What every Realty Pro must Know About Kickback Rules

Navigate the market moves with Inman Select in your corner.

The biggest New York property occasion

Blueprint Las Vegas
Inman On Tour Texas
Luxury Connect
All approaching occasions

Inman Intel
Intel Index
Find out more

Data and research into what's taking place today - and tomorrow - in property genuine estate and proptech.

Inman Access Video
Tips, How-Tos, & Guides
Realtor.com PRO Resources
Tech Reviews
Insider Webinars
Handbooks
Essential Guides
Find out more

An immersive video experience bringing you realty's best professionals.

See all

The most desired awards in property, acknowledging achievement throughout the market.

Power Players
New York City Power Brokers
MLS Reinvented
Marketing All-Stars
Future Leaders in Real Estate
Golden I Club
Best of Finance
Inman Innovators
AI Awards
Best of Proptech

About Inman
Email Newsletters
Press Center
Advertising & Sponsorship
Customer Support

- Log in Subscribe
- - Account Settings
- Contact Us
- Log Out

Inman On Tour Texas is around the corner!
Track your market with 2 brand-new tools
2025 property events calendar
TikTok (not HGTV) boosted this biz
Must-know kickback rules
5 texts to send out today

What every real estate pro need to learn about kickback rules

Canva

RESPA is the biggest celebration foul in realty. Compliance expert Summer Goralik discusses the rules and stresses that anything less than complete compliance can be a career-ending mistake.

Quick Read

- The Realty Settlement Procedures Act (RESPA), imposed by the Consumer Financial Protection Bureau (CFPB), prohibits kickbacks and referral costs in domestic property transactions involving federally related mortgage loans. It's created to protect consumers and promote settlement openness.
- Exemptions to RESPA consist of bona fide payments for real services, cooperative brokerage recommendations within certified capability and disclosed associated organization plans, which permit ownership returns however no recommendation costs.
- RESPA violations consist of undisclosed recommendations with presents, payments connected to referrals, and steering clients to favored providers, running the risk of fines, license loss, and reputational damage.
- Compliance needs clear disclosures, adherence to state and federal laws, avoiding compensated recommendations and extensive documentation.

In the high-pressure world of realty sales, every agent rapidly finds out the classic saying: "Always be closing." It's the lifeline of business, right? The deal, the commission, the win.

If you've ever seen Glengarry Glen Ross, a traditional dark comedy drama, you know how completely honest and unforgiving the sales game can be. The motion picture's legendary line, "Coffee's for closers," is less about caffeine, of course, and more about success: Who earns it and who does not.

But there's another mantra every real estate professional need to live by, one that's far less memorable or popular however even more important in the long run: Always be complying. (Did I just coin that?)

And when it concerns the Real Estate Settlement Procedures Act (RESPA), compliance may be the most essential closing technique a specialist can embrace. Without it, it's not just danger; it's what I call a career-ending party nasty in this market.

Just as mastering the art of closing separates top manufacturers from the rest, understanding and appreciating RESPA is a requirement in property. It separates growing careers from regulatory nightmares.

So, where do we start? At the top, naturally. Let's go into the essentials, explore crucial guardrails, and paint a picture of what RESPA compliance and diligence appear like in the field.

What Is RESPA?

RESPA, enacted in 1974 and implemented by the Consumer Financial Protection Bureau (CFPB), is a federal law developed to safeguard customers by promoting openness in property settlements. Among other things, it prohibits kickbacks and referral fees in between settlement company that synthetically inflate expenses.

The law applies to a wide variety of service suppliers included in the settlement process, including property brokers, mortgage brokers and lending institutions, to name just a few. However, RESPA is only activated when the transaction includes property real residential or commercial property and a federally related mortgage loan.

Though complex and often confusing, RESPA's mission is basic: Keep the settlement procedure truthful and reasonable. The customer is the focus, and protection is the goal. Among its key arrangements, RESPA needs clear disclosure of all estimated or actual transaction expenses and empowers consumers to look around for settlement service companies.

