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Legally speaking: Avoiding RESPA violations when working with lenders & title companies

By Peg Ritenour, OAR Vice President of Legal Services/Administration

The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law, our “Legally Speaking” series spotlights some of the timely questions that are being asked by REALTORS. This one involves the what’s acceptable under the Real Estate Settlement Services Protection Act (RESPA)…

So you want to increase your business by partnering with other related real estate businesses? That’s a great idea, but before you do so it’s important to understand the restrictions under RESPA — a federal law you don’t want to violate.

The RESPA provision that can be called into question when REALTORS, lenders and title companies begin engaging in referrals, sharing leads, joint marketing, etc. is Section 8(a).  This section prohibits settlement service providers from giving or receiving something of value in exchange for the referral of real estate settlement services. This prohibition against kickbacks and referrals applies to “settlement service providers,” which includes real estate brokers and agents, lenders and title companies.

Below are a sampling of questions received on OAR’s Legal Assistance Hotline that involve situations that could violate RESPA:

Q: Can a lender pay a fee to a real estate broker for referring buyers to the lender?

A: No. The referral fee is prohibited under section 8 of RESPA.

Q: I have season tickets to Ohio State football games. Can I take a mortgage broker who refers me a lot of business to a game as a way of thanking him?

A: Because there is a value to these football tickets, this could be perceived by HUD as a RESPA violation if the ticket is linked to a referral of business. Therefore such a practice is not recommended.

Q: Is it a RESPA violation for a real estate broker to rent office or desk space to a lender or title company?

A: No. However, the rent the broker charges the lender must be the general market rate for the office space leased. Any amount charged in excess of the market rate could be viewed as a means to disguise referral payments. Rent cannot be based on the number of referrals or value of business generated from the location.

Q: A mortgage company that I send a lot of buyers to approached me about doing joint advertising. The mortgage broker indicated that he would pay for the ad. Is that permissible under RESPA?

A: While joint advertising is not prohibited, payment of the entire cost of the ad by the mortgage broker could be construed as hidden compensation for referrals you send them. Therefore, you should pay your proportional share of this marketing expense.

Tags: legal, Legally Speaking