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Buyer rebates, on the HUD? It's clear as mud!

I wrote a post back in November related to buyer rebates. My question then and now is the same. "Are Buyer rebates, not disclosed on the HUD, legal?" Anyway, over the last few days my previous post has come back to life. We have been having a pretty good debate but still I have not been able to get my head around my initial question, "Are Buyer rebates, not disclosed on the HUD, legal?"

Now, during my research, on this question, I can't seem to get a definitive answer. State laws vary. Alabama, for example, explicitly prohibits "rebates" after a closing. Florida, allows rebates to a party of the contract as long as they are disclosed (not approved) to all interested parties to the transaction. What if I disclose it to the Lender and they so no? Can I still rebate since Florida law states I just have to disclose it? Or am I now breaking FED laws related to mortgage fraud?

In March of 2005, the Kentucky Real Estate Commission was sued by the US Department of Justice for not allowing rebates and lost. But it still doesn't answer the question, "Are Buyer rebates, not disclosed on the HUD, legal?"

The same thing happened in South Dakota in August of 2005.

According to Money magazine, in 2005 rebates were prohibited in the following Sates: Alaska, New Jersey, Kansas, Oklahoma, Rhode Island, Louisiana, South Carolina, Missouri, West Virginia and Mississippi. They also reported that in Alabama, Oregon, Tennessee and South Dakota rebates were limited to closing credits.

So, I'm still confused.

On the 1003 Universal Residential Loan Application: Paragraph VII Details of Transaction, Line L ask about "other credits". Shouldn't a rebate be considered an "other credit"?

My conclusion is...I don't know. If I were in the business of giving buyer rebates I would be real sure to check out my State's laws. I would be real sure that the rebate was disclosed to all interested parties of the transaction i.e buyer, seller, lender and the insurer (VA,FHA). And the best way to protect my license, in my opinion, is to only give rebates that are on the HUD 1. I may be confused about conflicting State laws and unclear FED laws but I do know, that if it is on the HUD and is legal in my State, then I will be able to enjoy my broker‘s license for many years to come. What say you?

By the way, did you know the DOJ has a website named "Competition in the Real Estate Market Place"?

Here are some links to additional information on this topic.

http://ezinearticles.com/?How-Home-Buyer-Rebates-Work&id=61149

http://www.realestatejournal.com/buysell/agentsandbrokers/20050819-wsj.html

http://www.realtor.org/rmomag.nsf/pages/lawjan06

http://www.americanhomeowners.org/AHGA/DoJ-FTC10-25-05.htm

http://arec.state.al.us/%5Cbrieflylegal.asp

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 03/04/2007 06:45 PM

Comments (79)

buyer rebates, hud1, opinion

79 Comments on Buyer rebates, on the HUD? It's clear as mud!

MAR

2007

Reserved Parking For "The Lovely Wife"...TLW...ROAR!

Hubba! Bubba! Wink. Wink.

Darlin' I hope you do not mind, but I just don't feel like playing in the Mortgage Mud this evening.

I don't want to get my Lovely feet dirty :-)

I am just going to sit back read the comments and be the good little Broker's wife that i am. SVW....

I would say in my state I would disclose it to all parties and they would have to agree. It also belongs on the HUD-1.

Regardless of state laws: If a rebate isn't seen by a lender then you could be dancing into RESPA territory.

That is what I understand :)

Bryant - I truly thought rebates where under "other credits" category but now you have definitely created some doubt in my mind - I hope some of your readers can enlighten me as well.

MAR

2007

It has always been on the HUD-1 statements here. I am not sure if it is required by law.

Bryant,

Man you were right, talk about a post coming back to life! I had originally checked the notify me of comments box and this post kept filling up my InBox! Given my recent circumstances I have not had the opportunity to read all the comments in detail however I will state that from what I had read that your message was clear and consistent to me! I'm sure that there was a little frustration on your part that some may have beening reading more into it than what was there.

Great post, great job with the follow-on. I will try to find the time to go back and read it in more detail and well as follow the progression of this follow-on post.

"What if I disclose it to the Lender and they so no? Can I still rebate since Florida law states I just have to disclose it? Or am I now breaking FED laws related to mortgage fraud?"

