RESPA, Referrals California Real Estate Exam

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1. Compared to a CMA, a BPO is _______. A. Easier B. More complex This is the correct answer Feedback: BPOs tend to be more complex than a CMA. 2. Which of the following is legal according to RESPA? D. One settlement service provider (a real estate broker) pays another broker a referral fee. Congratulations, this is the correct answer! 3. One advantage to preparing a BPO for a lender is _________. A. You may get the listing Congratulations, this is the correct answer! 4. A lender has asked Chase to prepare a BPO. The reason the lender did not request an appraiser to provide an appraisal might be for all of the following reasons EXCEPT __________. D. The mortgage has been paid off Congratulations, this is the correct answer! 5. May a real estate licensee accept a referral fee for referring a client to a lender? . D. No This is the correct answer Feedback: Real estate licensees may not accept referral fees for referring business to a settlement service provider. 6. Where they are legal for a real estate licensee to do so, providing broker price opinions ________. A. Can provide a steady source of income Congratulations, this is the correct answer! 7. If a licensee performs a drive-by BPO, _________. D. A report/data sheet will still be required Congratulations, this is the correct answer! 8. In order to charge an administrative fee and not run afoul of RESPA, a real estate licensee should _______. D. Ensure that the fees are not split among settlement service providers Congratulations, this is the correct answer! 9. May a real estate licensee charge a client an administrative fee for a RESPA-covered transaction? . D. Yes, provided the fee is not split with another service provider.

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1. Which of the following service providers is NOT covered by RESPA? A. Real estate licensees B. Home inspectors C. Mortgage brokers D. Lawn maintenance professionals Congratulations, this is the correct answer! 2. Shared ownership between two service companies is covered by RESPA when the shared ownership is greater than _________. A. 1% Congratulations, this is the correct answer! B. 10% C. 25% D. 50% 3. A real estate licensee would NOT violate RESPA by ______. A. Accepting something of value for referral of settlement service business B. Participating in marketing that results in charges to the consumer that are not normal C. Charging more than standard real estate commission Congratulations, this is the correct answer! D. Failing to disclose ownership in a company the licensee refers business to 4. Bill is a builder who has a relationship with America Title Company. He receives an incentive from America Title every time a new buyer of Bill`s properties uses their services. Can Bill require his buyers to use America Title? A. Yes, because he is a builder B. Yes, because new construction does not fall under RESPA C. No, because Bill is receiving an incentive Congratulations, this is the correct answer! D. Yes, because consumers must not have the choice 5. Under the mortgage servicing rules the CFPB established in 2014, when must the mortgage service provider give the borrower a free copy of any appraisal obtained on the property? A. Within three months B. Within six months C. At closing D. At least three days prior to closing Congratulations, this is the correct answer! 6. Handle Realty and Real Money Mortgage Services own a portion of each other`s companies and share a portion of the business referred. This type of arrangement is known as ________. A. Tit for tat B. Double indemnity C. Affiliated business Congratulations, this is the correct answer! D. Multiple ownership 7. Jake is selling his townhome and requires the buyer to use his brother`s title company. Is this legal under RESPA? A. No Congratulations, this is the correct answer! B. Yes, if the relationship is disclosed C. Yes, if Jake pays the title company fees D. Only if an AfBA disclosure form is provided 8. Judd claims his title company paid undisclosed kickbacks to his real estate licensee. Judd paid $1,500 for his title services. If Judd wins a judgment against the title company, what amount may he expect to receive? A. $1,500 B. $4,500 Congratulations, this is the correct answer! C. $5,000 D. $10,000 9. Cooperative marketing between settlement service providers is _________. A. Required by RESPA B. Restricted by RESPA This is the correct answer C. Not covered by RESPA D. Prohibited by RESPA This was your answer, which is incorrect. Feedback: RESPA restricts certain types of cooperative marketing arrangements between

The BPO is a projection of selling price an agent or broker issues. Lenders typically order one or more BPOs as part of the short-sale process. Banks also use BPOs to get an idea of the value of their foreclosure portfolios. Lenders and mortgage companies use BPOs to value properties in situations where they believe the expense and delay of an appraisal are not necessary. The lender, mortgage company, or loss mitigation company gives real estate brokers the order to do a BPO. The broker will be asked to do either a drive-by exterior BPO or an internal (interior) BPO. note_icon NOTE: As mentioned, not all states allow brokers to prepare broker price opinions—and even when they do, not all brokers will allow it. For those that do allow it, the BPO may not be used for loan origination purposes (BPOs cannot take the place of an appraisal). Some states will not allow a broker (or anyone without an appraiser license or certification) to receive compensation for preparing a BPO for any purpose other than obtaining a listing on a property. Here are a few scenarios when BPOs are needed: The lender wants to avoid the cost of an appraisal. A borrower is delinquent in payments and foreclosure is pending. There is a refinance situation. When refinancing for lower rates or other reasons in a booming market, lenders frequently rely on BPOs rather than full appraisals. In many cases, a home has a recent mortgage and a full appraisal was performed before that sale. Therefore, to lower costs, the lender may decide to hire a real estate broker to provide the faster, and less expensive, BPO. In cases where a lender is considering foreclosure, or even if the lender is working with the borrower to avoid foreclosure, the lender will order a BPO. This allows the lender to get a reliable estimate of the current value of the property, compare it to the mortgage balance, and determine solutions.

A drive-by BPO is not as simple as it sounds. Lenders and other companies that hire real estate brokers to provide BPOs have varied (and usually very specific) requirements. Even when a BPO is a drive-by, lenders will also require a report/data sheet to be completed about the property, which will require more than simply taking a few photos from your car. The forms lenders and loss mitigation companies use vary greatly. However, most will require you to complete at least the following information: Broker information Property location Neighborhood Conformity to neighborhood and zoning Property type, style, approximate age Visual condition of all individual exterior features Whether the property appears to be occupied Parking Lot size Estimated square feet Estimated room count Comments Three recent sold comparable properties with info Three currently listed comparable properties Two or more photos As you can see, there is a lot of information to be gathered and transmitted. In addition to this information, some companies require you to get out of your car and photograph all sides of the home, as well. Use caution. If the property is occupied, do not trespass; be certain to obtain permission before entering someone else's property. Because drive-by BPOs may pay as little as $50, you really need to have a fine-tuned system to make them efficient and profitable. This is easier in densely packed urban areas than in rural communities. handout_icon HANDOUT: Here is a sample drive-by BPO input form from a loss mitigation company.

Lesson: How RESPA Applies to Affiliated Business Arrangements RESPA applies to business ownership of 1% or more. Sue continued researching information about AfBAs. Many real estate companies, in an effort to develop multiple streams of revenue, enter into business relationships with mortgage service companies, title companies, or other settlement service providers. The general set-up is that each company owns a portion of the other, and thus shares a portion of the business referred, which is known as an affiliated business arrangement (AfBA). RESPA has specific provisions and regulations relating to affiliated business arrangements between settlement service providers, such as real estate brokerage firms and affiliated mortgage companies, where there is a 1% or greater common ownership between the companies. A referring settlement service provider may refer to affiliates that are settlement service providers, provided that all of the following three requirements are satisfied: graphic Disclosure: Disclosure/notice is given to the consumer at or before the time each referral is made (or,if thereferral is made by a lender to a borrower, by the time the estimate of closing costs is provided), in the form prescribed by the regulations. Consumer choice: The consumer is not required to use any particular provider of settlement services (that is, the consumer is not steered or required to use an affiliated entity providing mortgage or other settlement services). No fee payments: The only thing of value that is received from the arrangement (other than reasonable payments for goods, facilities, or services actually furnished) is a return on the ownership interest (such as corporate dividends or LLC distributions, as applicable, in accordance with the owners' percentage ownership interests). example_icon Example: David was a real estate licensee who worked for Merit Realty. Merit has an affiliated business arrangement with Titan Title Company. Although it is appropriate for Merit to encourage its licensees to avail themselves of Titan Title Company Services, Merit licensees may not require their clients to use Titan Title, nor steer them to Titan by not offering other options.