Perhaps RESPA is most well-known for what it strictly prohibits: giving or getting any "thing of worth" in exchange for referrals connected to settlement services such as title insurance coverage, escrow or assessments. That suggests obvious commissions, no disguised referral fees and no presents.

So, just what counts as a "thing of value"? Think broadly. It goes far beyond fees or commissions and can consist of stock dividends, discounts, gifts, journeys - the list goes on. In truth, a CFPB attorney when informed me that not even a stick of chewing gum is legal if it's connected to or conditioned upon a referral.

Important exemptions to RESPA

No RESPA introduction is total without a fast examination of its exemptions. That is, while RESPA prohibits lots of referral cost arrangements, it also includes important exemptions under Section 8 that allow specific charges, salaries, settlement or other payments without restriction. Notable exemptions include:

Bona fide payments for services or goods: Payments made to anyone as an authentic wage, compensation or other payment for goods in fact provided or services in fact carried out are allowed [12 CFR § 1024.14(g)( 1 )(iv)]
Cooperative brokerage and recommendation arrangements: Cooperative brokerage and referral agreements between property agents and brokers are permitted, but just when all parties are acting within their licensed brokerage capability. This exemption does not apply to charge arrangements between genuine estate brokers and mortgage brokers, or in between mortgage brokers themselves [12 CFR § 1024.14(g)( 1 )(v)]
Affiliated business plans (ABAs): ABAs are allowed if particular conditions are fulfilled, consisting of complete disclosure to the customer - normally via the ABA disclosure kind in Appendix D of RESPA (which I frequently show customers). Under these arrangements, the only thing of worth got can be a return on ownership interest or a franchise relationship, which suggests referral fees from associated entities are restricted. Crucially, customers need to keep the freedom to select any settlement company; they can not be required to use a specific company [12 CFR § 1024.15 et seq.] Although these exemptions exist, and they are not exhaustive, some critics argue that the real estate industry limits true customer choice by guiding clients towards preferred providers, raising concerns about the spirit of consumer liberty that RESPA was intended to protect. But let's put a pin in that concept for a minute and keep moving through our RESPA crash course.

Additional considerations on charges and market value

To display how complex and not straightforward RESPA can be, it is very important to likewise comprehend the following regulatory assistance concerning payments and fees (which I am pulling straight from the law itself):

"The Bureau might investigate high rates to see if they are the outcome of a recommendation fee or a split of a charge. If the payment of a thing of worth bears no sensible relationship to the marketplace value of the items or services offered, then the excess is not for services or goods in fact carried out or supplied. These realities may be used as evidence of an infraction of section 8 and might work as a basis for a RESPA examination. High prices standing alone are not evidence of a RESPA infraction.

The value of a referral (i.e., the value of any additional business acquired consequently) is not to be taken into consideration in determining whether the payment exceeds the sensible value of such products, centers or services. The fact that the transfer of the thing of value does not result in a boost in any charge made by the individual providing the thing of value is unimportant in determining whether the act is restricted" [12 CFR § 1024.14(g)( 2) line breaks added for clarity]

The dos and do n'ts: Playing within RESPA's guardrails

Let's break down this complex body of law into a couple of manageable (and hopefully remarkable) pieces. RESPA has clear guardrails:

Don't provide or accept presents, discounts or payments connected to referrals.
Do spend for legitimate services rendered, not for the recommendation itself.
Do reveal ABAs fully and transparently, and ensure the disclosure sticks to RESPA requirements.
Don't get in into marketing service agreements without legal counsel, as these can be RESPA landmines.

For those who work better with genuine examples, here are a couple of activities that are prohibited under RESPA:

A title business pays a broker $500 for every client referred.
A representative refers customers to lending institutions and gets a $100 gift card per recommendation.
A brokerage owns a home warranty business but stops working to reveal the relationship when referring clients.
An escrow holder pays month-to-month marketing costs to agents in exchange for referrals.

