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Kickbacks and Referral Fees can be Ethical?

By
Real Estate Broker/Owner with Home Buyers Realty, LLC-Manchester, Bolton. Vernon,Ellington 0788174

The Real Estate Settlement Procedures Act (RESPA) and Code of Ethics imposed the prohibition of  receiving or payment of referral fees from individuals other than from Real Estate Brokers.  They are formulated and implemented because the need for them arise, presumably.

 

RESPA was enacted because Congress felt that consumers needed protection. It is illegal under RESPA for anyone to pay or receive a fee or kickback of anything of value because they agree to refer settlement service business to a particular person or organization. For example, your mortgage lender may not pay your real estate broker $250 for referring you to the lender.

 

It is also illegal for anyone to accept a fee or part of a fee for services if that person has not actually performed settlement services for the fee. For example, a lender may not add an amount to a third party’s fee, such as an appraisal fee, and then keep the difference.

 

Co-branding is also illegal if only one entity pays for the advertisement. It is considered as receiving something of value in exchange for a business referral. To make the co-branding legal, both parties should pay the advertisement proportionate to the cost of the size of the advertisement.

 

The question is what makes these referral fees, kickbacks and co-branding illegal when technically both parties are exchanging something of value for their mutual benefit. We don’t create laws and a Code of Ethics as mere exercises in futility. Certainly, professionals' conduct of business has been abusive that some consumers have become the unsuspecting victims of the professionals malpractice.

 

In 1974, Congress enacted RESPA primarily to address abusive practices, promote greater understanding by home buyers and prohibit practices such as kickbacks or referral fees that result in higher costs.

 

RESPA was created in the first place partly because various types of entities involved in the purchase and sale of real estate such as realtors, lenders, construction companies, and title insurance companies were often engaged in providing undisclosed kickbacks to each other, thereby inflating the costs of real estate transactions. What is drafted in RESPA is mirrored in the Code of Ethics for Realtors.

 

Based on the logic behind the enactment of RESPA, the inflated costs incurred by the consumers seem to be the only concern the rule or law is attempting to address. If the costs of referrals incurred by the realtors and by the mortgage brokers are not passed on to the consumer, doesn’t this enactment become inutile?

 

Now, if I am a non-realtor and I am given a choice to refer clients to two equally competent realtors in almost every aspect except that the other one is giving something in consideration, whom do you think I would choose?

 

The proponents of RESPA surmised that the referral fees, kickbacks and paid co-branding distort the client-professional relationship: that the gifts and pecuniary consideration given to referring individuals provides an unlevel playing field for other professionals. This part is a purported argument. Most professionals like realtors and mortgage brokers thrive on word of mouth. This is the most effective and cheapest way of increasing business.

 

RESPA has been criticized for failing to prevent what it was meant to prevent. Lenders and other service providers in the real estate industry, for instance, still see customers go with the service providers associated with a lender or realtor, although there is an explicit language on the documents the buyer signs that he can choose any service provider he wants.

 

Realistically, if I am referring an acquaintance, friend and family to a professional, if something goes wrong, I will feel fully responsible.

 

Equality here is paving the level playing field for all the professionals in the real estate. All professionals are at liberty to practice and compete without impinging on others' rights to choose or inflicting harm directly. This is not an unfair or unethical practice unless the referral fees translate into additional costs to the consumers on top of the standard, competitive and uniform costs. This is economic liberty.

 

Receipt of something of value in exchange for something else is utilizing the concept of efficiency. According to James O’ Toole, a corporatist who believes in economic growth, "A simple act of exchange of value makes an (sic) economic sense to both parties."

 

Corporatist values are efficiency, productivity, competitiveness, high standard of living and economic growth, (O’Toole, 1995). Corporatist shares the belief of the libertarian that  the market should be left alone where it works well.

 

Communitarians have meant two things when they say community: First, the Jeffersonian face-to-face community of neighbors; Second, the broader world; community and the human family. For communitarians, the key issue is to distinguish what is rightly mine and what is rightly yours. Communitarians believe that a design or work should be intrinsically rewarding for all those who do it, (O’Toole, 1995).