Before closing, send a certified letter to the lender stating:

Per a prearranged agreement with the the buyer, it is the buyer agent's intention to rebate $XXXXX.XX to the buyer after closing. This is deemed a reduction of transaction costs related to the purchase of real estate. This is not a violation of RESPA and it is protected by the USDOJ. Please consult the appropriate agencies regarding any concerns on the matter. Therefore, if the lender funds this loan, then it does so knowing full well that the rebate to the buyer will transpire.

Regards, Rebate Company.

This puts the ball in their court. Agents don't have control of the HUD statement, the lender's attorney does.

On the 1003 Universal Residential Loan Application: Paragraph VII Details of Transaction, Line L ask about "other credits". Shouldn't a rebate be considered an "other credit"?

If it is use against settlement charges, then it is a "credit". If not, then it is a rebate outside of closing.

Search Legal Hotline Results

Topic: Compensation/Commission

Question:
A buyer agent has agreed to rebate a certain part of her co-op fee to the buyer. Must she disclose this to the seller?
Answer:
No. This is your fee arrangement with your client, and it is confidential to your client.

http://www.varealtor.org/memberservices/questions_results_view.asp?questionid=94

Information, If they did that in Florida it would be grounds to lose you RE license. As Florida law states in MUST be disclosed. All states have different laws.

Rebate Co, That's an excellent way to handle it. Now if the lender fires back explicitly prohibiting it, do you rabte anyway after closing? This is the part I'm struggling with.

Here are some "Cash Back Bonus" Specific Affiliation Companies I dealt with about 4 years ago:

AAA, AFBA, American Airlines, BJ's Wholesale Club, Cendant Reap, Club Mom, Complete Home, Credit Unions, Farmer's Insurance, Friends & Family, Leading Edge, Mellon Bank, Merryll Lynch, NCOA & TROA & AMEX, NRA, NBA, Navy Fed. Credit Union, Quixtar, Sears, USAA Movers Advantage, Ratheon, Phillips and the list goes on and on.....

As a member of any of these groups, going through the affinity Services of Cendant Mortgage, a member will receive a Cash back after closing, the amount which is dependent on the size of their loan. In order to receive the rebate, the buyer has to work with a designated RE agent who pays a referral to the Relo Company.

Broker Bryant, here you go again with a subject that could be controversial!

Here in Texas rebates are allowed. They can be either at closing or after. I've found that adding it to the HUD on a resale is harder to do than on a new home and that the title company's actually would prefer not to include them. So on resales I usually do it after closing to be paid to the buyer after funding. We have a Buyers Rebate Disclosure form we use. This form is signed by both the brokerage or representative and the buyer. The buyer has to include their Social Security number if it is over $600.00 a 1099 is sent at the end of the year to the buyer.

------------------------------------------------------------------------------------------------------------------

AVALAR Real Estate Associates

BUYER REBATE DISCLOSURE

When I purchase a home using AVALAR Real Estate Associates to represent me as a Buyer, AVALAR Real Estate Associates may be able to provide me a rebate at the time of closing. I understand and accept that this rebate is subject to certain limitations/restrictions including, but not limited to:

Restrictions:

•1. AVALAR Real Estate Associates complies with state law, which may prohibit or limit the availability to give a rebate in a real estate transaction. Because of changes in state law, the ability to give the rebate is also subject to change;

•2. AVALAR Real Estate Associates shall offer a ________% or $ __________ rebate when AVALAR Real Estate Associates acts as an agent for the buyer, or in a intermediary capacity, and is paid a commission of at least 3.0% for such buyer representation by the seller, and cannot promise an exact rebate amount. AVALAR Real Estate Associates rebate structure is subject to change and shall be determined by the specific sale price, and commission offered and applicable by law;

•3. Buyer must sign a buyer representation agreement with AVALAR Real Estate Associates.

•4. Rebate is to be paid as follows and in this order:

•a. A check/credit at closing in the amount of the rebate in 2 above with the approval of the lender and title company or

•b. Paid as a credit towards buyers closing costs, pre-paids and or points by reducing the commission received by AVALAR Real Estate Associates in the amount of the rebate in 2 above or

•c. AVALAR Real Estate Associates will provide a check upon receipt of funds from closing in the amount of the rebate in 2 above.

•5. If buyer receives cash back (rebate) for over $600. than AVALAR Real Estate Associates will send you a 1099 form, and you will be responsible for reporting this on your income tax.

