Some Referral Fees Are Ok, but Caution Is Called for

Some Referral Fees Are Ok, but Caution Is Called for

Last week we discussed the Real Estate Settlement and Procedures Act (RESPA). It is almost inevitable that such a discussion will call for further discussion regarding the payment of referral fees. More than a few real estate agents are confused about the laws governing referral fees. Some don’t even know that there are any laws governing referral fees. Some know, but don’t care.

Particularly problematic is the issue of paying referral fees to people who do not have a real estate license. An agent’s unlicensed brother in-law might ask for a sum of money in return for referring to him a person who intends to buy a house; and the agent very well might agree. Indeed, agents will sometimes solicit referrals from unlicensed persons. They may even advertise that they will pay a certain fee for the referral of buyers or sellers.

Real estate transactions and the activities of real estate agents are subject to a variety of both state and federal laws. The fact that there are these two different authorities provides some explanation for the common confusion about referral fees.

California real estate law permits the payment of referral fees to unlicensed persons. Other states may prohibit that. In California, the only restriction is that the recipient of the referral fee must not have any involvement in the transaction itself. Their sole role can only be to introduce the buyer or seller to the agent. They must not get involved in such things as valuing the property or trying to arrange financing.

Federal law is different from California law in this regard. It allows the payment of referral fees from licensee to licensee; but it prohibits, in most cases, the payment of referral fees to unlicensed persons.

The relevant federal law is contained in RESPA (Real Estate Settlement and Procedures Act). RESPA rules govern residential real estate transactions, up to four units, in which the financing is done by a government entity such as FHA, or by a financial institution that is insured or regulated by the federal government. That is to say, just about every financial institution you can think of.

There are a number of exceptions to the RESPA prohibition against referral fees. If the transaction is a residential building that is greater than four units, it is exempt. If it is commercial, or vacant land, it is exempt. The same goes for transactions that are for cash, or those that are seller-financed.

Given the number of cash transactions that occur, a lot are exempt from the RESPA prohibition against referral fees.

Still, it is relevant to remember that, in the vast majority of residential real estate transactions, the payment of a referral fee to an unlicensed person is a violation of federal law.

Nor is this just a matter of interest for real estate agents. It is also of concern to those unlicensed persons who want to receive referral fees.

12 USC Section 2607 (a) says, “No person shall give and no person shall receive any fee… [pursuant to a referral agreement]”. [My emphasis.] Subsequently, Section (c)(3) goes on to exempt referral fee arrangements between licensees. But it does not exempt referral fee arrangements between licensed and unlicensed persons. In short, if a referral fee is paid to an unlicensed person in a transaction covered by RESPA (i.e. the vast majority of transactions), both the agent and the recipient will be guilty of a violation.

This being the great country that it is, there are always those with a creative solution. “We don’t call it a referral fee. We say it is a finder’s fee.” The response, however is: No, it still quacks like a duck.

Violations of Section 2607 are punishable by fines of up to $10,000 and a maximum of one year in prison. It’s something to think about


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