RESPA: The Rule is Clear

Referral payments from a lender are verboten.

June 1, 2003

Q. I’m confused about a lender who offers compensation to salespeople for loans placed with his company. My manager insists that all salespeople in my office avoid this company, because we’re not permitted to accept referral payments under the Real Estate Settlement Procedures Act.

My company’s affiliated with a mortgage company and is compensated for in-house mortgages, but salespeople aren’t compensated for buyers who use the affiliated mortgage company for loans. Is payment to a salesperson ethical and legal?

A. You’re right about the confusion in this area. But the law and the Code of Ethics are clear. The law, RESPA, prohibits kickbacks, commissions, and rebates for referring a buyer or seller to a settlement service provider such as a lender. If the payments you describe in the first situation are for referring business, there’s a violation of RESPA, regardless of whether the broker or salesperson receives payment.

RESPA does allow a real estate company, salesperson, or settlement service provider to own all or part of a service provider, such as a mortgage company. The owner could refer business to that mortgage company as long as any payments the owner receives from the mortgage company are in the form of a return on the owner’s investment (such as a dividend)—not a payment for referral business. If you make a referral to an affiliated company, you must provide to the buyer or seller an affiliated company disclosure, the contents of which are dictated by RESPA regulation.

Even if payments such as returns paid to a broker by an in-house mortgage company are permissible under RESPA, they must be disclosed under Article 6 of the Code. Article 6requires that REALTORS® disclose any financial benefit they receive as a result of a recommendation of a real estate product or service.

Q. I’m a salesperson who works for a builder. I solicit other salespeople to bring customers to my builder’s developments.

The builder I work for pays cooperative compensation. The problem is salespeople will call me 30, 60, or 90 days after the consumer’s been to our retail center and ask to be paid cooperative compensation for that consumer. In many cases, the salesperson was never here with the consumer.

I suspect salespeople find out about the transaction from friends, relatives, or church members, and they try to get cooperative compensation. Is this ethical? Should the builder pay them?

A. Cooperative compensation in new-home sales is a common source of conflict between builders and real estate practitioners in many markets.

There are several potential reasons for the conflict: Although builders usually have registration policies about cooperative compensation, salespeople’s customers or clients may visit new-home developments without their salesperson and not be aware of (or care to be aware of) the policy. And salespeople themselves may not know about these registration policies. But practitioners should know area builders’ policies.

Although there are some basic rules that govern many of these situations, the bigger issue is often one of communication. Builders and their representatives should inform buyers of their registration policies. In addition, a new provision in Standard of Practice 16-13 requires you to ask buyers whether they have an exclusive representation agreement with any other broker before you provide any substantive services, such as writing an offer to purchase.

Salespeople should also carefully counsel their clients about builder registration policies and decide how to work with clients in these situations. Whether the property is listed in the MLS will also affect how the builder’s registration policies apply. In the case you presented, I don’t think a demand for compensation is ethical.

Bruce Aydt

Attorney Bruce Aydt, ABR, CRB, SRS, is a national real estate educator, a Missouri real estate broker, and past chair of the National Association of REALTORS® Professional Standards Committee.

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