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Background
Applying equally to all settlement service providers, RESPA does not distinguish among different types of settlement providers based on their role in the real estate sales transaction. A settlement service generally includes any service provided in connection with a real estate settlement including, but not limited to: 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, home warranty companies, services rendered by a real estate professional, the origination of a federally related mortgage loan, and the handling of the processing and closing or settlement.
While the CFPB is generally excluded from exercising authority over real estate brokerage activities, the CFPB does have authority under RESPA over agents and brokers engaging in offering or providing financial products or services. Real estate agents and brokers must comply with RESPA and are prohibited from receiving anything of value in return for the referral of settlement service business. Violators of RESPA are subject to penalties, including damages, fines, and imprisonment.
Prohibition against Kickbacks and Unearned Fees
One of the primary ways real estate agents and brokers are concerned with RESPA compliance relates to relationships with other settlement service providers and potential kickbacks or payment of referrals that may result from those relationships. Section 8 of RESPA generally prohibits any person from giving or receiving any "thing of value" in exchange for the referral of settlement service business. However, there is an exception under RESPA that allows brokers and agents to exchange reasonable payments in return for goods provided or services performed by other settlement service providers, so long as those arrangements are carefully structured to comply with the law and regulations.
The CFPB has been increasing scrutiny of settlement service provider relationships and activities under RESPA in recent months, resulting in growing uncertainty for the real estate industry. Below are some examples for real estate professionals to follow when engaging in activities with other settlement service providers related to marketing, referral fees, and affiliated business arrangements.
Marketing
Co-Marketing : A real estate broker and a mortgage lender agree to jointly place a full-page advertisement in a local newspaper. Each company gets exactly one-half of the page to advertise its services. Each company pays one-half of the cost of the advertisement.
This is not a violation of Section 8 of RESPA as long as the advertising costs paid by each party are reasonably related to the value of the goods or services received in return (i.e., the amount of advertising). If one party is paying more than a pro rata share for the advertisement, the additional costs could be viewed as a disguised payment for referral, resulting in a RESPA violation.
Sponsorships of Events : A real estate agent is sponsoring an open house for other agents. A local title agency reimburses the real estate agent for the cost of the luncheon and the title agency does not market its title services at the open house.
Because the title agency does not market its title services at the open house, both the real estate agent and title agency could be found in violation of RESPA. By reimbursing the real estate agent for the cost of the luncheon, the title agency has given the real estate agent a thing of value in consideration for the referral of business. If, however, the title company attends the open house to make a presentation or to otherwise market its services, such payments may be lawful under RESPA.
A settlement service provider can sponsor an educational event as a way to promote its services, so long as the costs associated with the event do not defray expenses that the real estate agent would otherwise encounter and are not conditioned on the referral of business. Note, however, that a rule of reason should be applied. An educational event hosted by a mortgage lender that was held at a local hotel and provided a lunch would be different from an educational event held in Hawaii in which one hour was dedicated to education and the remainder of the event was directed toward recreation.
Marketing Service Agreements : A real estate broker and a title agent enter into a marketing service agreement (MSA), where the real estate broker charges the title agent a disproportionate share for the marketing materials developed and distributed to consumers - an amount that is in excess of the fair market value of the of the marketing services actually performed.
This would be in violation of RESPA, where the excess payments for the services could be deemed a payment for referrals. RESPA permits the marketing of other settlement services by another settlement service provider so long as the payments made for these services represents the fair value for the services provided. Fair market value should be based on what a non-settlement service provider would pay for the same services by another.
A lawful MSA should contain the following elements: (1) the real estate professional can perform services for other companies in the same field of business (i.e., the agreement is not exclusive); (2) the compensation is not based on the volume of business, but rather on the value of the services provided by the real estate professional; (3) a written contract between the parties that documents the services to be provided pursuant to the agreement; and, (4) a written disclosure is provided to the consumer describing the real estate professional's role in selling the third-party service.
Office Rentals : A settlement provider conducts real estate closings in the conference room of the real estate broker with the expectation that the real estate broker will refer closing business to the settlement agent. The settlement agent pays fair market value to rent the conference room for each closing.
This appears to comply with RESPA. A settlement service provider may rent a conference room or other office space from another settlement service provider, as long as it pays fair market value to rent the space. Fair market value should be based on what a non-settlement service provider would pay for the same amount of space and services in the same or a comparable building.
Promotional Materials : A homeowner's insurance company gives a real estate broker marketing materials, such as desk calendars, pens, and notepads, all of which promote the homeowner's insurance company's name.
Distribution of such materials is compliant with RESPA because the regulations provide an exception to Section 8 for normal promotional and educational activities that are not conditioned on the referral of business. Such materials must also not defray expenses that otherwise would be incurred by persons in a position to refer settlement service business.
Referral Fees
Brokers' Payments to Agents : A real estate broker pays its real estate agents $20 for each referral the agents make to the real estate broker's affiliated mortgage company.
