and consumers alike need to be aware of both the laws against such practices and the reasons why these laws exist.

 

George Sudol  is the Broker/Owner of Bay Area Realty Services, a successful San Francisco Bay Area residential Real Estate firm. He also owns and operates Bay Area Mortgage Alliance, a California residential mortgage lending brokerage. See more at www.ba-realtyservices.com , Email george@ba-realtyservices.com, or Call 650-242-4079

 

 

Similar Posts

25 Comments

  1. Is it illegal for a real estate associate (agent) to refer his/her family member to a friend (agent) of a different realty?

  2. Hi Marisa,
    It’s certainly not illegal for anyone to refer a family member, friend, etc to a real estate agent.
    However, a licensed Real Estate agent is not allowed to pay a referral fee to anyone who is “NOT” a licensed Real Estate agent. If you are a licensed real estate agent, you are allowed to receive referral fees from other agents. The issue is with agents who pay referral fees to people who are “NOT” real estate agents.
    Please let me know if you would like or need more of an explanation of this.
    Regards,
    George

  3. George,

    Is it legal for an agent to receive a referral fee from an outside company?

    For instance, if an agent refers a homeowner to a home security company, and they sign up, is it okay for the agent to receive a referral fee?

    Thanks!

    Meagan

  4. And yet …. agents are paying thousands of dollars a month to buy leads from companies such as Zillow, Trulia and Market Leader ……

  5. People are Adults and make their own decisions in life. People are swayed by advertising and marketing. If it was a government agency then I believe it would hold some weight but this is stepping into the private sector. I believe this comes from the stigma there is no middle man getting a cut like title offices and escrow offices taking a piece of the pie.. This is a terrible over reach and takes away from the simple principles of our corps values as a Nation. If we do not stand up now we will continue to be over regulated.

  6. Is it illegal, as an agent, to seek out a lender to work with where you refer each other business?

  7. Hi Meagan,
    I am sorry about the late reply to your question.
    I don’t know about existing laws “outside of” the Real Estate and Mortgage industry relating to receiving referral fees.
    Your question was regarding a Realtor receiving a referral fee from a company outside of Real Estate such as a home security company. If there “is” a law against receiving a referral fee for such a referral, it won’t matter whether or not the person receiving the referral is a Realtor.
    Please let me know if you want further clarification.
    Regards,
    George

  8. Hi Cheryl,
    I wanted to reply to your above comment “And yet …. agents are paying thousands of dollars a month to buy leads from companies such as Zillow, Trulia and Market Leader ……”
    The reason why Zillow, Redfin, and Trulia are able/allowed to collect referral fees is because they are all Real Estate Licensed.

  9. Is it illegal for a real estate agent to accept a referral fee from a builder or architect?

  10. It’s illegal if a mtg company pays for co marketing on postcards and marketing material? If I then refer that mortgage company, then is this illegal in any way?

  11. i know a california sales agent that offers any buyer $2500.00 towards their closing cost and or down payment or simply cash back at close of escrow is this legal ?

  12. I’m a brand new real estate investor. I would
    Iike to get expired MLS listings from licensed agents. Would it be legal/appropriate to give the listing of any properties I purchase to the agent providing the list as compensation.

  13. Great article George! You wrote:
    “While there are certain exceptions to the law (regarding unlicensed people receiving referral fees)….”

    Can you elaborate a bit on those exceptions?
    Thanks

  14. What about a mortgage lender or real estate firm offering their clients incentive for online reviews? Not specifically positive reviews but just offering incentive to get people to go leave a review? The client would not directly be referring anyone to the lender. I’ve done a lot of searches and have not found anything on this matter. Thanks, Jon

  15. Hi there, can you tell me if it’s legal for a Realtor to offer clients a “free home inspection or free 1 year home warranty” Also an entry to win a $1000 gift card to the 1st 10 closed deals? Appreciate any help

    Thanks, Shelley

  16. Is it legal for a loan officer to refer a family member as a realtor to a buyer? If so does it need to be disclosed that the agent is a family member of the loan officer?

  17. This web site truly has all the information and facts I needed concerning this subject and didn’t know who to ask.
    Thanks, Winifred

  18. Referrals are testimonials to a person that is associated with one of the parties. This is a ridiculous law and that somebody can not be compensated for a referral and actually hurts the consumer. A competent professional or anyone that has a strong moral and value system is not going to risk hurting their reputation in giving a bad referral. Can we please get back to personal responsibility.

  19. Zillow, trulia, etc are allowed to sell leads to anyone whether they are a licensed broker or not. They are providing a service and selling the leads for a flat fee, regardless of a deal being completed with any of those leads. It would only be considered a kickback if the company received an additional fee if a deal was closed with one of those leads. But as far as selling the leads for a set fee, they do not need to be licensed for that. They are just selling names and contact info of people that visited the site and either researched properties to purchase or looked into potentially listing their property. They are not necessarily going to make a purchase or sell a property, they are just considered more qualified then a random person.

  20. I have a great question for you. Are investors allowed to offer potential clients referral money?? I know agents arent alowed due to section 8 of RESPA, but does this apply to investors? thx!

  21. Beside all this if you have a mortgage and you receive a cash or check from the Realtor without lender approval this is Mortgage fraud. And NO lender will approve you to get funds from the sale, in cash from the agent. This is Mortgage Fraud and is a Federal Crime which is a Felony on your record which is punishable with imprisonment in a Federal Prison if you or your agent is not a American citizen you and your agent could be deported. This is a FEDERAL LAW and is the same in all states . MORTGAGE FRAUD is a FELONY !

  22. I had some folks that came to my open and decided that they wanted to use me as their buyers agent. I received a call from their Real Estate agent asking about my qualifications in another state and then requested that I pay her a commission cut for the referral. I decided to move forward and paid her a cut.
    I recently had the same clients refer me to a new client who asked I do the same to a broker they know in another state, I have never talked to this agent, nor do I know who they are,
    What would you do in this situation?.

  23. HI

    I work with a small real estate brokerage company and lately I have noticed that an agent has been given access to the brokers website that the broker has worked very hard to get that website to captures tons of leads. And on this particular website there are contact numbers for different cities and all those numbers ring on one agents phone is that legal in the state of texas.

Leave a Reply

Your email address will not be published. Required fields are marked *