Are Referral Fees allowed from Realtors to Attorneys

John McConnin, Esq
Published on May 16, 2016

Are Referral Fees allowed from Realtors to Attorneys

Are Referrals allowed from a Realtor to an Attorney

Referral Fees are Not allowed under a RESPA Covered Transaction

As a general rule a Realtor may not pay a referral fee to an attorney or anyone, if a transaction is covered under RESPA.  If a transaction is not covered by RESPA a Realtor in CA may be a referral fee to someone as long as the recipient did not  perform services which require a real state license.

While referral fees may not typically be allowed, Attorneys Fees may be Paid for Services Rendered

Under both RESPA and California law an attorney may be paid for services actually rendered.  See…  12 U.S.C. § 2607(c)(1).  So while a payment may not be a referral fee it there is good reason for an attorney to be paid for reviewing and/or drafting many of the documents involved in a Real Estate transaction including

  1. Listing Agreement (for sellers)
  2. The Purchase and Sale Agreement (for buyer or seller)
  3. Escrow Agreement (buyer or seller)
  4. The tax documents (buyer or seller)
  5. The form in which buyer(s) will take title (community property with right of survivorship, in a trust… etc.)

How might this work in Practice?

A Seller Could Benefit From Attorney Oversight

Lets say as an attorney you have a client that has real estate to sell.  You wish to oversee the important parts of the transaction. Instead of billing your client or the estate or the trust for some or all of your fee, you could have the Realtor set some of his or her real estate commissions aside to pay for some of your fees related to the real estate transaction.    .

A Buyer Could Benefit From Attorney Oversight

You have a client who is looking to buy a property and you would like to make sure he, she they or it receive top notch professional representation in the purchase of a property.  You it can help to have an attorney oversee a Realtors work.  As an attorney you instruct the Realtor to prepare a template contract ahead of time leaving out the home and the price.  You can go review the contract and answer the clients questions.  You could also be available for reviews of counter offers.

A note on Flat Fees

Having sold over 100 homes as a Real Estate Broker and being involved in hundreds more as an attorney, I have been paid attorneys fees out of the escrow many times and it was always a flat fee on the HUD.  We don’t have the luxury of increasing our fee after the lender and the parties to the transaction approve of the charges on the HUD.  However, I also know that few transactions go off with a hitch.  Many times we we see lenders changing conditions right up until the minute the transaction is funded… and sometimes beyond.  We see escrow having the clients sign odd tax documents or having problems with the form of title being taken.  So as an attorney your job may not include a finite amount of work.  In my opinion, oversight of a a real estate transaction is one of the times a flat fee can be the smart way to go for both client and the attorney.

Referral Fees – non RESPA

In California a Realtor may pay referral fee in a non RESPA transaction to anyone, provided that the person receiving the referral fee did not perform any services requiring a real estate license.  Leaving us with the odd outcome that some commentators state a Realtor may pay a referral fee to an Attorney as long as the attorney does nothing but refer the client over.

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The Statutes.. and Laws re: Referral Fees (we added the emphasis in bold)

12 U.S. Code § 2607 – Prohibition against kickbacks and unearned fees

(a)Business referrals

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

(b)Splitting charges

No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

(c)Fees, salaries, compensation, or other payments

Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, (3) payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers, (4) affiliated business arrangements so long as (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred (i) in the case of a face-to-face referral or a referral made in writing or by electronic media, at or before the time of the referral (and compliance with this requirement in such case may be evidenced by a notation in a written, electronic, or similar system of records maintained in the regular course of business); (ii) in the case of a referral made by telephone, within 3 business days after the referral by telephone,[1] (and in such case an abbreviated verbal disclosure of the existence of the arrangement and the fact that a written disclosure will be provided within 3 business days shall be made to the person being referred during the telephone referral); or (iii) in the case of a referral by a lender (including a referral by a lender to an affiliated lender), at the time the estimates required under section 2604(c) of this title are provided (notwithstanding clause (i) or (ii)); and any required written receipt of such disclosure (without regard to the manner of the disclosure under clause (i), (ii), or (iii)) may be obtained at the closing or settlement (except that a person making a face-to-face referral who provides the written disclosure at or before the time of the referral shall attempt to obtain any required written receipt of such disclosure at such time and if the person being referred chooses not to acknowledge the receipt of the disclosure at that time, that fact shall be noted in the written, electronic, or similar system of records maintained in the regular course of business by the person making the referral), (B) such person is not required to use any particular provider of settlement services, and (C) the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship, or (5) such other payments or classes of payments or other transfers as are specified in regulations prescribed by the Bureau, after consultation with the Attorney General, the Secretary of Veterans Affairs, the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Secretary of Agriculture. For purposes of the preceding sentence, the following shall not be considered a violation of clause (4)(B): (i) any arrangement that requires a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender’s interest in a real estate transaction, or (ii) any arrangement where an attorney or law firm represents a client in a real estate transaction and issues or arranges for the issuance of a policy of title insurance in the transaction directly as agent or through a separate corporate title insurance agency that may be established by that attorney or law firm and operated as an adjunct to his or its law practice.

https://www.law.cornell.edu/uscode/text/12/2607

§ 3500.14 Prohibition against kickbacks and unearned fees.

(a) Section 8 violation. Any violation of this section is a violation of section 8 of RESPA (12 U.S.C. 2607) and is subject to enforcement as such under § 3500.19.
(b) No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in § 3500.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.
(c) No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.
(d) Thing of value. This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. The term “payment” is used throughout §§ 3500.14 and 3500.15 as synonymous with the giving or receiving any “thing of value” and does not require transfer of money.
(e) Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.
(f) Referral.
(1) A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.
(2) A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use (see § 3500.2, “required use”) a particular provider of a settlement service or business incident thereto.
(g) Fees, salaries, compensation, or other payments.
(1) Section 8 of RESPA permits:
(i) A payment to an attorney at law for services actually rendered;
(ii) A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance;
(iii) A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan;
(iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;
(v) A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (The statutory exemption restated in this paragraph refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.);
(vi) Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or
(vii) An employer’s payment to its own employees for any referral activities.
(2) The Department may investigate high prices to see if they are the result of a referral fee or a split of a fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of section 8 and may serve as a basis for a RESPA investigation. High prices standing alone are not proof of a RESPA violation. The value of a referral (i.e., the value of any additional business obtained thereby) is not to be taken into account in determining whether the payment exceeds the reasonable value of such goods, facilities or services. The fact that the transfer of the thing of value does not result in an increase in any charge made by the person giving the thing of value is irrelevant in determining whether the act is prohibited.
(3) Multiple services. When a person in a position to refer settlement service business, such as an attorney, mortgage lender, real estate broker or agent, or developer or builder, 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. For example, for an attorney of the buyer or seller to receive compensation as a title agent, the attorney must perform core title agent services (for which liability arises) separate from attorney services, including the evaluation of the title search to determine the insurability of the title, the clearance of underwriting objections, the actual issuance of the policy or policies on behalf of the title insurance company, and, where customary, issuance of the title commitment, and the conducting of the title search and closing.
(h) Recordkeeping. Any documents provided pursuant to this section shall be retained for five (5) years from the date of execution.
(i) Appendix B of this part. Illustrations in appendix B of this part demonstrate some of the requirements of this section.
[61 FR 13233, Mar. 26, 1996, as amended at 61 FR 29252, June 7, 1996; 61 FR 58476, Nov. 15, 1996]

 

Are Referral Fees allowed from Realtors to Attorneys
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