Does Your Referral Fee Violate RESPA?

Ohio law permits real estate licensees to pay referral fees to real estate licensees licensed in another state or country. Conversely, licensees are prohibited from paying referral fees to unlicensed entities.

When paying a referral fee, care should be taken to confirm that:

• The referral is reduced to a written agreement
• The recipient of the fee is indeed licensed (i.e. get proof of licensure)

Oftentimes relocation companies demand a referral fee but are themselves unlicensed. Unfortunately, this is an example of when a licensee is prohibited from paying a referral fee.

But can a referral fee be paid or received from another provider of real estate services (i.e. appraisers, home inspectors, title companies, insurance companies, lenders, etc.)? In no uncertain terms, absolutely not. These types of referral fees violate RESPA or the Real Estate Settlement Procedures Act. RESPA was passed by Congress in 1974 and regulates settlement costs buyers and sellers pay because of the sale/purchase of real estate. RESPA provides criteria for disclosure of settlement service fees and prohibits unlawful kickbacks and referral fees.

Specifically, the law prohibits the payment from one real estate service provider (explained below) to another any referral fee, kickback, or anything else of value for a referral. A real estate service provider is anyone that provides a service regarding a real estate transaction.

Some examples include:

• Attorneys
• Surveyors
• Inspectors
• Loan officers
• Real estate salespersons
• Title companies
• Lenders

A real estate licensee that receives a referral fee for sending business to a home inspector, violates RESPA. There are both criminal and civil penalties for violations of RESPA, including a fine of up to $10,000.00 and imprisonment of up to one year.

Of course, with any law there are exceptions. A real estate licensee may share costs with a settlement service provider, as long as both pay and receive reasonable market value for the good or service. Here are some examples of fees that are not a RESPA violation:

• A title company and a licensee may jointly send a mailer to prospective clients. If the title company only pays the reasonable market value for the mailer (nothing more) there is not a RESPA violation.
• An instance where a title insurance company rents space in the licensee’s office. If the rents paid are market rents (nothing more or less) there is not a RESPA violation.

Caution should be taken on any business relationship that purports to tie payments to percentages of business generated for the settlement service provider, as such give the appearance of an illegal referral fee or kickback as opposed to the market value for a good or service.

You may decide for your business to limit your payment of referral fees to solely licensed agents. In that circumstance, you limit your exposure for any RESPA violation.