•6. This offer cannot be combined with any other offer by AVALAR Real Estate Associates.

______________________________	____________	____________________________________
Buyer	Date	Social Security #

______________________________	____________	____________________________________
Buyer	Date	Agent Avalar Real Estate Associates Date

Why would they send you a 1099? CPAs told me that you send 1099s to contractors who provide a service not a costumer that is getting a rebate on a purchase.

Here is one way to solve this disclosing to all parties issue. Change your company's name to I GIVE BIG REBATES TO BUYERS.COM realty and publish your rebate schedule on your website for the world to view. This way your rebate will be disclosed on the contract and the HUD-1 even if builder or lender will not allow the rebate to go as a closing cost credit. For a resale, this could make the listing agent very nervous because the seller would want to know why they are not getting a rebate on their purchase because the seller normally uses the listing agent as their buyer's agent on the house trade.

If the broker instructs settlement attorney to disclose rebate on the HUD-1, and a builder or lender removes this disclosure, the builder or lender is at fault (if anyone). Just document the fact that you attempted to disclose and that the settlement attorney would not follow your instructions. Irregardless, rebates only have to be disclosed on the HUD-1 if they are a "source of funds" for closing costs or down payment, if rebate payment is made post closing, it is not deemed a source of funds for closing.

There is a lot of confusion over the word rebate. RESPA does not cover rebates to buyers only rebates amongst service providers which inflates the cost of housing to the consumer. RESPA was created to reduce transaction costs to purchasers so rebates from service providers and brokers are good for the consumer and are not covered by RESPA. In fact, if a service provider; such as, a broker is overpaid, the broker would have to send a rebate check to buyer after settlement or the broker could be in violation of Sec.8 of RESPA for keeping "unearned fees". SEE Sec. 8 of RESPA for criminal and civil penalties for keeping unearned fees.

That is a good question. I am not a CPA but it is my understanding that unless the rebate is on the HUD as a closing cost credit it would be considered income. Especially if the check is coming directly from the RE company. Maybe will get a response from someone that has a definitive answer.

How in the world would it be income? You are NOT paying the buyer, just merely refunding some of the settlement fees.

All the professionals in the transaction are being paid. The buyer is the only one doing the paying. period.

"Rebate Co, That's an excellent way to handle it. Now if the lender fires back explicitly prohibiting it, do you rabte anyway after closing? This is the part I'm struggling with."

Given that scenario, the ball is in their court. It's their choice. The lender can walk away or fund the loan knowing full well that a rebate to the buyer is going to happen.

It could be income because you can not get cash back on a purchase as tax free money. The commission is taxable. If the RE Co. is rebating after the closing who pays the tax? Tax would be owed on the FULL commission unless they 1099 the buyer. The RE CO could write the rebate off as a biz expense only if it is 1099. Look at the rebate agreement that was posted in an earlier comment. Anything over $600 they 1099. Remember we are talking after closing rebates not closing concessions.

You are returning the buyer his own money.

The only money that belongs to the buyer is the earnest money he places down. Yes, he can request that back because it belongs to him. But the Rebate is over and above that.

I have checked with several CPAs and they say that the consumer rebate on a purchase are not taxed as income whether it is a closing cost credit on the HUD-1 or check after settlement. The rebate will impact the adjusted cost basis on the sale of the house. Check with your CPA.

If you disclose rebate to lender, if lender does not like, they can always condition a price reduction, the ball is in their court.

The best thing would definitely be for the buyer to consult his CPA. However as the owner of a RE CO. if I gave a rebate after closing from my biz checking account(which is where it would come from) I would with out a doubt 1099 the buyer. Why should I have to pay tax on his rebate? So whether he pays taxes or not would be between him and the IRS.

Bryant...I read and comment late at night/early morning. Once again, you have got me thinking. THIS one is the kind of post that will be on my mind until dawn. Maybe I will wake up with a worthy comment. In the meantime, I think I'll put this to the team at our staff meeting tomorrow. What a great topic for discussion (as usual)...THX

MAR

2007

What in interesting discussion. The person with the strongest opinion is posting anonymously. Why?