This is a violation of RESPA. Although RESPA provides an exception for payments made from an employer to its employees, payments between a real estate broker and its salespeople do not qualify for this exception. Real estate professionals are considered independent contractors, rather than employees of the real estate broker. As a result, the $20 payments constitute payments in return for the referral of business in violation of RESPA.
Payments between Settlement Service Providers : A licensed broker pairs buyers with real estate professionals in different geographical areas based upon information received from consumers and from participating real estate professionals. Referral fees are then paid from the other broker when a deal settles. This model is then expanded to pair real estate agents with mortgage brokers and a fee is collected.
This arrangement would violate RESPA. Section 8(c) of RESPA contains exceptions to RESPA's prohibitions on kickbacks that allows for cooperative fees to be paid between real estate licensees, including referral fees. However, no such exception exists for payments made to mortgage brokers and therefore would be in violation of the law.
Agent Incentives : A mortgage lender devises a contest among local real estate agents where the real estate agent who refers the most customers to the lender will receive a vacation cruise to Alaska.
This is a violation of RESPA because the vacation cruise is a thing of value in exchange for the referral of business, violating the law's anti-kickback provisions. Both the mortgage lender and the real estate professionals can be held liable for RESPA violations.
Meals : The owner of a title agency meets the owner of a real estate brokerage firm for dinner to discuss future marketing opportunities. After the discussion has ended, the owner of the title agency pays for the real estate broker's dinner.
This complies with RESPA because the purpose of the dinner was business related and was not a payment for the referral of business.
Affiliated Business Arrangements
Affiliated Business Disclosure : A real estate broker refers business to its affiliate title company and provides its customers with an affiliated business disclosure. The disclosure lists the range of charges that the title company will charge for its services; the financial interest in the title company; and notifies the customer that he or she is not required to use the title company for services.
This is compliant with RESPA, as the referrer of business to an affiliated entity is required to provide a written disclosure to each consumer that identifies the affiliated relationship, provides the charges or range of charges that the joint venture generally charges, and notifies the consumer that he or she is not required to use the affiliated business.
Payments Based on Referred Business : A real estate broker and a title insurance company create an affiliated title agency that pays dividends to both the real estate broker and title insurance company in proportion to the amount of business that each refers to affiliated title agency during the year.
This is a violation of RESPA because an affiliated business may only pay its partners or investors a proportionate share of the profits based on their ownership interest in the affiliate. Thus, if the partner owns 50 percent of the business, they may receive 50 percent of the profits in annual dividends, based on the amount of stock held. RESPA prohibits the payment of dividends based on the amount of business referred or expected to be referred to an affiliated business.
Consumer Discounts : A prospective buyer's credit union has told her that in order to qualify for a special package of services, she must use certain settlement service providers, including specific real estate professionals. Additionally, the real estate professionals are then required to rebate a portion of their commission to the buyer through this program .
Such arrangements could be legal under Section 8 of RESPA. The credit union can offer the consumer a package of settlement services at a reduced cost to the consumer if the consumer elects to use certain settlement service providers for settlement services, even if those providers are affiliates of the credit union. The credit union also could require a consumer to use a particular provider for settlement services without the offering of a discount, as long as the credit union and settlement service provider are not affiliates. However, the credit union cannot require the consumer to use an affiliate settlement service provider.
The credit union's offering of a package of services at a discount tied to the use of an affiliate provider is not considered required use, as long as the consumer is notified of his/her option to shop for settlement services and the discount is a true discount to the consumer that is not made up elsewhere in the cost of the transaction. A real estate professional can also agree to rebate a portion of his/her commission to a consumer. However, some states have laws prohibiting the payments of rebates to unlicensed individuals, making such a practice illegal in those jurisdictions.
Additional Guidance
Consult with a RESPA attorney to ensure compliance with any and all applicable laws, as some state and local laws prohibit or otherwise restrict activities that may be permissible under RESPA. For resources on specific issues under RESPA, see the additional guidance below.
Guidance on online co-marketing activities under RESPA .
Frequently asked questions on specific agent and broker activities under RESPA.
Advocacy
References
NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.
RESPA Basics
The Real Estate Settlement Procedures Act (RESPA) Explained (Rocket Mortgage, Apr. 24, 2024)
Real estate professionals, including real estate agents, attorneys, mortgage brokers, lenders and service providers (such as title companies and home inspectors) thrive on successful relationships. Home buyers and sellers benefit from those relationships by asking for professional recommendations and advice that they expect is trustworthy.
But when those recommendations are based on undisclosed financial interests, home buyers and sellers can suffer, either from poor service or inflated settlement costs. It’s impossible to know whether referrals are being made because the provider is knowledgeable, cost-effective and reliable – or because the person making the referral is being paid to say so.
Penalties for kickbacks and related transgressions include $10,000 fines and up to 1 year of imprisonment.
How the Real Estate Settlement Procedures Act (RESPA) Works (Investopedia, Mar. 28, 2024)
Overview of RESPA history, when and how the rule applies, and enforcement procedures.
