The Real Estate Settlement Procedures Act of 1974 [RESPA] and the associated Department of Housing and Urban Development rule known as “Regulation X” implemented a strict set of prohibitions on elements of the “real estate settlement” process. The whole point of RESPA was to stem a flow of intra-industry incentives that were flying around in the 1970s, where brokers were offered vacations and cruises if they referred enough business to certain mortgage lenders. The issue as Congress saw it was that the brokers and settlement service providers were taking unsophisticated clients and ramrodding them in the direction of certain service providers, not out of the client’s best interest, but because the broker/settlement service provider really wanted that free vacation. In particular, RESPA prohibits “giving or accepting a fee, kickback, or thing of value pursuant to an agreement or understanding (oral or otherwise), for referrals of business incident to or part of a settlement service involving a federally related mortgage loan.” A violation of RESPA can result in up to $10,000 in fines and up to a year in jail.
Let’s break it down.
- Fee, kickback, or thing of value — Broadly defined, basically anything. Money, stocks, credits, royalties, freebies, special price structures, increased equity in another company, business trips, partial payment of expenses, all of them are a “thing of value.”
- Pursuant to an agreement or understanding, oral or otherwise –— a contract, a wink and nod agreement, even patterns of conduct can all be considered an “agreement or understanding” that triggers a RESPA violation.
- For referrals of business — any action that directs or influences a person’s selection of a provider of a settlement service or business incident to a settlement service. “Required use” arrangements are equally considered “referral of business” so if a client has to use your specific mortgage broker to use your services, that checks the “referral of business” box for a RESPA violation.
- Incident to or part of a real estate settlement service involving a federally related mortgage loan — Any service provided in connection with a real estate settlement is considered a “real estate settlement service,” including but not limited to: loan origination, closing services, title services, title insurance, document preparation, property surveys, inspections, appraisals, attorney services, and real estate agent services. Technically, RESPA only applies to a federally related mortgage loan, but the definition includes any loan that “is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation or a federal institution from which the loan is to be purchased by the Federal Home Loan Mortgage Corporation,” so any loan that funnels through or to Fannie Mae or Freddie Mac or Ginnie Mae [practically all residential home loans] will be subject to RESPA.
Brokers need to remain cognizant of the particularly fine line between clever promotion and federal law violations. While it may sound great to have the client walk down the hall and work with that mortgage broker in your building, it’s always wiser to give the client a list with all their options and allow the client to make the ultimate decision without influence.
P.S. 12 USC 2607(c)(3) does exempt payments under “cooperative brokerage and referral arrangements or agreements between real estate agents and brokers,” so that segment of the real estate process is safeguarded.