An Affiliated Business Arrangement Disclosure Statement form should be developed and used to comply with the first of these three requirements. graphic If the referral is made verbally, then the written disclosure must be given to the consumer within three business days after the referral, and an abbreviated verbal disclosure of the existence of the arrangement and the fact that a written disclosure will be provided within three business days must be made to the consumer during the verbal referral. The disclosure form in any situation must be a separate document, and not combined with other forms. The consumer should be asked to sign a receipt or acknowledgment of the disclosure; and if the consumer refuses to sign the acknowledgment of such disclosure, that fact should be noted in the records the referrer maintains regarding such referrals. The RESPA regulations require that the referrer retain each signed disclosure document for a period of at least five years after its execution. example_icon Example: If David, the licensee at Merit, recommends Titan Title to a client, he must

If you decide to charge for BPOs, make certain it's legal to do so, make certain your broker approves, and make certain you are trained. BPOs can be more complicated than a comparative market analysis (CMA). In a short sale market, an improperly conducted BPO can lead to charges of mortgage fraud. Therefore, it's important that you understand the proper way to complete a BPO. No matter what information is required on the data sheet the lender or requesting company provides, at minimum, a properly prepared BPO will include the following: An inventory of the basic property features (e.g., age, square footage, size / number of rooms, type of construction, house style, size of lot) A notation of any unique features of the property such as view, water frontage, etc. Three to five comparables that sold within the last three to six months A computation based on the average price per square foot for each comparable used A base value, found by multiplying the total of the comparables' average sales prices per square foot by the property's square footage Adjustments based on unique features For further training on the subject, you may wish to check with your broker, or local or national associations. note_icon NOTE: If the BPO form does not already contain this statement, it is advisable to clearly state on the BPO that it is not an appraisal and that you do not hold an appraiser's license (unless, of course, you do).

BPOs may turn into listings. If the lender regains possession of the property, the lender will often work with the broker who prepared a BPO to list the property for sale. This is acceptable, provided the price arrived at for the BPO is not based on obtaining the listing.

Internal BPOs include an interior site visit. living_room When performing an internal BPO, you may be required to verify square footage and room count, and take photos of the interior rooms of the home. Unless the home is unoccupied, an internal BPO will likely involve contact with the homeowner or tenant. If the BPO is for refinance purposes, this likely will not present an issue. However, if a pre-foreclosure situation exists, you must exercise care when making personal contact. An internal BPO may include: Individual room measurements Overall square footage measurement Inspection of interior feature conditions More thorough value adjustments in comparables Individual photos of interior damage Repair estimates Cleaning or trash-out estimates note NOTE: Trash-out companies handle a range of services for foreclosure, abandoned, and bank-owned properties, including removing furniture and appliances, cleaning up, and performing maintenance. Trash-out service is also referred to as "property preservation." This may be another revenue stream for someone who wants to start a side business, which will have insurance requirements, etc., but may be worth investigating.

Because an internal BPO is more work than a drive-by BPO, the compensation is generally higher. The ordering company may require additional services, as well, so fees received will vary. Additional services required may include: Re-keying locks Winterizing Removing trash Maintaining the lawn, removing snow Repairing damage Securing the property Boarding up the property Generally, the BPO customer will require you to pay for these expenses out-of-pocket, with reimbursement in 30 to 60 days. handout_icon HANDOUT: Here is a sample Freddie Mac BPO input form that may be used for either a drive-by or an internal BPO. that may be used for either a drive-by or an internal BPO. Note the required additional information fields. (There is also a Fannie Mae BPO input form.)

Consider subleasing your office space. building Can you make do with less space? You may wish to: Rent space in your offices to other businesses. In addition to rental income, you may see an increase in walk-in traffic, leading to increased business. Rent your conference room or lobby for meetings and events.

Broker Price Opinions as an Additional Revenue Stream house Amid the foreclosure and short sale frenzy of more recent years, some brokers revamped their businesses to accommodate lenders in need of broker price opinions (BPOs). Lenders frequently order BPOs before or during the process of foreclosure, or when determining appropriate market value for a short sale property. BPOs are estimates of value in case the lender must take over the property and determine a price to sell it to an investor or on the market. The real estate professional providing the BPO will often just perform an exterior "drive-by" BPO, in which the professional drives by the property and takes photos, then completes paperwork for the lender. For this service the lender pays the real estate professional a small fee. The lender is looking for an inexpensive way to have someone look at the property and report on its current marketability and value—without paying the cost of a full appraisal. Hungry brokers will take on this kind of work. However, in some states it is illegal for licensees to perform BPOs, because these states have declared that BPOs are a form of valuation and therefore may only be performed by a licensed appraiser. Where they are legal, BPOs can provide a steady source of income for real estate professionals—a nice boon if you're not getting a steady paycheck. field trip VIRTUAL FIELD TRIP: It's always good to know potential trouble spots, so here's an article, "Dangers of Broker Price Opinions," that highlights a few things you should know before you dive in.

Lesson: California Laws Relating to Referrals law Here's a kicker: It is possible for a California-licensed real estate broker to claim, demand, pay or receive a lawful referral fee in accordance with California's law, but violate the federal law while doing it. Then, if the CFPB finds the real estate licensee violated RESPA, that violation finding may cause an issue, as CalBRE may take disciplinary action. CalBRE urges licensees to take into consideration more than just California's law when deciding the lawfulness of claiming, demanding, receiving, or paying fees or other compensation for a referral. Before engaging in any referral activities involving a fee/compensation, it is important to take some steps to avoid violating laws and regulations. Sue investigates what's different between state and federal law. California law regulates referral arrangements made by real estate agents, and Sue wanted to make sure she understood her state's requirements and where it may differ from federal law. Sue found that California law was generally less restrictive than federal law in this area. However, in this state, a real estate agent may not claim or demand "a commission, fee, or other consideration, as compensation or inducement, for referral of customers" to any of the following*: Title insurer or underwritten title company Escrow agent Controlled escrow company Structural pest control firm Home protection company *Source: Cal. Bus. and Prof. Code § 10177.4(a). There are exceptions to this rule related to "other consideration," including: Bona fide payments for goods actually furnished, or for services actually performed, by a licensee Providing documents, services, information, advertising, educational materials, or similar items, as long as such items are: Customary in the real estate business Related to the furnisher's product or services Available on a similar and essentially equal basis to all customers or the agents of the furnisher's customers NOTE: Just so there is no confusion, consideration is anything of value and according to the CalBRE Real Estate Bulletin (Winter 2016) can include "any gain, advantage, or benefit." Also, "other consideration" may be paid to a licensee if that licensee performs services that are outside of and separate from the licensee's professional capacity as a licensed salesperson. In other words, consideration for services performed by the licensee does in another line of work that doesn't involve the real estate license.