What is RESPA? (Bankrate, Jan. 2, 2024)
An appraiser gives a mortgage broker courtside tickets to a professional basketball game in exchange for business.
Your loan servicing company requires an additional $300 per month for escrow, even though your annual property tax bill will be $2,000.
A mortgage broker fails to send you an affiliated business disclosure form that acknowledges his company is also part of a network of another company that conducts title searches.
Your mortgage lender sells your mortgage to another servicer after closing, but it does not inform you of the change.
CFPB Penalizes Lender and Broker for Kickbacks (Florida REALTORS®, Aug. 21, 2023)
According to the allegation, Freedom provided Realty Connect USA Long Island (Realty Connect) agents and brokers incentives, including cash payments, paid subscription services and catered parties with the understanding that they would refer prospective homebuyers to Freedom for mortgage loans.
That conduct violates the Real Estate Settlement Procedures Act (RESPA) and its implementing regulation. The CFPB ordered Freedom to cease its illegal activities and pay $1.75 million into the CFPB’s victim relief fund.
RESPA Violations: Definition, Examples & How to Avoid Them (Fit Small Business, Jun. 26, 2023)
“RESPA violation penalties were implemented because individuals and companies associated with real estate transactions, like lenders, agents, and construction and insurance companies, were receiving undisclosed kickbacks and referral fees for recommending a settlement service provider.”
Window to the Law Video: Overview of RESPA for Real Estate Professionals (National Association of REALTORS®, Aug. 5, 2022)
NAR's Legal Affairs staff explains the Real Estate Settlement Procedures Act (RESPA) and how it affects REALTORS®.
4 RESPA Reminders (REALTOR® Magazine, Apr. 20, 2022)
RESPA generally prohibits kickbacks and offering a thing of value in exchange for the referral of business to a settlement service provider. The law applies equally to all settlement service providers, which goes beyond title insurance, loan origination, and real estate brokerage to include property surveys, credit reports or appraisals, pest and fungus inspections, home warranty companies, and more.
RESPA FAQ — Answers to Common Questions about RESPA from Real Estate Professionals and REALTOR® Associations (National Association of REALTORS®, Dec. 7, 2016)
NAR’s compilation of commonly received questions about the Real Estate Settlement Act (RESPA) for both real estate professionals and REALTOR® associations.
Real Estate Settlement Procedures Act (RESPA) (U. S. Consumer Financial Protection Bureau)
CFPB’s page of “resources to help industry participants understand, implement, and comply with the Real Estate Settlement Procedures Act (RESPA) and Regulation X.”
RESPA Products from the National Association of REALTORS®
RESPA Do’s and Don’ts for MSAs (REALTOR® Store)
“A great quick reference tool that provides examples of what the Real Estate Settlement Procedures Act (RESPA) allows and prohibits in marketing services agreements (MSAs),” available in print or digital format.
Real Estate Brokerage Essentials®: Navigating Legal Risks and Managing a Successful Brokerage (REALTOR® Store)
“The most comprehensive business tool for brokers to run their offices efficiently and minimize their risk for legal liability,” available as a printed book or digital download.
RESPA Marketing Service Agreements
How to Steer Clear of a RESPA Violation When Co-Marketing a Listing (CRES, Mar. 13, 2024)
Ensure all parties are clear about their responsibilities and obligations to comply with RESPA and any other legal requirements. Real estate licensees should develop a co-marketing agreement which accurately outlines the marketing services that each party will provide.
Market Service Agreement: Everything You Need to Know (UpCounsel, Jan. 1, 2024)
For MSAs to be the most effective and profitable, the people involved work to follow any and all compliance issues and work to create a positive business partnership. MSAs that violate RESPA should be avoided because they can be quite costly, ranging from $5,000 a day to $25,000 a day for extremely reckless violations.
RESPA Hot Topics: Marketing Alliances in a Competitive Mortgage Market (Mayer Brown, Feb. 1, 2023)
The MSA should not be exclusive, meaning the service provider should not be prohibited from providing services to other companies. In evaluating whether an arrangement complies with RESPA, regulators have indicated that an exclusive arrangement is one that raises red flags in that analysis.
Welcome Clarity on RESPA (REALTOR® Magazine, Mar.-Apr. 2021)
Tips for complying with rules on marketing service agreements, based on recently issued guidance from the Consumer Financial Protection Bureau.
How to Make Sure Your Joint Venture Is RESPA Compliant (RISMedia, Mar. 3, 2021)
Explanation of the differences between joint ventures and marketing service agreements, with advice on RESPA compliance for each.
Real Estate Settlement Procedures Act FAQs (U. S. Consumer Financial Protection Bureau, Oct. 7, 2020)
Compliance Aid issued by the CFPB pertaining to RESPA Section 8 and Marketing Service Agreements.
Window to the Law Video: PHH v. CFPB - Important RESPA Decision (National Association of REALTORS®, Jun. 4, 2018)
Have an idea for a real estate topic? Send us your suggestions.
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