I was wondering the same thing Randy.

janeAnne, Thanks for dropping by. The link to the first post I wrote on this back in November is really worth visiting. It's a more thorough outline of my concerns and has 100 comments on it. It had recently been getting a lot of acticity so I posted this one to try to get some additional opinions.

I'm not sure who anonymous is. Not a member, I assume. He has also left some pretty good comments on my prior post. All are welcome on my blog.

PREVIOUS POST WITH FURTHER DISCUSSION. http://activerain.com/blogsview/20200/Buyer-rebates-Good-business

If lender objects, can the lender and get a new one.

MANY LENDERS WILL ONLY ALLOW CREDITS UP TO CLOSING COSTS SO EVEN IF BUYER IS PUTTING DOWN A LARGE DOWN PAYMENT, SAY 50%, THE LENDER STILL WILL NOT ALLOW ON THE HUD-1 SETTLEMENT STATEMENT SO ONLY OPTION IS TO SEND REBATE CHECK AFTER SETTLEMENT. IN FACT, AFTER BORROWER INFORMS LOAN OFFICER AT LOAN APPLICATION THAT BROKER IS GIVING A BROKER REBATE, LOAN OFFICER WILL SAY TO TAKE CARE OF IT AFTER SETTLEMENT.

Anon, I understand your point BUT if you were licensed in Alabama and rebated after the closing, you would be breaking the laws of that State. So it really depends on where you are working. That's where the problem comes in, laws vary from state to state.

That is a good idea, tell your buyer to put "Buyer broker rebate" on 1003 Universal Residential Loan Application: Paragraph VII Details of Transaction, Line L "other credits". In fact, put these instructions into your signed buyer agreement with your buyer.

So in reality, if there is any mortgage fraud (which I don't think there is), the loan officer is the one committing it. The lenders should train their representaives better.

If the lending industry is concerned about broker rebates or other gifts to the buyers after closing, then there should be an appropriate question in the loan app. A rebate after closing is not a credit, it is a refund. Fact is, I think you guys are making something out of nothing. This is a smear campaign instigated by traditional Realtors to muddy the waters. Is Blanche Evans behind this? She has much disdain toward the FTC for going after the real estate industry.

Rebates are also illegal in New Jersey but they have not been enforcing the rebate ban since USA vs Kentucky overturned the rebate ban. Can these states enforce a state law that counters antitrust regulations?

Rebates are only illegal in these states where the real estate commission (comprising real estate brokers) have deemed that the broker's fees and commissions remained fixed on the buyer's side (violation of Sherman Act) or the real estate lobby has lobbied the state legislature and governor to keep commissions fixed which is counter to free trade and artificially inflates to the costs to the consumer.

The FTC trumps everything.

So what you are saying is that if I practiced in Alabama, I should ignore the law and rebate anyway? Since the chance of me getting caught or the chance of the law even standing up in a court of law are slim, just do it? If I practiced in Alabama I would simply negotiate a reduction in price to my buyer to cover the amount of the rebate. It's simple and it's legal.

Inest, a Lending Tree company, website indicates that they send rebate checks two weeks after settlement with $34 million dollars in rebates on new home purchases over 10 years including Florida. They have been doing this for many years so I guess you think they have been doing something wrong?

It is funny how real estate brokers fight and oppose new business models. RE-Max, for example, was strongly opposed by the industry in the 1970's. Now that they are the "establishment" they oppose the rebate model, pretty hypocritical. They are still involved with antitrust litigation over their original model in Cleveland.

RE/MAX International, Inc. reported today that it has filed a law suit against Smythe, Cramer Co. in United States District Court in Cleveland, Ohio. The suit charges Smythe, Cramer with breaching a settlement agreement reached in September 2000 which had brought to a conclusion federal antitrust litigation in which Smythe, Cramer was accused of participating in an unlawful conspiracy against RE/MAX and its franchisees in northeast Ohio.

Great point about RE/MAX.

IMO, the FTC would quickly come to the defense of any agent giving rebates. It's good to have that resource on your side. :)

MAR

2007

If the rebate is up to 3%, I don't think any red flags will be raised. However, anything more than that, should make everyones ears perk up, especially RE agents who should know the value of homes they are selling.

If there was a large rebate, it would make me take a look at the value of the property and the possibility of fraud.

Bernie,

You sir are a voice of reason amid a sea of gibberish. Thank You for your rational posts.

