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Referral Fees

by | Apr 18, 2022 | Referral Fees and RESPA

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

Q:  I am representing a buyer in the buyer’s purchase of residential real estate.  I referred the buyer to a lender. Can the lender pay a referral fee to me?

A:  No, not if the federal Real Estate Settlement Procedures Act, also known as RESPA, applies.

Under RESPA, referral fees are illegal if made to, or received from, mortgage brokers, attorneys, lenders, title companies, escrow companies and other “settlement service providers.” 

RESPA states that it is illegal to give, and to receive, ANYTHING OF VALUE between a real estate broker or agent and any Settlement Service Provider or unlicensed person in a residential 1-4 unit property transaction where there will be a “federally-related loan” (basically all institutional lender loans) in exchange for a referral of business pursuant to “any agreement or understanding, oral or otherwise.”

The only exception to this rule provided for by RESPA is that a real estate salesperson can pay a referral fee to another real estate salesperson.

NOTE:  Even if RESPA does not apply, if such payments are made to or received from a title company (or, in Northern California, a related escrow company), California state law makes any such payments illegal.

Finder Fees:  A fee to an unlicensed person is not called a referral fee but rather is known as a “Finder’s Fee.”  Finder’s Fees to unlicensed persons are illegal if RESPA applies. So, Finder Fees to unlicensed persons can legally be paid on 5+ residential sales, commercial and raw land sales, and on all cash and hard money loan transactions.

PRACTICE TIPS

  1. If RESPA applies, do not pay or receive a referral fee from anyone other than another real estate sales licensee.
  1. If you are paying or receiving a referral fee, please ensure the agreement is in writing. Verbal referral fee agreement are not legally enforceable and therefore, are essentially worthless. It is recommended that the parties use CAR’s Referral Fee Agreement (Form RFA on zipForms).
  1. All referral fees must be paid through the agents’ brokers. California law requires that all payments on behalf of agents must always go through their broker. Thus, the referring agent must have the referral fee paid through that agent’s broker, and to the receiving agent through that agent’s broker.

4. Attorneys are not eligible to receive referral fees from real estate                     licensees unless they have a DRE Broker license.

WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS.  This Weekly Practice Tip is an attorney-client privileged communication 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