The spring real estate market usually means more members are applying for mortgages, so I wanted to use this opportunity to review one of the most important provisions of the Real Estate Settlement Procedures Act (RESPA), Section 8(a) which prohibits kickbacks.
Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback, or anything of value in exchange for referrals of settlement services in connection with any loan covered by RESPA. The Act also prohibits fee splitting and receiving unearned fees for services not actually performed. These restrictions apply in any situation where settlement services are related to a federally related loan. The rendering of services by a mortgage broker is a “settlement service” for purposes of the rule.
To make this clear, let’s discuss some examples. Let’s suppose a real estate agent hosts an open house for brokers, and a mortgage lender offers to pay for lunch at the open house. This would violate RESPA because the mortgage lender has just provided a thing of value (lunch) in consideration for the referral of business in violation of RESPA’s anti-kickback provision. Now, what if instead, the lender gave the real estate agent marketing materials, such as desk calendars, pens, and notepads, all of which promote the mortgage lender company’s name. While this seems like it would be a “thing of value” on par with lunch, there is actually an exception in RESPA for normal promotional and educational activities that are not conditioned on the referral of business and that do not defray expenses that otherwise would be incurred by persons in a position to refer settlement service business. Likewise, if the mortgage lender had attended the open house to market its services or make a presentation, then paying for the lunch could also be permissible.
Now consider another example: what if the real estate agent and the mortgage lender agree to place a joint advertisement in the paper together and both split the cost of the advertisement 50/50. Provided the ads were of equal size and the fees were split evenly, this would not be a RESPA violation. Nothing is RESPA prevents joint advertising, provided each party is paying their pro-rata share.
These are just a few examples to illustrate Section 8 kickbacks. It is very important to be mindful of potential kickbacks when engaged in activities with other settlement service providers, as violations of Section 8 can be subject to criminal and civil penalties.