Kentucky Real Estate Commission: "Licensees may now offer inducements and rebates as long as such inducements and rebates are disclosed in writing. You can reference the Commission's emergency regulations with regard to inducements and rebates under the Real Estate Licensing Laws of Kentucky section below."

There is no mention of disclosure to the seller or lender.

Sample Inducement/Rebate Form

From HUD website:

17. Can a lender give a borrower an incentive, such as a chance to win a trip or a rebate, for doing business with the lender?

RESPA does not prohibit a lender or other settlement provider from giving the borrower an incentive for doing business with it as long as the incentive is not based on the borrower referring business to the lender.

HUD

MAR

2007

Bryant,

You wrote: "I have some office time today and will see if can bring some fraud experts into this discussion. Maybe they can help us all get a complete understanding of this very important issue."

What did the fraud experts say?

Nick, I didn't have any success with getting others involved. I sent out a few e-mails but didn't get any responses related to "buyer rebates"

Welcome to the club. IMO, everyone is like a deer in headlights when speaking of commission rebates to the buyer. I believe that once the FTC resolves all the anti-rebate issues with the remaining States, then a clear protocol will come about. Until then, it's as clear as mud. :)

Nick, I will look forward to the day when all states are consistent in their laws.

MAR

2007

It amazes me that even some real estate attorneys think a rebate of commission to a principle is fraud - on or off the HUD.

There reason you are getting conflicting responses from attroneys is because in some states rebates ARE illegal. That's the problem with this isue. There is no one size fits all answer. There should be but there's not.

MAR

2007

The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.

http://www.hud.gov/offices/hsg/sfh/res/respamor.cfm

MAR

2007

Q: 22. Can a listing agent or buyer's agent give a commission rebate to
the seller or buyer?

A: Yes. Even though RESPA prohibits referral fees, it apparently does not
prohibit a listing agent or buyer's agent from giving a portion of his or
her commission to the seller or buyer. Moreover, giving a commission rebate
to a seller or buyer seems consistent with RESPA's goal of minimizing a
consumer's settlement costs. However, a buyer who intends to use a
commission rebate as part of his or her down payment should first consult
with the mortgage lender about the loan underwriting guidelines for that
arrangement.

Consumer Rebates: HUD has traditionally taken an informal position that
rebates to the customers of a settlement service provider - and not to the
provider himself - do not violate RESPA. Therefore, any fee or portion of a
fee is paid to a provider that the provider subsequently passes along to the
customer in the form of a consumer discount or rebate would be exempt from
RESPA.

MAR

2007

Danny Smith,

This should clear up your confusion on the taxable issue of rebates

http://blog.redfin.com/redfin/2007/03/tax.html

Well that's interesting. thanks for the link.

MAR

2007

RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.

This statement from RESPA got me to thinking. In most of my transactions, the buyer will request to see the final settlement statement a day or two before the closing. However, the HUD isn't ready for the buyer to see until an hour before settlement. In a majority of the cases, the lender is at fault. This is a frequent occurrence. I had 3 closings this week and the HUD-1's weren't given out until the time of settlement -- even though a request had been given well in advance. What is the penalty for this?

In future transactions, I will make notes of when the HUD is first given to the buyer for review.

Nick, I don't know what the penalty for not providing a HUD 24 hours in advance is. But I can tell you that in my market it NEVER happens. We are lucky to get a HUD prior to closing. It's very frustrating. As a REALTOR(R) I want time to review it and make sure everything is correct. Normally I am going over it on the phone with my closer while I'm driving down the road towards closing. But what can she do? She doesn't get the closing package from the Lender until a hour or two prior to closing and it's dated for that day. If we wait 24 hours the package expires and has to be redone. So we do the best we can and close. This NEEDS to change.

Bryant - I know you and I have discussed this before (about not having the HUD in advance) - but pleasantly enough, in our last 3 closings we have had the HUD sent to us with at least 24 hours! Can you believe it? We were in shock and so pleasantly surprised...maybe there is some hope and some great changes in the industry.

It's truly sad and a clear violation of RESPA. The lending industry is a complete wreck. There is no excuse for this. The package can be send out 3 days in advance and dated for the day of closing.

