As Washington State’s residential real estate market heats up, an increasing number of settlement service providers are entering or re-entering the market to provide services to Washington’s consumers.
New mortgage loan originators, escrow companies, mortgage brokers, and consumer loan companies should keep in mind the Real Estate Settlement Procedures Act’s (RESPA) prohibition against giving or accepting a thing of value with the understanding that business incident to or a part of a real estate settlement service involving a federally related mortgage loan will be referred to any person.
Experienced licensees, while working hard to compete and to comply with new and changing regulatory requirements, should also remember that RESPA’s prohibition against referral fees or kickbacks remains in place since the statute was enacted in 1974, more than forty years ago. A violation of RESPA’s kickback prohibition, sometimes referred to as a “Section 8 violation,” can result in both civil and criminal penalties, including financial penalties and/or prison sentences.i.
RESPA was enacted by the United States Congress in 1974 to regulate the market for “settlement services,” a term that includes any service provided in connection with a residential real estate settlement, including title insurance products and services, legal services, document preparation, property inspections, surveys, home warranties, the rendering of credit reports or appraisals, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan, escrow and closing services, and any other service settlement-related service. See 12 USC 2602.
Since RESPA’s enactment over forty years ago, the services provided to consumers in relation to a real estate settlement have evolved. In addition, practices in the industry have changed significantly, with the industry often involved in social media marketing campaigns, internet loan origination, and new marketing and service provider relationships. While the statute remains unchanged, the market for settlement services has become increasingly dynamic. It is, therefore, important for licensees to recognize potential RESPA referral fee violations before offering or accepting a new service, joint marketing opportunity, or other relationship or benefit.
A “thing of value” may include a payment, gift, special privilege or opportunity, or any other tangible or intangible benefit. Some common examples of “things of value” which could be deemed to be an illegal referral fee include:
- Joint marketing campaigns, where a realtor and mortgage loan originator (or any other settlement service provider) host a joint open house, launch a shared website, or conduct other joint promotional activities, but the parties do not each pay their own share of the costs for the activity.
- Payment by one party for marketing services to be provided by another party (often between a mortgage lender and a realtor), but the marketing services are either not provided or the amount paid for the services exceeds the value of the marketing services received.
- A settlement service provider gives or accepts free tickets to a sporting event based on or in anticipation of the referral of settlement service business.
- Acceptance of free lead lists, real estate reports, or other things of value from one settlement service provider by another.
- Shared office space among settlement service providers, when each party is not paying his/her fair market rent, insurance, or other cost for the space that they use.
- Provision of free credit screenings to all potential buyers for a real estate developer.
The above are just some common examples of potential RESPA Section 8 violations. The important point for licensees to remember is that, unless an exception applies, any “thing of value” given or accepted for the referral of settlement business is in violation of Section 8(a) of RESPA.
Licensees should ensure that they are well-educated regarding RESPA’s prohibition against referral fees and illegal kickbacks. In addition, it is a good practice for licensees to keep up to date with RESPA enforcement actions taken by the Consumer Financial (CFPB) and by state regulators. Finally, avoid offering or accepting “things of value” without paying the fair value for them. When in doubt, consult with legal counsel that specializes in or is very knowledgeable with RESPA’s prohibitions.
i Section 8 of RESPA also prohibits the giving and accepting of any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service, other than for services actually performed. See 12 USC 2607(b).
– See more at: http://dfi.wa.gov/cs-newsletter/2015/issue3/respa-kickback-fees.htm#sthash.3ytAq8gI.dpuf
Article from the Summer 2015 Division of Consumer Services newsletter about RESPA’s prohibition against referral fees, kickbacks, or other things of value for referral of business.