BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Q: I understand the reasons why it might not be a good idea to help homeowners with their loan modifications for a fee when they are not involved in a sale transaction with me. But, my question is whether I can refer those homeowners who do want assistance with their loan modification process to a company that does provide such services. I am constantly being solicited by these companies who are willing to pay me a referral fee for sending them the names of the homeowners who need assistance with the loan modifications. Can I make these referrals and collect a fee?
A: As you have stated, there are substantial risks in real estate licensees engaging in assisting homeowners with their loan modifications when not a part of a sale transaction.
See Weekly Practice Tip entitled: “Loan Modifications Apart From a
There are also issues you must consider before referring a homeowner to one of these loan modification businesses. First, some background.
There are basically four types of loan modification servicers out there:
1. Scam artists – which may also be 3 or 4, below
2. Non-profits
3. Attorneys
4. Real estate brokers
The answer as to whether a real estate licensee can refer a homeowner to one of these, and collect a fee, depends on the type of service:
1. SCAMS: Of course, you wouldn’t refer to an obvious scam artist, but the problem is that many out-and-out scams pose as legitimate businesses. Some merely take an up-front fee and do nothing. Others do much worse. The concern is that, if a real estate licensee referred a homeowner who was scammed, by the person or business to whom the referral was made, that homeowner may look to the agent for restitution based on making a negligent referral.
2. NON-PROFITS: Non-profits do not pay referral fees; and it is safe to refer your clients to these legitimate services.
See e.g. CAR’s “Mortgage Workout Programs for Homeowners” at
http://www.car.org/legal/mortgage-workout-programs/?view=Standard
Or, you can refer them to the federal Housing and Urban Development (HUD) website for assistance at: http://www.hud.gov/foreclosure/index.cfm or at
http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?&webListAction=search&searchstate=CA
3. ATTORNEYS: Attorneys can, under certain circumstances, assist homeowners with their loan modifications. However a real estate agent cannot receive compensation from, or pay, an attorney in exchange for the referral of loan modification business.
First, an attorney or law firm is generally prohibited under State Bar rules from paying a referral fee to a non-attorney.
Second, the California DRE states that it has been advised by the Department of Housing and Urban Development (HUD, the government agency which enforces RESPA) that such a payment by an attorney, when received by the real estate licensee, would constitute a violation of the Real Estate Settlement Procedures Act (RESPA).
Basically, under RESPA, except for referrals between real estate sales brokers, a real estate agent is generally prohibited from giving or receiving anything of value in exchange for a referral for a transaction involving one-to-four residential units with a federally-related mortgage loan – which includes virtually all institutional lender loans.
For more information on RESPA and referral fees see:
Weekly Practice Tip “Referral Fees and RESPA”
CAR Legal Memo “Referral Fees and Arrangements” at
http://www.car.org/legal/2008articles/referral-fees-arrangements/
4. REAL ESTATE BROKERS: The referral of homeowners to other real estate licensees for loan modification assistance is a somewhat more difficult question. As we know, referral fees between real estate sales brokers are perfectly legal under RESPA. The difficulty here may be that the real estate licensee doing the loan modification may be viewed by HUD as providing a different type of “settlement service” and, thus, be subject to RESPA prohibition on illegal referral fees or kickbacks.
So, if the property, and the loan being modified, were to fall within RESPA (Residential 1-4 with a federally-related loan), then this referral may be construed as being subject to RESPA prohibitions against the payment, or receipt, of a fee for the referral.
Because, RESPA frankly is not clear on this point, it is good risk management to avoid taking a referral fee for such a referral.
PRACTICE TIP: Bottom line is: don’t ask for, or accept, referral fees for referring clients to home modification services.
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
Copyright Broker Risk Management 2009 March 13, 2009