Honestly, there is no lack of circumstances. In reality, this short article is practically composed on the heels of yet another case including alleged RESPA violations: a marketing service arrangement between a property brokerage and a lending institution, in which property buyers declare in 6 different claims that a North Carolina brokerage guided them to use its partner loan provider. As an outcome, they state they paid higher rates of interest and discount rate points on their loans than they would have if they had actually looked around.

Similar kickback issues are explored in a recent post about an escrow company supposedly compensating representatives for service recommendations.

Listen, there will constantly be an example or headline - just do not be one of them. A wise guideline for RESPA compliance: presume a recommendation cost is prohibited until you've safely verified otherwise.

When kickbacks cross legal lines

Having invested years investigating realty licensees for non-compliant activities during my time at the Department of Real Estate, I am no stranger to unlawful kickback plans. In California property, this isn't just theoretical. A typical arrangement I have actually seen, both while working for the state and later as a consultant, includes brokers financially incentivizing their agents to utilize the firm's internal escrow divisions. This is an illegal practice under both California law and RESPA.

I co-wrote a thorough piece on the parallels and disconnects between federal RESPA and California's recommendation fee laws, which still resides on the DRE's site. One way to consider the legal dynamics surrounding recommendation fees is this: RESPA sets the federal baseline, whereas states frequently layer extra enforcement rules, producing an intricate compliance landscape.

Consider California's B&P Code § 10177.4 - a family recommendation in my compliance world - which restricts recommendation fees for services including escrow, title and pest control. Despite the fact that it covers a smaller sized set of service providers, its scope is more comprehensive than RESPA's, using to transactions without secured loans and to residential or commercial property types such as business and commercial.

In essence, depending upon the state, property licensees may undergo multiple laws that don't always align. That's why it's vital for licensees to thoroughly vet referral fee activities for both state and federal compliance.

Avoid the 'f' word in realty: Tips for specialists

If I'm being entirely truthful, sometimes I think of RESPA as the "f word" in property. I state this half-jokingly, but the fact is, no one ever says "RESPA" when things are going efficiently. It typically turns up when something has actually gone incorrect, typically as the headline of a story declaring misbehavior.

The reality is, consumers get hurt when settlement company participate in unlawful recommendation charge activities. And it's no much better on the other side. Agents lured to sidestep RESPA, whether by offering or receiving recommendation kickbacks, concealing charges or skirting disclosure, run the risk of more than fines. They endanger their licenses, credibilities and incomes.

Ignorance is no excuse either. And though this article provides just a teaspoon of knowledge in the vast ocean of RESPA education, here are a few basics to keep in mind if you wish to endure RESPA compliance.

If you're making or getting referrals, make certain:

They're non-compensable or comply with both federal and state laws.
You have actually revealed everything plainly and in composing to clients.
You prevent any form of payment connected to recommendations.

Did I discuss that a recommendation charge arrangement doesn't have to be recorded in writing to be illegal? Under RESPA, a contract or understanding can be established merely through a pattern of activities or a course of conduct.

For example, if a "thing of worth" is gotten repeatedly in connection with the volume or value of referred organization, that alone can be sufficient to trigger enforcement. Put differently, even without a signed agreement or explicit discussion, the arrangement can still violate the law.

To conclude these pointers, keep in mind that compliance surpasses simply knowing the guidelines. Always speak up and ask questions when something isn't clear or doesn't feel right. If you are an agent, your responsible broker is a good place to start that questions. Document your activities thoroughly - as if you might one day be contacted us to safeguard them in court (though hopefully you won't). This implies keeping e-mails, texts and any other relevant interactions.

Diligence not only secures your clients however likewise safeguards your license and expert reputation.

Closing with compliance

If you ask a compliance specialist what real success looks like, be prepared to hear the words "regulatory compliance" in my response. Boring, ideal? But believe me, I've seen a lot in the game of genuine estate. The real winners aren't simply the finest closers; they're the ones who respect the guidelines, protect consumers and keep their organizations out of legal warm water.

You can close the most offers and earn the greatest commissions, however if you lose your license over a single illegal recommendation, it's useless. That's my point: Real success depends on compliance.

Remember: "Always be closing" just works if you're also constantly complying.