California specifically limits title insurers. Title insurance company representatives can provide limited promotional items; however, these items must have a permanently affixed title company logo and cannot have a value of more than $10. (Cal. Ins. Code § 12404(d)(1).) This doesn't include gift certificates or cards or like items that have a "specific monetary value on (their) face." Title insurance company representatives can provide education or educational materials exclusively related to the business of title insurance. However, continuing education credits, or free beverages, food or entertainment cannot be provided. (Cal. Ins. Code §§ 12404(c)(8) and (d)(2).) Sue remembered when title companies provided items or programs as a tax write-off. Until 2009, it was legal for title companies to provide "reasonable expenditure" items, such as food, beverages, entertainment, and educational programs, as long as they were an allowed IRS expense. That law changed when former Insurance Code Section 12404(d) was repealed by SB 133. For non-title insurers, moderate expenses for food, meals, beverages, and similar items furnished to licensees, or groups or associations of licensees, within a context of customary business, educational, or promotional practices pertaining to the business of the furnisher are allowed in California, as are promotional items customary in the real estate business that are made available on a similar and essentially equal basis to all customers, or the agents of the furnisher's customers. Source: Cal. Bus. Code § 10177.4(b). Unit Quizzes and the minimum required study time must be met to unloCalifornia law extends to all properties. building Unlike RESPA, California state law is not limited to one to four residential units. The state law applies whenever a real estate agent claims or demands a referral fee from the specified service providers for all types of real estate transactions related to the purchase, sale, or lease of residential, commercial, or vacant land. A violation of this law could result in, among other things, disciplinary action taken by the California Bureau of Real Estate, including suspension or revocation of the real estate agent's license. This law is set forth under California Business & Professions Code section 10177.4.

Penalties for RESPA violations are stiff. handcuffs Sue thought about how hard she worked to earn commissions while giving her clients quality, personal service. The last thing she wanted to do was have any type of violation that jeopardized her earnings, reputation, or even her license. She got a little chill when she read the penalties related to a RESPA violation: Any person who violates RESPA's provisions may be fined up to $10,000 or imprisonment for up to one year, or both. Additionally, the person violating RESPA is liable to the person charged for the settlement service for three times the amount paid for the settlement service. In addition to criminal penalties, RESPA violations may be combined with other private lawsuit claims, such as antitrust violations, which would expose violators to additional civil liability. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Candace, a real estate licensee, wants to share advertising space in a home magazine with her favorite mortgage broker. In order to not violate RESPA, what must Candace do? Ensure that advertising fees and space allocated are equitable. Congratulations! That's the correct answer!

Other requirements under the newer rules include: Two months' notice must be given to the borrower prior to making a change in monthly payment due on adjustable rate mortgage loans. Servicers must promptly credit payments (as of the day they arrive). Servicers must respond quickly (generally within seven business days) when a borrower asks how much it will cost to pay off the mortgage. Servicers must not charge borrowers for insurance they don't need, or over-charge borrowers for force-placed insurance, which is insurance the servicer puts in place due to a borrower's lapse in insurance. Servicers must quickly resolve complaints and share information with the borrower. Servicers must provide quality customer service policies and procedures to include access to information, communication and record-retention procedures. Servicers must contact the consumer to offer assistance when the consumer is having trouble making payments, work with consumers before starting or continuing foreclosure proceedings, and allow consumers to seek a review of any decision about a loan workout request. handout_icon HANDOUT: This PDF includes the RESPA mortgage servicing rules that went into eff

Complaints may be resolved with the CFPB. Sue made a note that if either licensees or their clients believe the client's lender is not following the mortgage services rules, the CFPB has provided an online complaint process at: www.consumerfinance.gov/complaint. Complaints may also be made by telephone at: Phone: (855) 411-CFPB (2372) Español: (855) 411-CFPB (2372) TTY/TTD: (855) 729-CFPB (2372) Fax: (855) 237-2392 Or by mail: Consumer Financial Protection Bureau P.O. Box 4503 Iowa City, IA 52244

There is nothing wrong with a real estate licensee offering additional services, provided the services do not require additional licensure and are legal. Real estate licensees wishing to offer broker price opinions for additional revenue must first make certain that their broker allows this activity, and that they are trained to provide this service. There are two types of BPOs: drive-by and internal. Both require more work than a CMA. Loan origination requires an MLO endorsement and a mortgage loan originator license. It is legal to charge clients an administrative fee, as long as it is for actual services, not a duplicative fee, and is disclosed and reasonable. Never charge fees for services not provided.

Congratulations! You successfully passed your quiz. Click below to return to the Table of Contents and continue your course. 1. Compared to a CMA, a BPO is _______. A. Easier B. More complex This is the correct answer C. The same D. Identical to an appraisal This was your answer, which is incorrect. Feedback: BPOs tend to be more complex than a CMA. 2. Which of the following is legal according to RESPA? A. Two or more persons split fees, any portion of which is unearned. B. One settlement service provider marks up the cost of service or goods provided by another without providing additional services or goods to justify the additional charge. C. One settlement service provider charges the consumer a fee where no, nominal, or duplicative work is done, or the fee is in excess of the reasonable value of goods provided. D. One settlement service provider (a real estate broker) pays another broker a referral fee. Congratulations, this is the correct answer! 3. One advantage to preparing a BPO for a lender is _________. A. You may get the listing Congratulations, this is the correct answer! B. BPOs pay very well C. Lenders are very easy to work with D. BPOs are easier to prepare than CMAs 4. A lender has asked Chase to prepare a BPO. The reason the lender did not request an appraiser to provide an appraisal might be for all of the following reasons EXCEPT __________. A. To avoid the cost of an appraisal B. The borrower is delinquent on payments and foreclosure is pending C. The property is being refinanced D. The mortgage has been paid off Congratulations, this is the correct answer! 5. May a real estate licensee accept a referral fee for referring a client to a lender? A. Only if the person referred is a client of the licensee B. Only if the person referred is not a client of the licensee C. Only if any AfBA has been disclosed This was your answer, which is incorrect. D. No This is the correct answer Feedback: Real estate licensees may not accept referral fees for referring business to a settlement service provider. 6. Where they are legal for a real estate licensee to do so, providing broker price opinions ________. A. Can provide a steady source of income Congratulations, this is the correct answer! B. Are still unethical C. Still require an appraiser license D. Often pay $1,000 or more per BPO 7. If a licensee performs a drive-by BPO, _________. A. No photos are required B. An appraiser license is required C. It is illegal in all states D. A report/data sheet will still be required Congratulations, this is the correct answer! 8. In order to charge an administrative fee and not run afoul of RESPA, a real estate licensee should _______. A. Keep it under $250 B. Split the fee with the client C. Split the fee with the lender D. Ensure that the fees are not split among settlement service providers Congratulations, this is the correct answer! 9. May a real estate licensee charge a client an administrative fee for a RESPA-covered transaction? A. No; this is a RESPA violation. B. No; this is against California law. C. Yes, provided the fee is under $25. D. Yes, provided the fee is not split with another service provider. Congratulations, this is the correct answer! Retake Exam Continue Course

