Co-Author: David A. Farus, Esq.
This article explains the exception for Payment for Services Actually Rendered. Another article on our site explains the Affiliated Business Arrangements (ABA’s) exception.
Question: I own a real estate brokerage firm. Mortgage companies and others profit from the business I refer to them. Does RESPA prohibit me from receiving referral fees from mortgage companies?
Response: Yes, but there are at least two business models that allow you to capture some of the benefit from your referrals.
General RESPA Prohibitions
RESPA regulatory requirements apply to transactions that may involve a loan on residential real estate. RESPA generally prohibits payment of referral fees, unearned fees or kickbacks, as well as the splitting or sharing of fees or charges made or received for providing “real estate settlement services.”
The terms “federally related mortgage loan” and “settlement services” are both broadly defined. Virtually any institutional residential loan will be a federally related loan. “Settlement services” include:
any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement
Absent some other “saving” provisions or exceptions, payments from the mortgage company to the builder for referrals are prohibited.
Payment for Services Actually Rendered. Payment by a lender to a real estate broker for loan origination services actually performed by the real estate broker (or the lender’s splitting of a loan origination fee with such a real estate broker as compensation for such services actually performed) is a permitted exception under RESPA. However, this exception does not provide a lender or a real estate broker carte blanche for the making or receipt of any such lender payments or fee-splitting. The mere labeling of a payment is not by itself conclusive of its treatment under RESPA. Treatment is determined by analyzing facts and circumstances on a case-by-case basis.
In determining whether such a payment (or fee splitting) from a lender to a real estate broker is permissible under § 8 of RESPA, the first question is whether compensable loan origination services were actually performed by the referor for the compensation paid by the lender to the real estate broker. In the analogous situation of payments by a lender to a more-typical mortgage broker, HUD has provided some guidance as to when it believes compensable services have been performed. In its Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, 64 F.R. 10080 (1999), HUD referenced its prior itemization of the following non-exhaustive list of services normally performed in the origination of a loan:
- (a) Taking information from the borrower and filling out the application;
- (b) Analyzing the prospective borrower’s income and debts and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;
- (c) Educating the prospective borrower in the home buying and financing process, advising the borrower bout the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;
- (d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
- (e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);(f) Initiating/ordering request for mortgage and other loan verifications;
- (g) Initiating/ordering appraisals;
- (h) Initiating/ordering inspections or engineering reports;
- (i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;
- (j) Assisting the borrower in understanding and clearing credit problems;
- (k) Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed;
- (l) Ordering legal documents;
- (m) Determining whether the property was located in a flood zone or ordering such service; and
- (n) Participating in the loan closing.
Statement of Policy 1999-1 went on to express HUD’s opinion that compensable services would be performed if it were found that: (1) the lender’s agent or contractor (the real estate broker in this context) took the application information (under item (a) above) and performed at least five additional items on the preceding list; and (2) the payment was not a fee given for steering a customer to a particular lender disguised as compensation for purported “counseling type” services (taking the application plus performing only the additional services identified in (b), (c), (d), (j) and (k) above).
In addition, the regulations also provide:
When a person in a position to refer settlement service business, such as . . . [a] real estate broker or agent . . . receives a payment for providing additional settlement services as part of a real estate transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person. . . .
Even if compensable loan origination services have been actually performed by the real estate broker, however, that fact does not, by itself, make the contemplated payment legal. If the payment bears no reasonable relationship to the market value of the services provided, then the excess is not considered to be for services actually performed.
Many of the themes of RESPA conflict with the instincts of real estate brokers who are used to receiving referral fees for work referred to other brokers (permitted under a specific RESPA exception). In a competitive market, aggressive settlement service providers push the RESPA envelope. The cat-and-mouse game between the regulators and aggressive competitors make the rules complicated. Each situation is different. Brokers should consult their own attorneys before accepting fees for services or entering into an affiliated business arrangement.
A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.