Congress enacted the Real Estate Settlement Procedures Act (RESPA) in 1974 to protect consumers in the home buying process. RESPA is now administered and enforced by the Consumer Financial Protection Bureau (CFPB). Settlement service providers, including real estate agents, with questions about RESPA should e-mail the CFPB at CFPB_RESPAInquiries@cfpb.gov.
REALTORS® are most familiar with Section 8 of RESPA, which prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business related to a federally related mortgage loan. Settlement services are services provided in connection with a closing, including services relating to the buyer’s loan, title insurance, closing documents, appraisals, credit reports, property inspections, hazard insurance, surveys, property taxes and, of course, real estate brokerage.
Affiliated business arrangements
When writing offers on another company’s listing, can the buyer, upon the buyer’s broker’s recommendation, request that the seller order title work from the buyer, upon the title company affiliated with the buyer’s broker?
Real estate brokers and agents are permitted to own an interest in a settlement service company, such as a mortgage broker or title insurance company. The referral of a party to a broker’s affiliated settlement service provider is not considered an illegal kickback or unearned fee under RESPA if the following conditions are met:
- The broker making the referral has provided each party receiving the referral with a written disclosure in the format of the Affiliated Business Arrangement (ABA) disclosure statement. The required content of the ABA disclosure statement is found at Appendix D on the United States Department of Housing and Urban Development (HUD) website at portal.hud.gov/hudportal/HUD?src=/program_offices/housing/ramh/res/resappd. A copy of the mandatory ABA Disclosure Statement also can be found on page 16 of the February 2005 Legal Update, “Common Practice Pitfalls,” at www.wra.org/LU0502.
- The broker making the referral generally cannot require any party to use any particular provider of settlement services.
- The only thing of value that is received from the arrangement is a return on an ownership interest or franchise relationship.
- The affiliated company must be a bona fide, stand-alone business with sufficient capital, employees and separate office space, and must perform core services associated with that industry.
After the broker gives the buyer an ABA disclosure statement, the buyer may agree to draft the offer to state that the referred title company will prepare the owners’ policy of title insurance. The ABA disclosure statement also serves to fulfill the disclosure requirements under Wis. Admin. Code § REEB 24.05(3).
Choosing the title insurance company
The broker believes that the buyer can select the title insurance company for the owner’s policy, but the listing agent is insisting that the seller can choose because the seller pays for the policy. Where is the statute that says the buyer may choose the title company?
The seller’s obligation in the WB-11 Residential Offer to Purchase is to give evidence of title in the form of an owner’s policy and pay the costs thereof. Unless the offer names a specific title company, the seller may be free to choose.
RESPA rules prohibit a seller from conditioning the sale of property on the use of a certain title company. The WRA contacted HUD’s RESPA office for clarification regarding whether a buyer would lose his right to choose the title insurance company if he drafts the offer without specifying a title insurer and later decides that he wants to choose the title insurance company. HUD responded that they do not provide advisory opinions. However, the correspondence cited section 9 of RESPA, which does not allow a seller, or the seller’s agent, to require a buyer, as a condition of the transaction, to purchase the owner’s title insurance from any particular title company.
To avoid any ambiguity or conflict, a buyer who wants the seller to provide title evidence from a particular company should draft the offer to specify the title company that is to furnish the owner’s title insurance policy. If the offer does not name a particular title company, the RESPA prohibitions against sellers making the offer conditioned upon the use of a certain title company appear not to apply, thereby allowing the seller to select the title company.
Referrals of non-settlement services
A local home painting business wants to pay a referral fee to agents who refer painting business to the company. Is this legal?
Under RESPA, painters generally are not settlement service providers so this particular type of referral is not subject to RESPA, provided the painting is not rendered as part of the closing and not paid for on the closing statement.
Wis. Admin. Code § REEB 24.05(3) provides, “A licensee acting as an agent in a real estate or business opportunity transaction may not recommend or suggest to a party to the transaction the services of another individual or entity from which the licensee may receive compensation for a referral or in which the licensee has an interest, other than referrals to other licensees for real estate services under s. 452.19, Stats. unless the licensee, prior to or at the time of the referral, discloses the fact that he or she may receive compensation for the referral or that he or she has an interest in the individual or entity providing the services."
If this referral to the painter is made in the context of a transaction, then the broker must follow this rule and disclose that he will receive a fee from the painter. If the broker is not acting as an agent and the referral occurs outside of a transaction, then it is not subject to license law. It may be prudent, however, to disclose the referral fee in all cases to avoid any possibility that a transaction may later occur with the party. This disclosure need not be in writing, but an e-mail or other writing would be recommended if the referral were to a party in a transaction.
Distributing lender financing information
A builder/broker is building and selling homes in a local community. A local bank put together a flier detailing the payments and other information for purchase money loans under various available loan programs. This is intended for use as a sales piece, but the bank said that they couldn’t put their name on it due to RESPA restrictions. May the builder/broker use the flier as a handout?
The NAR Frequently Asked RESPA Questions provide the following insight into this issue, online at www.realtor.org/LetterLw.nsf/pages/0305respaQ&A:
“11. Can brokers and agents accept from lenders and distribute to prospective buyers flyers containing financing information? For instance, at an open house, may a lender provide flyers that offer closing cost calculations for various down payment scenarios, to be distributed by brokers and agents?”
“Distribution of such flyers provided by lenders does not violate RESPA. The information gathered is consistent with the real estate agent’s responsibilities to his or her client to facilitate the sale of the property and no separate benefit flows to the agent from the lender. The agent may not, however, accept from lenders flyers which also promote the listed property, since that would result in the lender bearing a portion of the agent’s advertising expenses, which are the agent’s responsibility.”
Education and promotions
Is it legal for a settlement service provider, such as a title insurance company or a home inspection company, to sponsor continuing education (CE) for real estate agents?
It depends on whether some of the expenses an agent would otherwise bear are defrayed by the affiliate member. Sponsorship of CE may be a RESPA violation because members normally have to pay a fee to attend such programs. CE credits are necessary for agents to maintain their licenses, and agents normally have to pay for CE. A free class for CE credit offered to real estate agents by a settlement service provider may be seen as a thing of value in exchange for the referral of settlement service business.
RESPA does allow settlement service providers to conduct normal promotional and educational activities that are not conditioned upon the referral of settlement service business and do not involve the defraying of expenses otherwise incurred by persons in a position to refer settlement service business. Thus the title company may offer free education to the agents so long as it is not CE. This is based on the NAR FAQ at www.realtor.org/LetterLw.nsf/pages/0305respaQ&A.
May a mortgage company cater the food offered at a broker’s open house tour?
If the mortgage company came to the lunch and provided a short presentation regarding interest rates and loan programs, the payment would likely be permissible as an educational and promotional activity. Furthermore, if the mortgage company prominently displayed a sign indicating its sponsorship of the lunch and distributed brochures during the open house, the payment would likely be permissible. A rule of reason should be applied. If these activities or materials are present, a casual lunch of sandwiches for brokers could reasonably be a permissible marketing cost. See the NAR FAQ at www.realtor.org/LetterLw.nsf/pages/0305respaQ&A.
For further discussion of RESPA, see the November 2006 Legal Update, “RESPA and the Real Estate Broker,” at www.wra.org/LU0611.
Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.