April 5, 2020
When our instructors teach the New Jersey real estate license class, one of the most challenging subjects for our students is RESPA: what must be disclosed and what is simply illegal. Few things are more important to a real estate agent. Failure to abide by RESPA rules can cost you your real estate license—and a whole lot more!
What is RESPA?
The Real Estate Settlement Procedures Act—better known simply as RESPA—is the federal law that protects the public in two areas:
- It ensures when they are buying or selling a home that settlement costs are fully disclosed to the clients.
- It places strict rules on kickbacks, referral or finder’s fees, or other compensation that a real estate agent or brokerage may receive for sending clients to a preferred vendor.
It is the second point that our blog will focus on today.
What does RESPA actually say?
The relevant part of the Act for this discussion comes from Section 2607(a), which is commonly referred to as “Section 8.” It makes it illegal for any real estate licensee or their employing brokerage to accept kickbacks from vendors to whom they refer a client.
In the words of the Act, “No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
When RESPA says “business incident” it refers to the service delivered by any vendor or person that is necessary to move the transaction towards the real estate closing. Home inspectors, mortgage companies, appraisers, title companies and attorneys are examples of business incidents when you must abide by RESPA regulations.
“Why can’t I send clients to the vendors I know do a great job?”
There is nothing in RESPA that says you cannot do this. Where you cross the line is by referring a client to a mortgage company, home inspector or other such vendor in return for “any fee, kickback or thing of value.” This could be a $50 gift card or two tickets to the baseball game where the vendor has season tickets – if that reward was tied to the business referral.
Sometimes the line can appear to be blurry. For example, your favorite mortgage company loan officer pays for your business cards or your Zillow advertising. Does this happen? Every day of the week! How about a real estate agent who directs all his buyers to a specific mortgage company—a company that coincidentally pays hundreds of dollars for all her printing and mailing costs for her monthly newsletter? Yep! That is also a real example of a RESPA violation.
If a mortgage company printed free business cards for you, that is likely a RESPA violation. “Who is going to find out?” you may ask. If the lender is audited, or if you are investigated by a state or federal agency, how are you going to prove that you paid for those business cards—let alone the last years’ newsletter printing and mailing expenses?
On the other hand, if that mortgage company were to print your color flyers for the open house on Sunday, and the flyers provided sample mortgage rates and contact details for the lender, along with your own photo and contact, that is probably not a violation.
Be Careful About “Creative Solutions.”
There have been examples of brokers who were paid a significant sum—thousands of dollars—to act as a “director” or “consultant” of the title or mortgage company “to advise the company on ways to market their service to the real estate industry.”
Is that illegal?
Probably not. But is likely IS illegal when that broker has an agency policy that urges his agents to only recommend that lender or title company as the preferred vendor and allows only that vendor to have access to presentations at brokerage meetings. I used to work for a large regional real estate firm whose owner also owns a mortgage company. My local office broker would be constantly asking why my buyers were not using that lender–because his own bonus was tied to the percentage of deals the office referred to the owner’s mortgage company.
Was that policy in my clients’ interests?
Fines for RESPA violations can be enormous. A California mortgage company was found to have colluded with several real estate brokerages to offer “things of value” to the brokers and agents based on the number of referrals those licensees gave the lender.
The lender was fined $4 million plus legal fees and one broker admitted fault and reached a settlement with the Consumer Financial Protection Bureau for $230,000.
There is nothing wrong with a mortgage or title company or attorney or home inspector going to a broker’s office and providing lunch for everybody in a “lunch & learn” seminar that addresses a problem in the industry or which is an educational presentation.
So what to do?
Never give a finder’s fee or referral fee to anybody in return for them giving you a business lead. The only way an agent can give a referral fee is to another licensee—and then it must be through their brokers.
Most importantly, never take anything from a vendor that is directly tied to you receiving some form of reward.
The National Association of Realtors® recommends licensees always provide at least three vendors when clients ask whom they recommend for a mortgage, inspection services or title work. This can also help you avoid liability if one of those vendors makes a mistake.
An agent I know well is a very professional REALTOR® and had enjoyed rave reviews of a certain home inspector her many past clients had used. He had done such a good job for her clients that whenever she had buyers, she would just give the client the inspector’s name and offer to call him and set up the appointment. Everything went well . . . until it didn’t.
The home inspector missed the fact that the gas-heated home had previously been heated by oil. There was an oil filler tube at the back of the house. Worse yet, the abandoned tank had never been removed and was now leaking into an adjacent lake. The buyer sued the home inspector, his agent and her broker. That became a $166,000 settlement. The agent’s liability would probably have been avoided had she given her buyer a list of three or more home inspectors with the notation that this was simply a list as a customer service and that she was not endorsing any of them.
There are two parts to the RESPA issue.
- The first is that you should know the purpose of RESPA in case you encounter a question on your state exam.
- The second is that you should learn as much as you can from your broker, seminars you attend and professional journals that you read once you earn your license.
RESPA is a serious law. A little knowledge of it can save you a lot of future grief and money!
If you know anybody who is considering a real estate career or thinking of earning their broker’s license we’d love to show them how Garden State Real Estate Academy is New Jersey’s top-rate real estate school.
David C. Forward is a licensed real estate broker and instructor and was first licensed as a Realtor® 31 years ago. During his career, David and his business partner sold more than 450 homes in South Jersey. He is now School Director of Garden Real Estate Academy, has won numerous awards for real estate sales, is a much-requested public speaker who has addressed audiences on six continents and is the author of 15 books. David can be reached at David@GSREacademy.com