Referral fees

When a licensee receives money back from referring the buyer to a landscaping company, does the referral fee need to be disclosed? 

According to Wis. Admin. Code § RL 24.05(3), a licensee acting as an agent in a transaction may not recommend or suggest that a party use the services of another individual or entity from which the licensee may receive compensation unless the licensee discloses the potential referral fee to the party before or at the time of the referral. In addition, Article 6 of the Code of Ethics provides, “REALTORS^® shall not accept any commission, rebate, or profit on expenditures made for their client, without the client’s knowledge and consent. When recommending real estate products or services (e.g., homeowner’s insurance, warranty programs, mortgage financing, title insurance, etc.), REALTORS^® shall disclose to the client or customer to whom the recommendation is made any financial benefits or fees, other than real estate referral fees, the REALTOR^® or REALTOR^®’s firm may receive as a direct result of such recommendation. (Amended 1/99)”

Builders

Can a real estate licensee refer consumer names to a local builder for a fee? Is the fee subject to a commission split with the broker? 

This will depend upon whether the referral is being made in conjunction with a transaction. If the consumer already has a lot and is just looking for a builder, there is no rule requiring agents to disclose compensation from the builder. It may still be recommended practice to make this disclosure in order to prevent the uncomfortable situation where the consumer later discovers from the builder that the agent was paid a fee.

If the agent is acting in a lot purchase transaction, the agent arguably will be compensated by a person other than the client and must accordingly obtain the written consent of all parties per Wis. Admin. Code § RL 24.05(1). § RL 24.05(3) and Article 6 of the Code of Ethics would also require disclosure when the referral was made that the agent may receive a referral fee.

A real estate licensee may enter into a referral agreement with a builder; it is prudent practice to have the terms and conditions of the agreement reduced to writing. Whether the fee must be paid to the broker or directly to the agent will also depend upon whether the payment is in connection with a real estate transaction. According to Wis. Stat. § 452.14(3)(f), a licensee may accept compensation only from his employing broker if the compensation relates to the licensee’s performance of any act in connection with a real estate transaction. If no transaction is involved and the referral is only for a building contract, the referral payment would not have to be paid through the broker. Licensees should review their independent contractor agreement and office policies for specific details.

Disclosure of interest

An agent, her husband and two other partners are all real estate licensees and they own a subdivision development company as members of a limited liability company (LLC). The LLC owns the subdivision the agent is listing. What disclosures are needed? 

When the agent sells the lots, the agent will be required to obtain the written consent of all parties to each transaction due to her ownership interest in the LLC. Both Wis. Admin. Code § RL 24.05(2) and Article 4 of the Code of Ethics require written evidence of the disclosure and consent of the parties.

Article 4 provides in relevant part that, “In selling property they own, or in which they have any interest, REALTORS^® shall reveal their ownership or interest in writing to the purchaser or the purchaser’s representative. (Amended 1/00)” Standard of Practice 4-1 indicates that these written disclosures should be made before the signing of any contract.

Similarly, § RL 24.05(2) requires that a licensee acting as an agent in a real estate transaction may not act in the transaction on behalf of any organization or business entity in which the licensee has an interest without the prior written consent of all parties to the transaction. This consent may be obtained in the offer to purchase.

Affiliated business relationships

An owner of a local real estate company now has an ownership interest in a title company. What disclosures are needed? Is it a violation of the Real Estate Settlement Procedures Act (RESPA) to refer a seller to the affiliated title company? 

The regulation of affiliated business relationships in real estate transactions is multidimensional in nature. In addition to Wisconsin license law and Code of Ethics requirements for the disclosure of referral fees and disclosure of interest, referrals between settlement service providers are also regulated by RESPA.

RESPA rules prohibit certain activities, including referrals, kickbacks and unearned fees that increase the cost of transactions to consumers. RESPA forbids paying someone for the mere referral of business. Under RESPA, no person may give or receive fees or kickbacks for referral of settlement services, or give or receive a split or percentage of settlement charges other than for services actually provided. RESPA violations may occur when a real estate broker or agent receives a thing of value for the referral of business to another settlement service provider. Settlement service providers include, but are not limited to, mortgage brokers, bankers, title companies, insurance agents, home warranty companies, and appraisers.

A referral to an affiliated settlement service provider is not considered an illegal kickback or unearned fee under RESPA if the following conditions are met:

1. The agent or other person making the referral has provided to each person receiving the referral a written disclosure, in the format of the Affiliated Business Arrangement (ABA) disclosure statement. The required content of the ABA disclosure statement is found as Appendix D on the Department of Housing and Urban Development (HUD) website at
www.hud.gov/offices/hsg/sfh/res/resappd.cfm.

2. The agent making the referral generally cannot require any person to use any particular provider of settlement services.

3. The only thing of value that is received from the arrangement is a return on an ownership interest or franchise relationship.

In recent months HUD enforcement has been on the rise and brokers with affiliated business relationships may be wise to have legal counsel review disclosure documents and company policies to ensure total RESPA compliance. Agents working with brokers with affiliated business must follow office policies and complete all forms provided by legal counsel to assure compliance. For more information regarding compliance, review “The Real Estate Settlement Procedures Act: Dos and Don’ts for Real Estate Brokers and Agents,” online at www.realtor.org/GAPublic.nsf/files/dos&donts.pdf/$FILE/dos&donts.pdf.

Test your RESPA awareness at www.news.wra.org/story.asp?a=221. More information regarding RESPA is available on the WRA website at www.wra.org, and HUD website at www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm.

Debbi Conrad is Director of Legal Affairs and Tracy Rucka is Staff Attorney for the WRA.