Respa, Refferals, You

By Sarah E. Herman, Consumer Protection Officer

A  pest control company solicits real estate brokers to join what they refer to as a “Preferred Broker Program.” Among other listed benefits of becoming a Preferred Broker, the company offers all broker participants quarterly pest control services at their personal homes at no charge. In order to receive the free pest control, the broker must refer their buyer clients to the pest control company for the completion of lender-required pest inspections.

The question posed to the Commission’s legal staff was whether this type of program is in violation of the Real Estate Settlement Procedures Act (RESPA).  RESPA prohibits kickbacks and unearned fees in any real estate transaction involving a federally related mortgage loan. The kickback provision is generally referred to as RESPA’s “Section 8.”

Section 8 prohibits anyone, including real estate brokers, from “…accept[ing] any fee, kickback, or thing of value…” as “…part of, a real estate settlement service involving a federally related mortgage loan…” 12 U.S. Code Chapter 27 § 2607(a).

A “thing of value” is any payment, advance, funds, loan, service, or other consideration with more than nominal value.

“RESPA also defines the term “Settlement service” as any service provided in connection with a real estate settlement for which the buyer or seller will pay. These services  include, but are 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.

When a lender requires a buyer to have a pest inspection as part of the loan qualification process, the inspection is considered a settlement service. On the other hand, if a seller independently chooses to have a pest inspection as part of the listing process, and pays for that service separately from the settlement process, it is not related to the real estate settlement and is not considered a settlement service.

If a broker receives a quarterly pest control from the pest control company at no cost, a service that would typically have an associated cost, they have received a “thing of value.”  And if that broker receives that thing of value for referring a client to the pest control company to do a lender-required pest inspection, there is very likely a RESPA violation.

Even if the broker is referring a client to the pest control company for services unrelated to a closing and there is no apparent problem with RESPA, the broker must fully disclose their arrangement with the pest control company to their client per Commission Rule A .0109.

As you can see from the example above, whether a referral is prohibited under RESPA depends greatly on the specific transaction.  If you are confronted with a business referral program, use the following fill-in-the-blank sentence as a test to determine whether the program may be in violation of RESPA:  As part of this program, I will receive _________, which will enrich or benefit me or my firm, in exchange for referring clients to _________ for services related to a real estate settlement.  If you can fill in these blanks, the safest course is to consider the program a no-go.

This article came from the February 2017-Vol47-3 edition of the bulletin.