 

The most appropriate prescriptive policy as an amendment to the RESPA law and the Realtor's Code of Ethics is to legalize referrals, kickbacks and co-branding as long as the costs of the gifts and fees are not passed on to the consumers. The standards of professional practice should suffice to serve as guidelines for the conduct of services to the public.

 

In the real world, there are so many loopholes and grey areas to circumvent the referrals, kickbacks and sponsored co-branding. We should eliminate this prohibition with a caveat: a provision discouraging a practice that would inflict pecuniary harm or infringe the rights of the consumer.

 

Do I see EYEBROWS raising? I welcome your comments. Speak your minds!

 

Posted by

        Maria Gilda Racelis 

      "I Always Strive to Make a Difference."

         Serving Hartford, Tolland and Middlesex Counties

Phone: 860-995-9473

Email: mariagracelis@gmail.com

mariaracelis.com

 

 

 

 

 

 

Comments(42)

Larry Hodel
First Team SnS Real Estate - Chino Hills, CA

Maria,

It also seems like those escrow companies who will negotiate short sales for free if you go with them for the escrow are violating RESPA also?

Dec 07, 2011 05:26 AM
Jennifer Chiongbian
Specializing in all types of Manhattan apts & townhouses - Manhattan, NY
Real Estate Broker - NYC

Great post.  I am wondering how they will deal with these "rebates".  To me it is just a play on semantics and really just a kickback in the end.

Dec 07, 2011 06:07 AM
Kimo Jarrett
Cyber Properties - Huntington Beach, CA
Pro Lifestyle Solutions

Interesting analysis and comments too. Coming back for a closer look.

Dec 07, 2011 06:14 AM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

Maria:  To attempt to "legalize" kickbacks and so-called referral fees in the cases you state... as long as they are NOT passed on to the consumer... is just plain silly.  It's also impossible.

A referral fee is a "cost."  It is not free.  It is not a smile, or a handshake.  And... if it is a "cost..." someone must be paying that fee, or incurring that expense.  Obviously, if that expense were not paid to the referror... it could benefit the consumer by being reflected in a lower cost to them for whatever the service was.

No referrals.  Just the good will of knowing that your service was considered so valuable that someone recommended you... and knowing that that kindness may be reciprocated in the future... if the quality of the service deserves it.  Period.

Dec 07, 2011 06:24 AM
Erick Blackwelder
Cell: 703-677-1120 - Woodbridge, VA
Text or call Erick now at 703-677-1120.

Back in the early 1990's, I was co-owner of a real estate office,

We three owners set up a title company IN OUR WIVES NAMES and contracted with a title attorney who payed us 30% of the title insurance profit, and a transaction fee.

Our lawyers said we did not have to disclose ownership because we three partners were not involved with the title company.

The fees the title company earned paid our medical insurance for our families.

Was it a gray area?  You bet.

I sold my portion of the company to my partners and my wife sold her portion of the title company.

Since then, we have not engaged in such activities.

All we collect now are a transaction fee, and spiffs from home warranty companies.

Dec 07, 2011 06:25 AM
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

RESPA is just another one of those laws that interferes with commerce as a whole.  Any other industry can have undisclosed kickbacks and Congress does not care - car industry, banking industry, Wall Street, retail industry.  But for some reason they do care about real estate.  Because of RESPA it is almost impossible for a consumer to do one-stop-shopping.  They can't simply call up a lender or a Realtor and get a specific quote for fees because RESPA prohibits the combining of services.  Just look at the new HUD settlement statement from 2010 - an additional page of numbers.  The consumers could barely understand the 2 page form and now there are 3 pages.

Dec 07, 2011 06:36 AM
Ric Mills
Keller Williams Southern Az - Tucson, AZ
Integrity, Honesty, and Vast Real Estate Knowledge

Play by the rules or get burned.  It is not worth the risk to go against RESPA.  I am sure there are people that will, but for a few hundred or even thousands is it worth the risk.  I think not!!!!!!!!!!!!!

Dec 07, 2011 06:41 AM
Theresa Bonin
RE/MAX Valley Properties - Green Valley, AZ

As a 'newbie' to the real estate world this was very helpful - thansk!

