How to Stay RESPA Compliant When Referring

How to Stay RESPA Compliant When Referring

The Real Estate Settlement Procedures Act (RESPA) was enacted to protect consumers from abusive practices in the referral of mortgage loans and settlement services. You simply can’t steer business to lenders, title companies, inspectors, or other settlement services providers and get paid cash, gifts, or anything of value.

Many agents have problems and don’t realize it. If you trust a lender enough to send referrals, they might be inclined to “thank you” with marketing help, event sponsorships, leads, or gifts. In that situation you have to be careful.

The Real RESPA Bans

RESPA section 8 states you cannot give or receive any compensation, kickback, or anything of value for referring settlement service companies in relation to any mortgage loan related to the federal government.

These include services such as:

• • Mortgage loan title companies
  • Escrow services
  • Closing services
  • Appraisals
  • Home inspections

“If somebody is just paying you to send them business, that’s a problem.”

What You Are Allowed

You may be paid for services that you actually perform.

For example:

• • A lender can pay fair market value for advertising.
  • A title firm can sponsor an event if the cost is commensurate with actual marketing exposure.
  • Vendors can pay for access to your client pipeline and also pay for actual services.

What matters is that the pay has to be proportionate to the real work. If the arrangement exists solely because referrals are bartered, it probably goes too far.

Mistakes Agents Commonly Make

Some agents try to create “marketing agreements” which are really referral agreements disguised as advertisements. Regulators examine these configurations.

Warning signs include:

• • Receiving payment for services not clearly defined
  • Performing vague contracts for marketing
  • Receiving payment above fair market value
  • Sharing of fees associated with referrals
  • Gifts or benefits associated with client referrals

Trouble can come from small things. The item of value does not have to be expensive to qualify under RESPA. Referrals that come with complimentary tickets or gift cards, expensive dinners, or paid vacations may raise red flags.

Referral Splitting Is a Huge Problem

One area that causes problems for lenders and agents is splitting marketing expenses based on referrals.

For instance, if a lender pays part of your marketing costs because you’re sending them borrowers, regulators would see that as paying for referrals, not real marketing.

The safe way is simple:

• • Referrals are not a part of the contract
  • Each participant pays for their own part
  • The costs are based on real market value
  • The services are documented precisely

How to Stay Compliant Best Practices

Before entering into a contract for co-marketing or referral services, consider the following:

• • Am I really helping people?
  • Does the pay depend on the quality of the work?
  • Would this system still exist without recommendations?
  • Does the salary match the market value?
  • I would be comfortable telling a regulator about this arrangement.

If the answer seems tentative, walk away.

The Last Score

Referrals are part of real estate. They are not illegal kickbacks.

Build relationships; the professionals are good at what they do, not because somebody is handing out benefits in the background. If you don’t know, make sure your agreements are clear, documented and based on legitimate company services, not referral volume.

*I have a RESPA checklist for agents. If you’d like a copy, please e-mail me.  Your1styear@gmail.com