Are unscrupulous rebaters violating RESPA by retaining unearned fees? The unscrupulous rebater agrees to work for a lower fee to attract buyers. At or near closing, the lender disallows the rebate on the HUD-1. The unscrupulous rebater tells the buyer "sorry, no rebate for you". The buyer was duped and the unscrupulous rebater keeps the unearned fee -- a possible section 8 violation of RESPA.

Ines, sounds like you are on a roll with HUDs coming in in advance. I'm jealous.

Nick, You know I always hear don't schedule closings for the end of the month so the lenders aren't as busy. So I always try to schedule near the middle of the month and give the lender plenty of time. Doesn't matter. It I give them 30 days or 60 days they still wait until the last minute. Mid month closings almost always get postponed till the end of the month. I just can't figure it out. Bare in mind that I work with sellers so I don't have the luxury of using my preferred lenders.

Bryant,

I meant to tell you. At one of my closings last week, my client was receiving a rebate of approx. $1,950. This was disclosed in a new construction contract to purchase. As the settlement agent was preparing the HUD an hour before closing, I instructed her to give "An agent credit to the buyer" on the front page of the HUD under credits. The lender then instructed her to remove the credit without contacting me. Upon arrival to the closing, the attorney told me the credit had been removed by the lender. I called the lender and ask what the problem was. The lender said that an agent can't contribute to a buyer's settlement charges. The loan officer went so far as to say it was illegal. I laughed and said "tell that to RESPA/HUD and the USDOJ. To say the least, the buyer was p*ssed at the lender. The lender totally disregarded the disclosure in the contract. The lender eventually conceded that it wasn't illegal, but they didn't want to see it.

To make a long story short, the buyer was ready to close so the builder agreed to reduce our commission by 1% and increase the builder's contribution by 1% to the buyer. The purpose of this, according to a source to the lender, was so that it looked clean on the HUD and this wouldn't present any problem when selling the loan. The rebate smelled of a "kick-back".

So there you have it. The lenders would prefer not to see it because of how it might play out in the secondary market. Misinformation is abound....

Nick, That is interesting. I sure wish the FEDS would make a ruling on this that is clear and concise. This is one issue where everyone needs to be on the same page. Thanks for sharing that story Nick.

No problem. I agree. This goes to show the reason why rebates are arbitrarily opposed by lenders.

Secondly, if the builder had not of been accommodating, then a rebate outside of closing would have been required.

APR

2007

From HUD's website:

Paid Outside Of Closing ("POC"): Some fees may be listed on the HUD-1 to the left of the borrower's column and marked "P.O.C." Fees such as those for credit reports and appraisals are usually paid by the borrower before closing/settlement. They are additional costs to you. Other fees such as those paid by the lender to a mortgage broker or other settlement service providers may be paid after closing/settlement. These fees are usually included in the interest rate or other settlement charge. They are not an additional cost to you. These types of fees will not be added into the total on Line 1400.

Notice how anything marked POC is for the borrower's information and protection. The purpose of the HUD-1 is to clearly show all charges imposed on borrowers and sellers in connection with the settlement, not the professionals.

APR

2007

State of Illinois

May compensation be paid to a principal to a transaction, even if the principal does not have a real estate license?

The Answer: Yes. Section 10-15(c) of the Act authorizes the offer or payment of compensation ("prizes, merchandise, services, rebates, discounts or other consideration") to an unlicensed person who is a party to a contract or lease. Of course, such compensation is not required. The payment of such compensation should be pursuant to the negotiations on the transactions. The payment of such compensation is not limited to payment by a licensee to the licensee's client - in other words, a seller's agent may pay compensation to an unlicensed buyer.

May a licensee offer compensation to solicit clients?

The Answer: Yes. Section 10-15(d) of the Act authorizes the offer or payment of compensation ("cash, gifts, prizes, awards, coupons, merchandise, rebates or chances to win a game of chance") to a consumer as an inducement to that consumer to use the services of a licensee, even if the consumer and licensee ultimately do not enter into a client relationship. Any advertisement under this Section must also comply with all requirements regarding real estate advertisements. Also, care should be taken not to offer compensation to unlicensed persons for referrals of clients - this is prohibited.

That's interesting . The first part is very similar to Florida law the second part is illegal in Florida(to the best of my knowledge). It just shows again how varies State laws are.

APR

2007

Interesting. I found this article because I was searching for the topic in Google and guess what came up number one? Unfortunately, I am still clear as mud!