Dec 07, 2011 06:58 AM
Allan VanInwegen
Your Castle Real Estate Services - Littleton, CO

Boy oh boy!

This topic always gets me stirred up at the amount of ignorance and fear it seems to expose and create.

First of all, Lloyd, #11, is correct. I quote him: "RESPA only applies to transactions where a federally-related loan is involved. If you think kick-backs are acceptable you should only do "owner-carry" transactions and assumptions. Kick backs are not illegal on these."

Second of all, "referral fees or gifts" are limited to a nominal amount not to exceed $25.00.  (At least in my state.)The RESPA law/rule is designed to prohibit steering anybody towards Service Providers who while not "party to the contract," ARE party to the transaction!  This means Lenders, Title Reps, Inspectors, Appraisers, Lawyers, Repair vendors, and anyone else that stands to financially gain for doing work related to the contract's successful closing, under State or Federal laws which acknowledge these 3rd parties as always or even sometimes required, to consummate the transaction.  That means you too on the giving or receiving end.

Now here's the part most people don't get.  If my neighbor, "Jack Doe," comes to me and says, "John Smith," a buddy of mine at work, is looking to sell his home.  I gave him your card and spoke highly of you.", of course I am grateful.  Now keep in mind, "Jack Doe" is NOT providing a service related to the transaction and is NOT a party to the transaction.  He has simply provided a testimonial to a friend whom I may or may not ever work with.

Thus, if and when the transaction closes, and I want give "Jack" a $200 gift card to the best steakhouse in the state, or buy him a $2,000 stainless steel appliance suite for his kitchen, or payoff his $200,000 mortgage, all because I am grateful that he thought of me when the topic of real estate was discussed between 2 friends, I may do so and it's none of anybody's business INCLUDING THE FEDERAL GOVERNMENT!  Last time I checked, we are still Americans, free to give or receive favors in the name of gratitude as long as the person receiving the "gift" is not a party to the contract or a service provider related to the Offer To buy Contract, Listing Contract, Inspection Notice, Closing Instructions, Loan Documents, or any other attached addendum to the contract.  Well almost.  "Jack" MAY have to declare the gift and pay a gift tax depending on the value of the gift received.  And you may or may not have to declare the gift as business expense and 1099 "Jack."  I am not a CPA and won't kick that can down the road any further.

When it comes to these types of referrals from friends or even past clients that are now your friends, keep in mind that the Buyer or Seller, (That RESPA is trying to protect,) is free to choose any Real Estate Practitioner and ANY Lender or Service Provider as long as they have multiple choices and are not coerced or "steered"by any party connected to the transaction.  Recommending a couple of good Home Inspectors in your opinion, with the caveat that the phone book and web have plenty of good Home Inspectors worth Investigating, is not considered steering.  However, just to be safe, I would not give or receive a penny from any Service Provider That you might suggest, including a lunch at Mcdonald's off the Value Menu. 

I have reviewed this with both HUD and our last State Real Estate Commissioner approximately 4 years ago and both agreed with the distinction.  Finally, these rules apply to you the Realtor, whether you give or receive, such a referral Gift-(Read kickback.)  If the party giving or receiving something greater than nominal value, is any way, connected to the transaction, formally or informally, you better think twice about giving or receiving anything that could be construed as a kickback.  A personal friend or acquiantance, simply giving you the name of a potential client and doing nothing else, does NOT meet the definition for RESPA enforcement.

Dec 07, 2011 07:34 AM
Maria Gilda Racelis
Home Buyers Realty, LLC-Manchester, Bolton. Vernon,Ellington - Manchester, CT
Home Ownership is w/in Reach. We Make it Happen!

It is raining brains in here and they are all good.  Please do not hold back your thoughts. This blog contains no serious intent to insult the promulgator nor to ferment moral ambiguity. It is more of a juxtaposition of neither black nor white. Cheers.

And as a rejoinder to the comments in reference to what RESPA encompasses:

RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.

Hence, RESPA covers all and not only limited to federal or federally- related one- to four-family residential loans.