Let's take a look at the Echevarria case. The U.S. Court of Appeals for the Seventh Circuit in Echevarria v. Chicago Title & Trust Co. (7th Cir. 2001) concluded that unearned fees must be shared between two parties in order for those fees to violate Section 8(b). In Echevarria the court held that RESPA did not cover a situation where Chicago Title charged the consumer more money than what the county recorder's office charged it to record a mortgage. Since Chicago Title did not split this excess charge with any other party and the recorder's office received no more than its regular fee, the transaction did not violate RESPA. The Seventh Circuit's decision followed a long line of prior circuit court and district court cases holding that there can be no 8(b) violation without a sharing of the unearned fee. In short, no splitting of a fee means no violation. However, HUD did not share the Seventh Circuit's view on the subject. In response to Echevarria, HUD issued a policy statement to express its disagreement with the decision and to formalize the department's position regarding unearned fees under Section 8(b). According to the policy statement, HUD interprets Section 8(b) of RESPA to prohibit all unearned fees, including any of these types of cases: Two or more persons split fees for settlement services, any portion of which is unearned. One settlement service provider marks up the cost of services or goods provided by another without providing additional actual, necessary, and distinct services or goods to justify the additional charge. One settlement service provider charges the consumer a fee where no, nominal, or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed. This third category could be interpreted to apply to administrative fees. Although contrary to the court decisions in the Seventh Circuit and elsewhere, HUD has long held that charging the consumer a fee for no, nominal, or duplicative work violates Section 8(b). Now HUD's policy statement goes even further by declaring that fees in excess of the reasonable value of the good or service are also a violation. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Does RESPA impose price controls? question Congress specifically rejected price controls when it enacted RESPA referral fee prohibitions. RESPA was not designed to be a rate-setting statute. Other state and federal laws exist to protect consumers from unfair and deceptive trade practices. However, in an attempt to distinguish its views from the Echevarria decision, HUD claimed that excessive fees, even when not split with another party, are prohibited by Section 8(b) of RESPA. This position may make you wonder: do you have to subject every charge to some type of reasonable test? Is it ever appropriate to mark up someone else's services? You may even be wondering whether you can charge an administrative fee.

Nothing in RESPA prohibits referral fees among real estate licensees. Sue confirmed that it is perfectly legal to pay another licensed real estate professional a fee for referring business. She knew this situation often happened when one licensee was too busy or unqualified to assist a client with a specific transaction. It also occurred across state lines, or within the state but outside of a real estate licensee's area. Example: Jim was a real estate licensee. His cousin lived two hours away in another town, and wanted to sell his house. He called Jim to ask him to represent him. "I could," Jim said, "but you'd be better represented by someone in your own town. I know someone there. Let me give her a call and see if she can help you." Jim then called Sarah, who was happy to take the referral, and agreed to give Jim a 25% referral fee when Jim's cousin's house closed.

For a RESPA-covered transaction, it is your responsibility to ensure that a referral source is currently licensed. Sometimes, an unscrupulous individual whose license has lapsed, or who perhaps never had a license in the first place, may try to earn commission dollars by referring out business that an unlicensed individual would otherwise not be able to conduct. Paying a referral fee to an unlicensed individual is illegal. (Sue made a note under "What NOT to do!") Given the increased exposure among licensees due to the Internet, this illegal practice is something to consider. The following scenario appeared in an article, "The Law and You: Don't Pay Illegal Referral Fees," that Sue found in REALTOR Magazine: Imagine receiving an email titled "potential referral" from Joe Smith, a real estate salesperson who says he saw your website. Joe and his nephew Johnny live out of state. Johnny's been transferred to your area, and Joe is referring him to you. Joe tells you he received his license in 1985 and he'd like a referral fee. "No problem," you think. You know a fee may be paid out-of-state as long as the referring person holds a license. Your broker and attorney confirm your understanding. You eventually find a home for Johnny's family. They love the house and appreciate all the time you spent with them. You pay Joe a nice referral fee. Happy sellers, happy buyers, fair commission. Two weeks later, you get a letter from a real estate commission investigator asking you to explain your illegal referral payment. The investigator tells you Joe used to be licensed but didn't renew his license five years ago and "forgot" to tell you. Source: REALTOR Magazine, 2001.

Even reciprocal referrals may violate RESPA. Section 8 of RESPA prohibits kickbacks between lenders and third-party settlement service agents in the real estate settlement process. Even reciprocal referrals among settlement service providers could be construed as a violation of RESPA. However, reciprocal referrals between two real estate licensees, even though both are settlement service providers, would not be a RESPA violation. Sue had a certain geographical area where she was most comfortable working because she knew the market and wanted to stick with what she knew while she grew her business. She had met real estate professionals through networking events who handle other geographical areas, so from this research, she understood that she would not be violating RESPA if she pursued reciprocal referral arrangements with these other licensees.

Here is an example Sue found of a RESPA violation relating to "sham employees." An HUD investigation found that Znet claimed ReMax of Atlanta agents as employees, paying them $400 for each consumer referred to Znet. The real estate agents were found to be "sham employees" who performed little or no origination work other than filling out loan application forms. Under the terms of the settlement, the companies, their officers, and the real estate agents agreed to stop this bogus employee compensation program. Further, the ReMax agents were ordered to refund $400 to each consumer referred to Znet for a total of $9,200. In addition, Znet was ordered to make a settlement payment of $15,000 to the U.S. Treasury. See the related Business Journal article.

Sue parses out Section 8 of RESPA. Section 8 makes it illegal to give or receive any "thing of value" (or split fees) according to an agreement or understanding to refer real estate settlement services to a particular entity in connection with a federally related mortgage loan (as long as no RESPA exception is available). First, what is a "thing of value"? HUD (which originally administered RESPA) broadly defined thing of value to include virtually anything that would be worth giving or obtaining. This may include money, property, salaries, discounts, credits, dividends, interest-free loans, eligibility for a lottery, frequent-flyer miles, and much more. The "agreement or understanding" to refer services, as mentioned in Section 8, was also broadly interpreted by HUD. This agreement doesn't have to be in writing, or be formal. A simple nod or wink between the parties is enough to constitute an "agreement." VIRTUAL FIELD TRIP: RESPA is now enforced by the Consumer Financial Protection Bureau (CFPB). The federal regulations for RESPA can be found at CFPB's website, www.cfpb.gov.

How HUD defined "referral." In order to meet the definition of illegality under Section 8, you must actually refer business (or have business referred to you) in exchange for the thing of value. HUD defined referral to mean "any oral or written action directed to a person that has the effect of affirmatively influencing the selection by any person of a provider of settlement services when that person will pay in part of whole for such services." Examples of referrals include recommending another provider, verbal or written discussions about the merits of another provider, and most other verbal or written individual actions designed to influence the selection of the provider.What, then, is a "settlement service"? To meet the definition of illegality under Section 8, you must refer (or give a thing of value or have referred to you) by or for a "settlement service" business. HUD broadly defined a settlement service to include "any service provided in connection with a prospective or actual settlement, including the origination, processing, or funding of a federally related mortgage loan or related services, mortgage brokerage services, title services, legal services, document preparation services, credit reports and appraisals, home inspections, escrow and closing services, home inspection/pest inspection, mortgage insurance, homeowners insurance, homeowners warranties, mortgage life insurance, real estate brokerage service, real property tax service, and any other service that a settlement service provider requires a borrower to sell or pay." If it appears on the closing disclosure forms, or is required to close, it is likely a settlement service. Under RESPA, there can be no referral fee paid between settlement service providers. This means that generally, a lender may not give a real estate agent a referral fee. In order to legally receive such a fee, the real estate agent must perform a settlement service, such as the mortgage origination (if the licensee is licensed to originate loans). The fee must be based on providing a tangible service. The prohibition against referral fees for settlement service providers, however, does not include referral fees paid between real estate brokers for referring business. For instance, you may pay a referral fee to a broker who referred a client to you. Sue made a note of this information under her "What MAY be done" section. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

The Supreme Court weighs in: it is fee splitting that is the real issue. The Supreme Court decided in the Freeman v. Quicken Loans case (2012) that there can be no RESPA violation unless the fee is split. Under this rationale, a real estate broker's administrative fee would not violate the act. After all, the broker is not sharing or splitting this administrative fee with any other party. Additionally, the court dismissed the HUD policy statement as an attempt to read into RESPA "price controls" and "price regulation." note_icon NOTE: It is inadvisable to split any administrative fee, even payment to a broker's own agents in-house. You may certainly charge a "reasonable" fee and retain the whole of it, but be certain to adhere to state laws regarding deceptive or misleading advertising. Any fees should be disclosed to your client in advance. If an administrative fee is charged, it should go to the broker exclusively and not be shared with anyone else.

