The 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