Please correct me if I am wrong. Thanks

 

Dec 07, 2011 08:33 AM
Patricia Beck
RE/MAX Properties, Inc., ABR, GRI, SRES - Colorado Springs, CO
Colorado Springs Realty

 

Interesting comments and thought provoking post.  Protecting the consumer is key here and and maybe RESPA has become so extreme since many people in the past took it to the other extreme and abused it.  Comment #18 has a point, many other businesses pay referrals.

 

Dec 07, 2011 11:43 AM
Jirius Isaac
Isaac Real Estate &TriStar Mortgage - Kenmore, WA
Real Estate & loans in Kenmore, WA

I agree with you compaletely & love Allans response #32.  These lawlls are confusing & we could use more clairification.  Not too many people think is was not ok for the title company to do reserach for us, or bring some goodies to an open house.  There were some going overboard, & that was the problem.  I always send friends & clients a gift for a referral.

Dec 07, 2011 04:02 PM
Jairo Arreola #SOLDBYVETERAN
PRG Real Estate - San Jose, CA
VA Home Loan Specialist - SF Bay Area

Great Blog! The comments were great also =)

Dec 07, 2011 05:39 PM
Sylvie Stuart
Realty One Group Mountain Desert 928-600-2765 - Flagstaff, AZ
Home Buying, Home Selling and Investment - Flagsta

Better safe than sorry. It could be done differently like you said at the end, just leaving out the consumer side, but I'm staying safe in the meantime until the law changes.

Dec 08, 2011 12:21 AM
Martin E. Kalisker, Esq.
Natick, MA
Real Estate Law From A Practical Perspective

RESPA relates to the parties in the transaction that could have benefited through their provision of services to the customer.  Referral fees to non-affiliated parties, such as a neighbor, would be governed by the rules and regulations of the state real estate commission (which probably restrict payment of referral fees to licensed real estate agents only).  When in doubt, let the closing attorney figure it out.  If it shows up on the HUD, then it's probably not a violation of RESPA.

Dec 08, 2011 03:56 AM
Jayson Holland
Listings.com - Denver, CO
Jay Holland

Allan, #32 ~ I agree with your completely...great comment.  I realize more and more as the years go by that the bar is set so low in our industry you can barely trip over it. Some people just dont understand the most fundamental concepts. Be careful deducting your $200 gift card to Jack as a business expense though.....(not a CPA ~ so not going down that road either).  What about giving a client a "rebate"? (and deducting it) Lets talk about that topic. Someone please! :-)

 

 

Dec 08, 2011 04:56 AM
janine nielsen
Re/Max Advantage - Redlands, CA
Homes For Heroes Realtor

I love my pool of lenders and service providers because of their superior serviec, timely closings, transparancy, and communication. No kickback needed if the transaction closes successfully.

Dec 10, 2011 12:56 PM
Debbie Knowles
The Boulevard Company - Mount Pleasant, SC
GRI - Relocation Specialist - Buyers and Sellers

Okay okay... I have been trying to find out the answer to this question.

 

Can a Real Estate Agent give their client buyer or client seller a gift after closing.  I heard it was against RESPA to buy gifts for your clients after closing.

 

WHY??

 

I don't see any reason why I can not buy a gift for someone because I simply want to buy them a gift to enjoy their house.

 

Anyone know the real answer to this puzzling question??

 

Thank you

Debbier

Nov 02, 2012 10:24 AM
Allison Bernard
Keller Williams Central Rhode Island - East Greenwich, RI
Real Estate & Relocation Services 401-533-6916

Commenting so many years later on this post: Title Company Sponsoring Food/Drink at Open Houses is interesting.

This is common in Rhode Island for one title company and brokerage.

Aug 25, 2013 08:40 AM
Walid Muhammad REALTOR
ProStead Realty - Charlotte, NC
REALTOR Broker GRI SFR

Kickbacks and Referral Fees cannot be Ethical and the assertion flies in the face of hundreds of thousands of man hours in police and federal agent work, court cases and testimony, legal precedent and an injured public, not to mention common sense.

 

I doubt most can even afford the cost involved if such a thing were legal since deep pockets would most certainly rule the day.

Jan 09, 2014 06:13 AM