In California, a real estate agent can also be a loan officer within the same transaction. business_man Full disclosure must be given to all parties involved in a transaction if a real estate agent represents a buyer in both the property purchase and loan obtainment. Real estate agents must be licensed with the Bureau of Real Estate in California. Loan officers must qualify and register with the Nationwide Mortgage Licensing System. When acting as an agent for one of the principals and brokering the loan within the same transaction, California law requires two additional disclosures: The broker is acting in both capacities The amount, source, and form of compensation must be disclosed to all parties in the transaction These disclosure requirements may be met by using CAR form LBSB—Loan Broker-Sales Broker Disclosure. note_icon NOTE: Other states may have different licensing requirements and restrictions for real estate agents who also work as loan officers.

Which of the following statements is TRUE regarding RESPA? D. Under RESPA, consumers must generally have the choice of settlement service providers

Key Points for Unit 1 RESPA was created to provide consumer protection from excess charges by regulating the disclosure of all costs and business arrangements in a real estate transaction settlement process and prohibiting kickbacks for referrals. Regulation X further clarifies rules surrounding affiliated business arrangements. While initially administered by HUD, RESPA is now administered by the Consumer Financial Protection Bureau. Mortgage service providers must provide two months' notice prior to a monthly payment adjustment in an ARM, must not over-charge borrowers for forced-place insurance, and must quickly resolve borrower complaints. RESPA applies to residential transactions involving federal loans. Settlement service providers covered under RESPA include real estate agents, home warranty companies, mortgage brokers, home inspectors, home and pest inspectors, and title companies, among others. Service providers generally NOT regulated by RESPA include builders and remodelers, service and repair contractors, moving companies, and landscapers. Transactions covered by RESPA include first and subordinate loans on residential property, home purchase loans, lender-approved assumptions, refinance loans, loans for property improvement, HELOC and home equity loans, and reverse mortgages. Transactions not covered by RESPA include cash transactions, commercial and business loans, vacant land, and construction-only loans. Under RESPA, a real estate licensee may not accept anything of value for the referral of a settlement service provider. Penalties for RESPA violations may include fines of up to $10,000, up to one year in prison, or both. An affiliated business arrangement (AfBA) is one in which two or more companies share partial ownership and revenue. RESPA applies to those arrangements where business ownership of 1% or more is shared. When referring an AfBA to a consumer, the relationship must be disclosed, the consumer must be given a choice, and there must be no payment between AfBAs for the referral itself. AfBAs may violate RESPA in a variety ways, including charging less than market value for services or rent. Sham AfBA arrangements do not qualify as AfBAs under RESPA. Factors used to determine whether a bona fide AfBA exists include capital, client base, employees, separate facilities, and whether the entity performs substantial services. Unless there is a clear reason for requiring the use of a particular lender that does not involve any kickback, the practice is suspect, and suggests a RESPA violation, a violation of consumer protection regulations, and possibly anti-trust law. As such, the practice of mortgage steering should be avoided.

Mark is a real estate licensee found in violation of RESPA. What is the worst case scenario for his penalty? Congratulations! That's the correct answer! D. Fine of up to $10,000 and jail time of up to one year

Which of the following statements is TRUE regarding referrals and RESPA? Congratulations! That's the correct answer! A. Real estate licensees may not offer rebates to their clients for RESPA-qualified transactions. B. Under RESPA, referral fees are allowed for properties containing five or more units.

Lesson: Referral Fees to Unlicensed Individuals whistle It is illegal to give referral fees to unlicensed individuals for RESPA-covered transactions. Example (a true story, with names changed): Sue remembered attending a real estate seminar in another city earlier in her career. She participated in a session called "Increasing Your Referral Pipeline." As the attendees sat around a conference table, the participants took turns sharing referral-generating ideas with the others. One participant, Claire, shared her best tip: "I just tell everyone in my sphere that if they refer me business, as soon as the transaction closes, I'll give them $200." The attendees gasped. Sue spoke first. "You can't do that. That's illegal." Why? Because these unlicensed individuals are now soliciting real estate business rather than a more casual referral. It's not unheard of for real estate licensees to reward referral sources with tangible tokens of appreciation. There used to be a belief (and still is, in some circles), that any tangible token of appreciation under $25 was "safe" and would not violate RESPA. But here is how Section 8 is worded: Section 8: Kickbacks, Fee-Splitting, Unearned Fees Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed. Violations of Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case, a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private lawsuit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service. There is no mention of a $25 cap. Offering a $200 referral fee would definitely violate RESPA, but even the $25 can be questionable. And any token of appreciation, if offered in exchange for a referral (and not simply a "thank you" after the fact) would be a violation in a RESPA-covered transaction. Both the broker and the unlicensed person would be considered in violation of the law. Remember that unlicensed activity is a criminal act per state real estate law.

RESPA does not cover some transactions. Though it may be good practice to disclose all costs and affiliated business arrangements, whether covered by RESPA or not, RESPA does not require disclosure for the following exempted transactions and loan types. All-cash transactions Commercial or business loans: Normally, RESPA does not cover real estate loans for a business or agricultural purpose. However, if the loan is made to an individual entity to purchase or improve a rental property of one to four residential units, it is regulated by RESPA, but only if the owner will also occupy the property. Vacant land/unimproved property: When a loan is made to purchase vacant land and none of the loan proceeds will be used to construct a covered residential structure, the loan is exempt from RESPA oversight. Large land tract purchases of 25 or more acres are exempt whether or not a residence is present. Certain loan assumptions: When a loan is assumed and the lender has no rights to approve future persons for assumption, RESPA does not cover the loan. Construction-only loans: Unless a loan is made as a construction-to-permanent loan, RESPA does not cover a construction loan. Governments: The government exempted itself and state governments from RESPA. note_icon NOTE: You may not know at the onset whether any ensuing transaction will involve a federally-related mortgage loan or will otherwise fall under RESPA. For example, a mortgage broker proposes to give you, in exchange for a finder's fee, the name and phone number of the mortgage broker's cousin who is interested in selling his home. If you took a listing for that cousin, and the eventual buyer paid all-cash for the home, the proposed referral arrangement and finder's fee would be legal. However, if the buyer obtains a federally related mortgage loan to buy the property, as is commonly the case, the referral fee arrangement would violate RESPA.

