Ancillary Income

Finding the 'yes' in RESPA

May 1, 2005

If you’ve ever said something like, “I just sent my neighbor, who’s a mortgage broker, four loans this month, so I figure I’m entitled to something for my efforts,” you’re right. You are entitled to something, according to the Real Estate Settlement Procedures Act: a thank-you. That’s because Section 8 of RESPA, which governs conduct between settlement-service providers, makes it a crime for providers to pay and for real estate sales associates or brokers to receive fees for the referral of settlement service business.

That said, there are exceptions to RESPA’s anti-kickback provisions that allow you to be compensated and avoid a visit from the RESPA police.

Loan originations

Several mortgage companies pay real estate brokers and sales associates substantial fees for “originating” mortgage loans. According to the U.S. Department of Housing and Urban Development, the federal agency charged with enforcing RESPA, a practitioner must do a lot more than merely take a loan application to be paid an origination fee. To receive fair and reasonable compensation, a loan originator must not only take the loan application but also perform an additional five services from a list of 13 origination functions. These duties include counseling borrowers, issuing good-faith estimates, and ordering credit re ports and appraisals.

There’s also a question of what constitutes reasonable compensation for performing loan origination services. If you’re performing certain tasks for which the fair market rate is, say, $200, but the lender pays you $500, your compensation doesn’t reflect the work you do and, in fact, you’re indirectly being paid for the lead. HUD acknowledges that reasonable compensation is ultimately a function of the marketplace.

If you have to defend to HUD the payment you receive, it helps if the amount paid is a flat fee rather than a percentage of the loan amount. After all, the services being performed are identical, whether the mortgage amount is $100,000 or $500,000.

Even if you meet HUD’s test for earning compensation, be advised that in many states individuals who are paid to assist borrowers in obtaining a loan must be licensed as mortgage brokers. Some states do permit individuals to hold both a real estate and a mortgage broker’s license. In other states, such as California, licensed real estate practitioners are authorized to serve as loan originators without a separate license. However, several states, including Virginia and Texas, prohibit practitioners from receiving “dual compensation” in the same transaction, which means you can’t originate a loan on a property for which you represent the buyer or the seller. Make sure you know your state’s requirements.

Since RESPA exempts origination payments by an employer to its employees, you could be hired by a lender as a part-time employee; several lenders’ programs offer this type of arrangement. Only bona fide employees are covered by this exemption, however, and never in connection with FHA-insured loans.

Although HUD has never published criteria for what constitutes a bona fide employee, the Internal Revenue Service has strict standards for defining employment. Among other things, an employee must: be under the supervision and control of the employer, use the employer’s equipment, and receive a W-2 form. Under these strict criteria, it would be difficult for a sales associate to operate as an employee of the lender.

Affiliated business arrangements

Another important exemption from RESPA’s anti-kickback provisions occurs when real estate practitioners and lenders establish joint ventures called affiliated business arrangements. To take advantage of the AfBA exemption, partners must satisfy a four-part safe-harbor test under Section 8(c)(4) of RESPA. You must:

  1. Inform customers of your interest in the affiliated company at or before the time of referral, making clear that you may receive a financial benefit.
  2. Supply customers with information concerning the services provided and an estimate of what those services will cost them.
  3. Inform customers that they aren’t required to use your affiliated company in connection with the transaction. These first three requirements must be given to the customer in writing, on a separate sheet of paper, and customers must acknowledge the receipt of this information.
  4. Ensure that your share of the profits corresponds to your ownership interest. Under no circumstances may the payment be conditioned on the number of loans you referred to the joint venture.

HUD has also expressed concern that many joint-venture arrangements between real estate practitioners and mortgage or title companies aren’t bona fide businesses. In a 1996 Statement of Policy, HUD set forth criteria including whether the new entity is realistically capitalized and has its own employees, manages its own affairs, and provides “substantial services” typically associated with lending activities.

A word to the wise: If an opportunity sounds too good to be true, it probably is. Make sure your activities can withstand scrutiny.

Phillip L. Schulman, a former assistant general counsel of the inspector general at the U.S. Department of Housing and Urban Development, is a partner with K&L Gates in Washington, D.C. He can be reached at

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