Eric Reeber provided an excellent topic in his recent Real Estate Blog - Mortgage Companies partnering up with Realtors... Legally? Or not? (Part 1) that produced a number of interesting comments.  One the comments debated, Realtor Loan Origination/Referral Compensation, requires further examination. 

There is a recent trend for Agents to seek and/or Mortgage professionals to offer compensation for "referrals" that falls within an exception of RESPA.  While the practice is not new the realities of a slowing real estate market have driven some participants to seek alternative revenue sources.  The guidelines surrounding the legality of the arrangement are fraught with uncertainty and remain a slippery slope. 

There is one basic way for Agents to be paid for their referrals that do not violate RESPA requirements.  The exception is payment for services actually rendered - originating the loan.  Let's examine this exception in greater detail.

In order to meet the services rendered test the Agent must take the loan application and perform five of the thirteen necessary mortgage origination functions.  Jonathan Goodman and David Farus, Colorado Real Estate attorneys, offer the guidance in their article RESPA Exception: Payment for Services Actually Rendered with the following.

"HUD has provided some guidance as to when it believes compensable services have been performed. In its Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, 64 F.R. 10080 (1999), HUD referenced its prior itemization of the following non-exhaustive list of services normally performed in the origination of a loan:

(a)  Taking information from the borrower and filling out the application;

(b)  Analyzing the prospective borrower's income and debts and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;

(c)  Educating the prospective borrower in the home buying and financing process, advising the borrower bout the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;

(d)  Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;

(e)  Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);

(f)  Initiating/ordering request for mortgage and other loan verifications;

(g)  Initiating/ordering appraisals;

(h)  Initiating/ordering inspections or engineering reports;

(i)  Providing disclosures (truth in lending, good faith estimate, others) to the borrower;

(j)  Assisting the borrower in understanding and clearing credit problems;

(k)  Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed;

(l)  Ordering legal documents;

(m)  Determining whether the property was located in a flood zone or ordering such service; and

(n)  Participating in the loan closing.

Statement of Policy 1999-1 went on to express HUD's opinion that compensable services would be performed if it were found that: (1) the lender's agent or contractor (the real estate broker in this context) took the application information (under item (a) above) and performed at least five additional items on the preceding list; and (2) the payment was not a fee given for steering a customer to a particular lender disguised as compensation for purported "counseling type" services (taking the application plus performing only the additional services identified in (b), (c), (d), (j) and (k) above).

    In addition, the regulations also provide:

When a person in a position to refer settlement service business, such as . . . [a] real estate broker or agent . . . receives a payment for providing additional settlement services as part of a real estate transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person. . . .

Even if compensable loan origination services have been actually performed by the real estate broker, however, that fact does not, by itself, make the contemplated payment legal. If the payment bears no reasonable relationship to the market value of the services provided, then the excess is not considered to be for services actually performed."

So it appears that even if the services are actually rendered by the Agent compensation still may not be warranted under HUD's interpretation of RESPA.

In order to better understand the RESPA exceptions and provide its members with guidance the NAR commissioned the opinion of RESPA expert, Philip Shulman, a Washington, D.C. attorney.  He provides his opinion on these actions and HUD's interpretation in laymen's terms with INTERNET-BASED LOAN ORIGINATION PROGRAMS OFFER REAL ESTATE AGENTS OPPORTUNITIES AND PITFALLS .... BEWARE OF RESPA.  Shulman also contends that even if the services are rendered by the Agent one of the challenges would be whether the Agent could be considered an employee of the Lender.  Specifically he states           

"The Internal Revenue Service sets strict standards for employment. Although HUD has never published criteria, it's likely the IRS rules would prevail. That means in order to be considered an employee, rather than an independent contractor, the agent/loan officer must: (1) be under the supervision and control of a lender's office; (2) use the lender's equipment; (3) have set hours; (4) receive a W-2 form; (5) receive standard employee benefits; and (6) have the lender be liable for the employee's conduct. That means that a real estate agent that becomes a "loan officer" only after selling a property, is unlikely to be considered a true employee, and therefore, would not be covered by the RESPA exemption."

In addition to meeting the employment and performance requirements illustrated by the preceding interpretations Agents will have to comply with Individual mortgage lending licensure.  The licensing and continuing education prerequisites vary by jurisdiction.

The exception does not allow government based mortgage programs such as FHA and VA.  Thus the client/borrower will be limited in the programs that will be offered by the Agent/Loan Officer.

Finally, there is the matter of disclosure to the client/borrower which must demonstrate there is no conflict of interest.  This will be difficult given the limit on programs available.
 
It's just my opinion but Agents list/sell and originators lend...comments welcome.