Lesson: The Many Ways a Real Estate Licensee May money Violate RESPA Congress enacted RESPA to curb abuses against the consumer in real estate settlement charges. Sue was curious about the types of abuses against consumers that were occurring before the act was passed. She found that excess closing costs were due to behind-the-scenes dealings, such as: Kickbacks paid for referrals of closing service business Business arrangements that resulted in sham services with no value Undisclosed affiliated business arrangements Marketing arrangements between service providers that resulted in increased settlement costs for consumers Unit Quizzes and the minimum required study time must be met to unlock Final Exam.Even reciprocal referrals may violate RESPA. Section 8 of RESPA prohibits kickbacks between lenders and third-party settlement service agents in the real estate settlement process. Even reciprocal referrals among settlement service providers could be construed as a violation of RESPA. However, reciprocal referrals between two real estate licensees, even though both are settlement service providers, would not be a RESPA violation. Sue had a certain geographical area where she was most comfortable working because she knew the market and wanted to stick with what she knew while she grew her business. She had met real estate professionals through networking events who handle other geographical areas, so from this research, she understood that she would not be violating RESPA if she pursued reciprocal referral arrangements with these other licensees.

In Carter v. Welles-Bowen Realty, 493 F. Supp. 2d 921 (6th Cir. 2009), the plaintiffs did not allege that they were overcharged for the title insurance or settlement services. Sue reviewed the case further and found that the defendants argued that "Congress did not grant a right of action to private plaintiffs to seek recovery of damages when private plaintiffs have not suffered any harm in the form of economic damages or in the form of inflated services without providing any benefits to home buyers." However, the plaintiffs asserted that the section 8(a) presents the possibility for other harm, including a lack of impartiality in the referral and a reduction of competition between settlement service providers. Ultimately, the plaintiffs argued, the purpose of the statute is to prevent certain practices that are harmful to all consumers by establishing that consumers have a right not to be subject to those practices and providing both public and private remedies of that right. The court held that "Congress created a private right of action to impose damages where kickbacks and unearned fees have occurred—even where there is no overcharge." This allows private parties to enforce RESPA. handout_icon HANDOUT: Here is a copy of the court transcript for the above-referenced case. Unit Quizzes and the minimum required study time mus

Mortgage Steering and Federal Laws trust Mortgage steering may be illegal under RESPA or Truth in Lending Laws. Sue considered this scenario: Let's say you have presented an offer on behalf of your buyer. The seller counters on several terms and the price—and demands that your buyer use the seller's lender of choice. Is this a RESPA violation? Sue discovered that the answer depends on several variables. In some instances, the seller may have a particularly difficult property to finance—such as a condominium complex undergoing a switch from ownership to rentals or vice versa. If the building is 50% or more rentals, some lenders will not provide financing. If the seller knows this, but has done the legwork to find a lender that will finance the purchase, this should be communicated, and would likely not be a violation of either RESPA or Truth in Lending. However, if the seller wants the buyer to use a particular lender for another reason (e.g., incentives or an affiliated business arrangement between the listing firm and the lender), this would likely be a violation of RESPA, Truth in Lending, or both. note_icon NOTE: Basically, unless there is justification for doing so (as in this scenario), requiring a buyer to use a specific lender would be suspect in any RESPA-covered transaction. Nearly any other purpose would involve a kickback to either the seller or the agent, either of which would violate RESPA. Sue noted this under "What NOT to do."

Next, HUD has stated that it would generally be satisfied if all of the following conditions were met: The "third party" (you) takes information from the borrower and fills out the loan application. You perform at least five additional items from the above list. The fee paid is reasonably related to the market value of the services rendered. note_icon NOTE: If the five items performed are the last five counseling services listed in the group of 14 (see items 10‒14 below), HUD expressed concern that the fee paid could be construed as payment to steer a borrower to a certain lender. 10. Analyzing the borrower's income and debt and pre-qualifying the borrower to determine the maximum mortgage the borrower can afford 11. Educating the borrower on the home buying and financing process, advising the borrower about available loan products, and demonstrating how closing costs and monthly payments may vary under each product 12. Collecting financial information and related documents as part of the application process 13. Assisting the borrower in understanding and clearing credit problems 14. Maintaining regular contact with the borrower, licensees, and lender during the loan process to apprise them of the loan status and to gather additional information as needed Therefore, under this specific situation, the third party must: Give the borrower the opportunity to consider products from at least three different lenders Receive the same compensation regardless of which lender's product is ultimately selected Ensure that any payment made for the "counseling type" services is reasonably related to the services performed, and not based on the amount of loan business referred to the lender Source: HUD's Informal Opinion Letter No. 13 (February 14, 1995).

Loan Origination as an Additional Revenue Source loan You may not accept a fee for referring a client to a mortgage broker or lender if the transaction is covered under RESPA. However, you may receive a bona fide payment for loan origination services actually performed. The CFPB issued guidelines for this type of arrangement, starting with a list of 14 bona fide loan origination services, which include: Taking information from a borrower and filling out the loan application Ordering verifications of employment and verifications of deposit Ordering requests for mortgage and other loan verifications Ordering appraisals Ordering inspections or engineering reports Providing disclosures to the borrower Ordering legal documents Determining whether the property is located in a flood zone or ordering such service Participating in the loan closing Analyzing the borrower's income and debt, and pre-qualifying the borrower to determine the maximum mortgage the borrower can afford Educating the borrower on the home buying and financing process, advising the borrower about available loan products, and demonstrating how closing costs and monthly payments may vary under each product Collecting financial information and related documents as part of the application process Assisting the borrower in understanding and clearing credit problems Maintaining regular contact with the borrower, licensees, and lender during the loan process to apprise them of the loan status and to gather additional information as needed note_icon NOTE: These guidelines are based upon HUD's 1999 RESPA Policy Statement and were labeled as an "unofficial interpretation." There is nothing in the Dodd-Frank rules or the CFPB overturning or withdrawing this opinion. However, under the California Business and Professions Code section 10166.01 (which implemented the federal SAFE Act), a mortgage loan originator (MLO) is defined as "an individual who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain." Given that HUD "would be satisfied" if the third party filled out the loan application, then as a practical matter, it would be necessary to obtain an appropriate mortgage loan originator license endorsement before you could legally receive a fee for loan origination. Your broker would need an MLO endorsement, as well. field trip VIRTUAL FIELD TRIP: To learn more about the California Bureau of Real Estate's licensing law for MLOs, click here to read this article that was published when the law went into effect (which explains why the bureau's former name, "DRE," is used).

Become a real estate columnist. If you enjoy writing, consider writing for the local newspaper, magazine, or a real estate publication. Study the real estate market, interview key players, and produce reports. Whether or not you are compensated, such activities can lead to additional referrals and opportunities. They can also decrease the amount of money you need to spend on advertising. A bonus is that articles tend to carry more credibility than advertising. You have likely spent money advertising in local publications, so they might be receptive to your offer to write for them. In addition to the print media, consider online venues, such as blogs with content advertising, guest blogging, etc. Place an ad on a neighborhood website or blog. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Partner with banks to prepare and market foreclosure properties. When there's a glut of foreclosure properties on the market, this is an especially timely option. Banks may be willing to pay you as a consultant rather than through commissions at closing. You may even wish to create foreclosure purchase seminars and charge for attendance. Foreclosure properties require a specialized skill set and knowledge, so make certain you have the training and expertise you need to provide appropriate service to this particular market

Payment of referral fees between a real estate brokerage firm and affiliated service providers is still prohibited. graphic The last of the three criteria means that this RESPA exemption for affiliated business arrangements allows referrals between affiliated businesses, but does not create a mechanism for the payment of referral fees between affiliated businesses. With respect to this third requirement of no payment of fees, RESPA regulations state that when it comes to an ownership interest, the return on investment cannot be based on referrals (e.g., actual referrals, estimated referrals, or anticipated/future referrals). example_icon Example: When licensees at Merit refer clients to Titan Title, Titan Title may not pay a referral fee to Merit or its licensees. Merit may share in Titan Title's revenue, which includes the referred business, but this revenue-sharing agreement may not be based on the number of referrals given or anticipated future referrals.

