Don't Tempt RESPA Fate

Many years ago - when I was first starting out in the real estate closing business - I was approached by someone who offered to send me a lot of closing business, but it came with a catch: the person who could bring me the business wanted a "piece" of the fees. They assured me that "People do it all the time."

Desipte not having a lot of business and needing all the business I could get, I had the good sense to turn this person away.

At that time, I hadn't spent a lot of time studying the Real Estate Settlement Procedures Act ("RESPA"), but I knew that this proposition didn't pass the smell test.

As the years passed, and I was asked from time to time to render an opinion on whether or not a particular arrangement was permissible under RESPA, I spent more and more time reading RESPA, case law interpreting RESPA and HUD's Formal and Informal Opinions about RESPA. I don't claim to be a RESPA expert - far from it. I know a couple of folks are are bona fide RESPA experts, and they have helped me tremendously.

One of the people I know who is well-versed in RESPA is Dana Strandmo. Dana is HomeServices of America's General Counsel, and is one of my bosses. About a year and a half ago, Dana sent out a memorandum to all HomeServices of America's agents (HomeServices owns approxmately 18 real estate brokerage companies across the country, including RealtySouth, and through these companies has in excess of 11,000 agents) giving them some guidance on what is and isn't permissible under RESPA. Dana's memorandum was titled "The Good, The Bad and The Ugly."

Now, at the beginning of the new year, seems a good and appropriate time to review "The Good, The Bad and The Ugly" and take a look at what is, and perhaps more importantly, what is not permissible under RESPA. Today's post looks at "The Good" - that is, permissible actions under the provisions of RESPA. These questions and answers are directed at real estate agents and their relationships to title insurance companies, loan officers, and others to whom they have the opportunity to refer busienss. Remember, however, that in the context of payments in exchange for the referral of business, RESPA makes it a crime to either give or to receive any thing of value in exchange for the referral of a settlement service. Accordingly, these quesions and answers apply equally to anyone in a position to make or receive referrals of settlement services.

The Good (Legal)

1. Can a real estate (RE) salesperson advertise with a lender, title company or other settlement service provider if each party pays their fair share?

Yes, if the RE salesperson and the other party are sharing the cost of the ad on a pro rata basis (e.g., if you have 10% of the ad space, you pay 10% of the ad cost).

2. Can my office manager sponsor a contest that awards points for listings, open houses, showings, etc.?

Yes, so long as points are awarded only for real estate brokerage activities.

3. Can a lender, title company or other settlement service provider buy lunch for the office?

Yes, so long as everyone in the office can benefit equally and the cost of the lunch is not overly expensive. That is, the cost is considered in the range of a normal marketing expenses for that market area.

4. Can a loan officer give my buyer a closing gift that is from both of us?

Yes, so long as you and the loan officer each pay your pro rata share of the gift expense.

5. Can a lender, title company or other settlement service provider send me a gift on the holidays?
Yes, you can receive gifts that are not overly expensive, that is, they are in the normal range of marketing expenses for the market area.

6. Can I give my seller or buyer a gift in appreciation for their business?

RESPA does not prohibit gifts or other benefits given to your client in the transaction. However, many state laws prohibit it. Check with your manager or company management before making gifts to your clients.

7. Can a lender, title company or other settlement service provider sponsor lunch at my open houses?

Yes, so long as it is clearly advertised that the lunch is sponsored by the lender, title company or other settlement service provider and is not overly expensive, it is considered a normal marketing expense.

8. Can a lender, title company or other settlement service provider help sponsor a party, softball tournament or some other real estate company event.

Yes, so long as the sponsorship is not overly expensive, that is, it is in the normal range of marketing expenses for that market area.

Clearly, this list of permissible activities is not exhaustive and whether or not a particular activity is or is not permissible under RESPA is fact dependent. Throughout the questions and answers set out above, there is one recurring theme - everybody pays their fair share. If somebody pays more than their fair share, the it could be that the payment is considered a "thing of value" in exchange for the referral of business. That is where you can get in trouble under RESPA, and that will be the topic of my next post.

Until next time,

Pat Smith