Hi Karen, This does seem to be a very confusing topic. State laws vary and fed laws are decisve. For me, if it ain't on the HUD it ain't happening. I know that's legal:)

"If you are a buyer, you can receive a payment from your agent after the transaction closes. This comes from the commission paid by the seller and can give you thousands of dollars to get set up in your new home."
www.contactreagent.com/sfbay/

"After selling a home, real-estate agents often give clients a gift, such as a scented candle or decorative plate. Jeffrey D. Thomas received something more memorable: a check for more than $10,000."

By JAMES R. HAGERTY Staff Reporter of THE WALL STREET JOURNAL

SanFran, If they did that in Alabama, according to their State laws, their RE license could be revoked.

http://www.realtor.org/rmomag.nsf/pages/lawjan06

Are real estate brokers operating the Alabama Real Estate Commission? Who is the commissioner? Those are the questions that might reveal a conflict of interest. States that don't allow members of the real estate industry to reside within the commission tend to be more for the "consumer".

Look At Georgia:

FAQ's : Offering Gifts, Rebates or Other Inducements

The third type of problem advertisements probably provokes the most calls and complaints to the Commission. Those are advertisements that promise a rebate or a gift to a prospective customer or client. In the 1970s the Commission had rules which prohibited advertisements which offered prizes, gifts, or rebates to prospects. Federal and state court rulings in the early 1980s overturned such rules. In rejecting such rules, the courts held that the first amendment to the Constitution protects what they termed "commercial free speech." Therefore, most advertisements which promise gifts, prizes, or other compensation to prospects or clients are acceptable as long as they are not misleading or inaccurate in any material fact and the licensee provides the item as promised. While giving gifts or other compensation directly to clients, customers, or prospective clients or customers is permissible, offering anything of value to unlicensed persons for providing leads to prospective clients or customers is not. (For additional information, please refer to, " SOLICITING PROSPECTS AND PAYING REFERRAL FEES .")

Maryland Real Estate Commission

"Rebates/Cash Payments. Section 17-604 provides that a licensee may not pay compensation in any form for the provision of real estate brokerage services to an individual who is not licensed. A person who is simply a party to a real estate transaction is not providing real estate brokerage services within the definitions in Section 17-101, and therefore may receive monies from a licensee. If the monies are used to pay settlement charges, that should be reflected on the HUD-1 form.

The agreement to pay compensation to a buyer in the form of a rebate of commission, or to compensate the seller either through a cash payment or a reduction of the commission rate must be in writing as required by the Code of Ethics, COMAR 09.11.02.01H. The Real Estate Commission has also taken the position that financial payments by a licensee to a party should be disclosed to the other party to the transaction, even if they are not required to be recorded on the HUD-1 form."

According to my understanding of the aforementioned verbiage from the MREC, apparently only rebate money used for the closing is required to be on the HUD.

I don't know about the rest of you, but the statement above is as clear as the water in the Yucatan.

APR

2007

To answer the question that has been posed, we must first determine what the purpose of the HUD-1 is. Let's take a look at the information provided by NAR:

Question #3:

To provide consumers with cost information about the mortgage process, RESPA created the good faith estimate (GFE) and the HUD-1 closing document. RESPA requires that the HUD-1 form be provided to the:

1. Tax assessor
2. Next-door neighbor
3. Real estate salesperson
4. Buyer

Answer: Buyer

http://www.realtor.org/RMOQuiz2.nsf/RESPAQuiz?OpenForm

There you have it. RESPA created the HUD-1 form for the purchaser.

OCT

2007

A RESPA compliance officer told me that RESPA does not investigate broker rebates to buyers. Anyhow, they say to fax the request to disclose rebate on the HUD-1 settlement statement to settlement attorney. If settlement attorney does not comply because lender or builder will not allow, (any) liablity will rest with those parties. Lenders and builders should not be preventing the HUD disclosure. They would be in violation, not the real estate broker.

Irregardless, real estate brokers are not going to get in trouble with RESPA for giving rebate savings to buyers.

MAY

2008

The above post seems to be a logical approach to an issue that is rarely understood by many within the real estate industry.

JUN

2008

I know this is an old post, but since someone has commented recently and it came up on a Google search I was doing to investigate how other people were handling real estate broker rebates, I can't keep myself from commenting.