Affiliated Business Arrangements. Sue investigated the connection between RESPA and affiliated business arrangements. She found that one purpose of RESPA is to regulate the referral of business between companies involved in a real estate transaction settlement through an affiliated business arrangement (AfBA). An example of an AfBA would be a title insurance company, where one of the owners was a real estate broker, that received referral title business from that broker's real estate business. These types of relationships are not necessarily illegal, and Congress recognized that they may offer convenience and potential savings to consumers, provided they were both regulated and disclosed. In 1992, the Department of Housing and Urban Development (HUD) issued Regulation X, which further clarified rules surrounding AfBAs and their permitted involvement in real estate settlement transactions. Though amended slightly in 1996, Regulation X was not changed much, and both RESPA and HUD recognized AfBAs as being legal and useful if regulations were followed and proper disclosure were made to the consumer. On July 21, 2011, administration and enforcement of RESPA was transferred from the Department of Housing and Urban Development to the Consumer Financial Protection Bureau (CFPB).

RESPA Mortgage Servicing Rules Change in 2014 The Consumer Financial Protection Bureau (CFPB) adopted proposed changes in January 2013, which will be in effect January 10, 2014. While the rules pertain to mortgage service providers, it is important for you to be aware of the changes, particularly if your brokerage has an AfBA with a mortgage company. A summary of the rules follows. Mortgage servicers must give borrowers a mortgage statement each billing cycle in writing. The statement must include what is owed, payments made since the last statement, how those payments were applied, any transaction activity such as fees charged to the account, contact information for the servicer and housing counselors, and any late payment information. For borrowers with fixed rate mortgages, a servicer can waive the monthly statement if it provides the borrower with a book of coupons to send in with payments. The coupon book must contain certain information about the account and how to contact the servicer. note_icon NOTE: Under the new rules, three days prior to closing on the loan, the mortgage servicer must provide the borrower with a free copy of any appraisal obtained on the property. This is something all real estate licensees should know, so Sue added this information to her notes.

Certain activities and businesses are regulated by RESPA, and others are not. Sue dug out some handouts she received during a previous training at her brokerage. Read over her shoulder on the next few slides. Knowing the activities and businesses that RESPA regulates will help you to stay out of trouble in your marketing efforts. RESPA strictly prohibits certain cooperative marketing activities between regulated businesses (settlement service providers). A settlement service provider provides services in connection with the purchase or sale of a property that are paid for, directly or indirectly, out of the funds at settlement. Examples of settlement service providers RESPA covers include: Real estate agents and brokers Insurance agents Appraisers Home warranty companies Mortgage brokers Title companies and title agents Credit reporting agencies Document preparation companies Home and pest inspectors If you're wondering whether a company would fall under the heading of "settlement service provider," ask yourself whether the transaction could be consummated without the use of these services. All of the listed services are, or can be, part of the closing (or settlement) of a real estate loan and transaction. Service providers NOT regulated by RESPA include those services that would generally be provided after closing, such as: Building and remodeling contractors Service and repair contractors Moving companies Landscapers Other home improvement or design companies Use or non-use of these companies would not be related to the settlement costs the consumer paid. Knowing the difference between a company that falls under RESPA and one that does not is important if you are anticipating doing any cooperative marketing with any of these companies. If you plan on any marketing ventures with a regulated business, you need to be very careful.

RESPA covers most real estate transactions that involve loans. business_woman As most residential loans end up federally related in some way through federal loan guarantees and mortgage funding consolidation, RESPA covers the vast majority of real estate transactions. Specifically, the coverage triggers include: Most loans secured by a lien (first or subordinate position) on residential property Home purchase loans Lender-approved assumptions Refinance loans Loans for property improvement Home equity lines of credit Reverse mortgages Installment sales contracts, or land contracts, would also be covered if the seller taking back part of the loan is also funded by another loan on the property that is covered by RESPA.

Real estate professionals can violate RESPA in any of the following ways. Sue listed the following under the "What NOT to do" section of her notes: Accepting anything of value for the referral of settlement service business Accepting marketing help or ad space from a settlement service provider Having ownership interest in a service company and referring business to it without proper disclosure Participating in any marketing or service that results in charges to the consumer that are not normal or for services without real value Sue understood that it's one thing to have ownership interest in a title company and to refer business to that company. It is quite another to do this without disclosing your relationship, or in a manner that suggests this is the only title company the consumer may use (which reminded Sue of Jill the Buyer and that $2,000 service fee!) Sue made a new section in her notes: "What MAY be done" and wrote the following information: It is not illegal to share marketing costs with an affiliated business. But "sharing marketing costs" is a gray area, so Sue added the caveat that licensees should be very careful when they do so. Fines and sanctions for RESPA violations are stiff and can include loss of license. Sue noted that a title company may NOT: Provide you with free marketing or ad space Provide free food for your open house Sponsor your annual golf outing Provide anything of value in exchange for your referrals

RESPA enforcers will look for the following red flags. Sue found an article that provided the following red flags that will pique the interest of RESPA enforcers: Juggling shares. Don't rearrange share percentages in an affiliated service business each year based on the volume of business a salesperson submitted the previous year, or divide profits based on referrals instead of ownership interest in the venture. Delaying affiliated business arrangement disclosures. Don't wait until closing to reveal that a service is provided by an AfBA. Disclose the fact at or before the time of referral. Tying the monthly marketing agreement fee to referrals. Don't make the mistake of basing the next year's marketing fee on the number of referrals received in the previous year. Paying third-party sales representatives on a commission basis. Only W-2 employees may receive transaction-based compensation under RESPA. Using a real estate practitioner as a mortgage broker. Taking a loan application is an actual and necessary service, compensable under RESPA, but most states require anyone acting as a loan officer or negotiating a residential loan for compensation to have an active mortgage loan originator's license. Receiving less than market value for services, such as payroll, performed for an affiliated business. Make sure the fee bears a reasonable relationship to the value of the service. Basing office rental rates to third-party service providers at a brokerage on a monthly services fee similar to that charged to real estate agents at the company. Calculate charges for space on the fair market value of the square footage under the lease. Compensating referrals from past customers. Giving a gift certificate to a past customer, as opposed to a current one, for every friend or relative of theirs who closes with your title agency violates Section 8(a) of RESPA. Contracting out substantive services. Affiliated businesses are expected to use their own employees to provide such core services to the public. Offering sales associates office-wide incentives for referrals to the broker's affiliate service business. Source: "10 AfBA Mistakes That Violate RESPA," REALTOR®.org magazine.

