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Real Estate Brokers & Referral Fees under RESPA

Special Considerations for Commercial Real Estate Brokers and Referral Fees under RESPA and Colorado law.

Paying for referrals is a common practice in various competitive industries where the struggle to attract customers determines which participants will flourish and which will flounder.  However, the business of real estate is subject to various restrictions that limit industry-participants’ ability to engage in conduct which may be common elsewhere.  For example, the Real Estate Settlement Procedures Act (“RESPA”), title 12 of the Colorado Revised Statutes, and the Rules of the Colorado Real Estate Commission impose severe restrictions upon various forms of referral agreements between settlement-service providers involved in real estate transactions.

Due to the nature of the deals they are frequently involved in, Commercial brokers may have a greater ability to formulate inventive referral arrangements designed to comply with both state and federal law, including RESPA.  However, commercial brokers should still consider the ways in which both RESPA and Colorado law may prohibit such arrangements.


RESPA first became law in 1975 with a stated purpose to increase transparency for consumers and combat the practices of those involved in  real estate sales who provide undisclosed kickbacks to each other, thereby increasing transaction costs.  Together with its regulations, RESPA includes a variety of laws applicable to those nearly all professions involved in the settlement or closing of a real estate transaction.   Under Section 8 of RESPA, any provider of “settlement services” who gives or accepts anything of value (e.g., referral fees, fee splits, kickbacks, payments, commissions, gifts, tangible items, or even special privileges) in exchange for the referral of business is in violation of RESPA and may be subject to criminal and civil penalties.  This seemingly simple rule is actually quite complicated.

RESPA only applies to those transactions involving “federally related mortgage loans,” which is defined to exclude extensions of credit made primarily for “business” or “commercial” purposes.  By contrast, RESPA clearly does apply where credit is secured for “personal, family, or household purposes.” Thus, in many cases, RESPA will not apply to the types of transactions in which commercial real estate brokers are ordinarily involved.

However, under certain circumstances, even a seemingly “business” or “commercial” transaction may still fall within the scope of RESPA.  If a broker is accused of violating RESPA, courts may closely examine the nature of the particular transaction at issue to determine whether the particular acquisition was made for a “business” or “commercial” purpose.   To make this determination, courts may consider five factors:

  1. The relationship between the borrower’s primary occupation and the acquisition. Where the two are closely related, it is more likely to be a business purpose.
  2. Whether the borrower will be personally involved in managing the acquisition. A greater degree of involvement indicates a greater likelihood that it is a business purpose.
  3. The ratio of income from the acquisition to the borrower’s total income. The higher the ratio, the more likely it is to be business purpose.
  4. The size of the transaction. Larger transactions are more likely to be for a business purpose.
  5. Finally, the borrower’s statement of purpose for the loan is also considered.

When applied, these factors could require the application of RESPA even where the borrower and broker believe that the acquisition is being made for a business purpose.  Thus, even the “bright line” rule exempting business and commercial transactions has its exceptions.

Confusion frequently arises in the context of the acquisition of rental properties.  Different rules apply to non-owner-occupied and owner-occupied rental property.  The acquisition of property that the borrower does not intend to occupy is generally treated as one for a business purpose.  A loan may also be deemed to be for business purposes if it is used to acquire an owner-occupied rental consisting of more than 2 housing units, or if it is extended to improve or maintain rental property containing more than 4 units.  If these thresholds are not met, then the determination of whether credit has been extended for a business or commercial purpose must be made using the five factors 1-5 described above.

As can be seen, the application of RESPA to brokers involved in commercial transactions may afford a greater amount of leeway when formulating business models involving referral fees.  But commercial brokers should still exercise caution when agreeing to any form of kickback.

Colorado Law

Even though RESPA frequently will not apply in the context of a commercial transaction, Colorado real estate brokers should still consider the application of Colorado law, including the Rules of the Colorado Real Estate Commission.  Unfortunately, a plethora of such laws may prohibit referral fees that may be allowable under RESPA.

For example, the establishment of a referral fee relationship in a commercial transaction may still result in an affiliated business arrangement subjection to Commissions rules and statutes.  Such rules and statutes could require that disclosures be made or they could forbid the arrangement altogether, even though RESPA may not apply.

Similarly, the Commission rule pertaining to conflicts of interest applies to brokers involved in any transaction, regardless of its nature as either commercial or residential.  A conflict of interest likely arises where a broker makes a referral of business to a settlement-service provider who has agreed to compensate the broker.

Brokers must also take care to avoid inadvertently engaging in conduct which has the effect of defrauding a lender.   This can occur where a referral fee or kickback agreement has an impact on a borrower’s creditworthiness, resulting in a detriment to an unsuspecting lender.  Under similar circumstances, a broker could inadvertently violate a fiduciary duty if a seller’s interests are harmed by the borrower’s distorted financial qualifications.

Moreover, Commission Rules E-18 and E-19 appear to prohibit certain referral fees between brokers, mortgage lenders, and title insurance companies, regardless of whether a “federally related mortgage loan” is involved.

Finally, even where a referral fee is permitted, brokers must still be careful in how they implement the referral fee.  For example, a broker may not require the use of an affiliated business arrangement or a particular provider of settlement services as a condition of obtaining services from that licensee.  All of these are considerations applicable to commercial brokers irrespective of RESPA.

For questions about this article please contact Jon Goodman.

Damien Zumbrennen is no longer with the law firm of Frascona, Joiner, Goodman and Greenstein, P.C.
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