I see several comments regarding getting the HUD-1 before closing, but they fail to take into account how many things are outside of the lender's control in regards to the timing of the closing package. Most of the time a lender will not send out the closing package until all conditions on the loan are cleared.

Sometimes this depends on items which the borrower or another 3rd party must provide and these items are not provided until the last minute. Sometimes it is due to lender underwriting times causing a loan which the broker submitted with all due haste being issued unpredictable last minute conditions or the loan simply not being cleared to close until just before the scheduled closing time. Sometimes this was due to setting unreasonable closing deadlines in the purchase contract.

More often it is caused by the borrower not having been completely upfront at the time of application or not getting documents to the lender in a timely manner. The alternative is to require that the closing time be moved to accomodate having everyone review the HUD within guidelines. Most of the time the parties do not want to do that.

After all, the HUD-1 is an incredibly simple document to understand for anyone with more than a couple of closings under their belt and a tiny bit of common sense. It is the rest of the documents that are difficult to understand, but that aren't required to be available ahead of time.

On the issue of lenders having stricter guidelines at times than the DOJ, or RESPA, or HUD - this is allowed. Lenders also have to comply with secondary market guidelines or risk having an unsalable loan. But rebates are completely ethical and legal in most states now. A few still ban them but would lose the lawsuit most likely if anyone challenged them.

AUG

2008

this is an old string but I'm re-researching some things now. Been all over this with title companies and their attorneys, lenders, my own attorney and a former client who was a corp. lawyer, later became IRS research lawyer and gave me free, but sound advice. Here in TX a Broker can always rebate his client and can also rebate the other party with all parties permission. Rare, but their are some theoretical scenarios where it could come up.

If the rebate is being used in connection with the closing and purchase, it goes on HUD. If the rebate is rebate is post closing for post closing and/or non-purchase items, whether a $1,000 check two weeks later or your agreement to pay for one year's alarm system at $1,000; then it does not need to go on HUD. If it's a top Maytag W/D costing $1,000 delivered a week after closing, that does not go on HUD.

As for 1099 - any rebate is ABSOLUTELY not earned or unearned income. To even consider that money, or goods, as income or payment for services would have you violating state and board law by paying a commission to an unlicensed person. Or paying commission for no work done, or not procuring a sale, and so forth. All sources who have researched for me or had issue come up agree that per IRS Publication {don't have file handy - you can go to IRS.gov and search for "rebate"} and other regulations, a rebate from a dealer / broker who received funds from the transaction and rebates some back to the client / customer should be considered as a reduction in the cost basis of the product / home.

So a $6K Buyer Rep. commission with $1k cash/check rebated to Buyer will not generate a 1099, but will reduce purchase basis by $1K when they re-sell. It should also come with a Hold Harmless agreement advising buyer to confirm tax treatment independently via IRS or CPA so that you aren't accused of giving tax advice.

P.S. this has worked only when I already had captive client, so maybe it wasn't needed? Difficult to sell to general public because they think that some how it's added on to sales price like car dealers, even though the economics of a Buyer's Rep don't work that way. They really do not see any extra value, believe it's all smoke and mirrors, and "kids" these days care more about decor than saving money!

Good info Ed. Texas sounds very similar to Florida.I agree with every thing you wrote. BUT if you rebated in Alabama you'd be breaking their law. So I guess it just depends where you are at and how you handle the rebate.

NOV

2008

Hi, Bryant:

I've been researching this, too, since I recently agreed to rebate a builder's sales bonus back to my client. The builder has contributed the maximum to his closing costs, and he wants the rebate in cash, not as a reduction to the sales price. I checked with TREC and my MLS, and they seemed to think that I should just have my client sign a letter and I'd be good to go. I now have to figure out if I should issue a 1099; like you, I don't really feel like paying taxes on it!

Thanks for the great post and update!

Cheers,

Robin

DEC

Now that Fannie Mae is fully under the control of the Federal Government, should there be anymore confusion over cash back rebates from buyer brokers to their clients? Not only Fannie Mae, but Freddie Mac, Ginnie Mae, FHA and VA are all under the control of the federal government. Therefore, since the USDOJ, which is a federal government entity, is in full support of these rebates, should there be any more problems recording them on the HUD-1?

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