Which governing body administers RESPA? Congratulations! That's the correct answer! B. CFPB

RESPA protects the consumer from exces s charges. Sue continued her research. She had learned that RESPA was created because various companies associated with real estate transactions, such as lenders, real estate brokerages, construction companies, and title insurance companies, often provided undisclosed kickbacks to one another, which increased the overall settlement cost to consumers. For example, a lender advertising a home loan might have advertised the loan with a 6% interest rate. When Jill the Buyer applied for the loan, the lender told her that in order to get that rate, she must use the lender's affiliated title insurance company and pay $2,000 for the service, whereas the normal rate was $1,000. The title company would then pay $1,000 to the lender—at the expense of Jill the Buyer. RESPA makes this practice illegal. RESPA regulations require that prices for the settlement services be made clear to allow price competition by consumer demand, which drives down prices. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Client gifts are fine. It is acceptable for a listing agent or buyer's agent to pay for the seller's or buyer's transactional costs, and to give a closing gift to a buyer or seller. Let's say, for example, a listing agent pays for a buyer's home warranty plan, or the buyer's agent gives a buyer a new doormat as a housewarming gift. Again, as mentioned previously, these activities are not only good business practices, but in some cases, they fall squarely within RESPA's goal of minimizing consumers' settlement costs.

RESPA violations are usually reported by other licensees. Rarely does the public report such violations, because the average person is unaware of the rules prohibiting paying referral fees to unlicensed individuals. When violators are turned in, the violators' colleagues are usually behind the call. If found guilty of a RESPA violation, you may be subject to civil and criminal penalties, including: License suspension License revocation Hefty fines Jail time

Some shared marketing does not violate RESPA. house Sue discovered that you can do cooperative marketing with a title company, or have a title company present at an open ho use, but the rules for compliance are strict. A title company, as an example, can: Share ad space with you if you pay your pro-rata share of the cost Provide handouts/promotional items if these handouts have the title company's logo and not yours Co-op direct mail if you pay your share of the cost Attend your open house and promote only its business with its sign/logo note_icon NOTE: These are just a few of the areas in which licensees have run afoul of RESPA regulations. If in doubt, a licensee should run any decisions related to the marketing or referral of business by a knowledgeable attorney.

RESPA violations may not involve overcharging. Sue—a big fan of Law and Order and other legal shows—wondered if there were any legal cases related to RESPA. Of course there were, she found, considering the issues that had swirled around the topic with those unpleasant closing surprises for consumers! Although RESPA was originally enacted to prevent overcharging of consumers, a service provider may violate RESPA even when charges are customary. In a landmark case, Alston v. Countrywide Financial Corp., the U.S. Court of Appeals for the Third Circuit ruled that a lawsuit alleging RESPA violations against a major lender can move forward even though the borrower who filed the suit wasn't overcharged. In this case, the borrower obtained a mortgage loan from Countrywide Home Loans (which later merged with Bank of America). The borrower was also required to get private mortgage insurance, as is customary, because her down payment amounted to less than 20% of the home purchase price. Countrywide referred her to a group of seven private mortgage insurers, all of which were required to reinsure their mortgage insurance with Balboa Reinsurance Co., a subsidiary of Countrywide. The borrower brought a class-action lawsuit against Countrywide, claiming that its captive reinsurance arrangement amounted to a disguised kickback, which would violate RESPA. The trial court dismissed the borrower's lawsuit, but the case was successfully appealed, with the Court of Appeals deciding that an overcharge is not required to bring a RESPA action. Instead, a consumer can bring a lawsuit for any charge that allegedly involves a kickback or fee split that violates RESPA. The case was sent back to the lower court and resulted in a $34 million settlement claim against the Countrywide unit of Bank of America. Sue made this note and underlined it several times: RESPA is serious business! She was glad she set aside this time to learn everything she, could because she didn't need any more bumps in her professional road. field trip VIRTUAL FIELD TRIP: To read this case, click here.

he Many Ways a Real Estate Licensee May money Violate RESPA Congress enacted RESPA to curb abuses against the consumer in real estate settlement charges. Sue was curious about the types of abuses against consumers that were occurring before the act was passed. She found that excess closing costs were due to behind-the-scenes dealings, such as: Kickbacks paid for referrals of closing service business Business arrangements that resulted in sham services with no value Undisclosed affiliated business arrangements Marketing arrangements between service providers that resulted in increased settlement costs for consumers

Even when referral fees are allowed, disclosure is required. If a referral arrangement is legal under both federal and state law, a real estate licensee who receives a referral fee should disclose that fee to the client in writing. California licensing laws prohibit a real estate agent from claiming or taking "any secret or undisclosed amount of compensation, commission or profit or the failure of a licensee to reveal to the employer of such licensee the full amount of such licensee's compensation, commission or profit under any agreement authorizing or employing such licensee to do" licensed acts (Cal. Bus. & Prof. Code § 10176(g)). To do so is grounds for revocation or suspension of a licensee's real estate license, with the licensee's lack of disclosure leading to the potential for charges of: fraud conspiracy to defraud intentional misrepresentation negligence, and/or dishonest dealing Furthermore, a real estate agent owes his or her client a fiduciary duty of utmost care, integrity, honesty, and loyalty in their dealings (Cal. Civ. Code § 2079.16).

Rebates to the consumer are allowed. Even though RESPA prohibits referral fees, it does not prohibit a listing agent or buyer's agent from giving a portion of his or her commission to the seller or buyer. Moreover, giving a commission rebate to a seller or buyer seems consistent with RESPA's goal of minimizing a consumer's settlement costs. However, a buyer who intends to use a commission rebate as part of the down payment should first consult with the mortgage lender about the loan underwriting guidelines for that arrangement. Some states prohibit any rebates, but California allows them.

RESPA applies to residential transactions involving federal loans. RESPA generally prohibits the payment of referral fees, unearned fees, or kickbacks, as well as the splitting or sharing of fees or charges made or received for providing "real estate settlement services." The terms "federal loan" and "settlement services" are both broadly defined under RESPA. Sue learned that almost any institutional residential loan is considered a federally related loan. Sue wanted to know how "settlement services" are defined under RESPA, so she looked it up and found this definition: "Any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement." Unless they fall under one of RESPA's exceptions, payments from the mortgage company to a builder or real estate licensee for referrals are prohibited. (Sue created a section in her notes titled, "What NOT to do" and added this information) Sue also underlined the section in the settlement services definition (underlining is not in the original) that noted that a "settlement service" is defined as "any service provided in connection with a real estate settlement." So, as a settlement service provider, a real estate agent is prohibited under RESPA from giving or accepting a referral fee related to the real estate business, whether the other party to the referral arrangement is a settlement service provider or not. For example, a real estate licensee cannot receive a referral fee for real estate service from a credit repair service, because the real estate licensee is a settlement service provider.

Rita is a real estate agent who is working with Carly, a buyer. Carly has some credit issues and Rita connects Carly with a credit repair service, ABC Credit Repair, to clean up Carly's credit. Six months later, Carly is qualified for a purchase. In addition to the commission Rita will receive when Carly's transaction closes, may Rita receive a referral fee from ABC Credit Repair? No, because Rita is a settlement service provider. Congratulations! That's the correct answer!

Sometimes a referral is not a referral. Sue wondered if this had ever happened to other licensees: You're approached by a buyer who wants to purchase a property in your area, and wants your representation. However, the buyer has a [friend, brother, sister, parent, child, aunt, uncle, grandparent, third-cousin-twice-removed] who is licensed and wants a referral fee—even though you've never talked to that supposed "referring" agent, and that agent had nothing to do with the buyer approaching you. Is this legal? Does it violate RESPA? Does it violate anti-trust laws? Sue confirmed that this is perfectly legal, if a bit annoying. RESPA was designed to protect the choice of consumers, not real estate brokers. Antitrust is related to limiting consumer's choices. The only choice that's limited here is yours as the licensee. If you're faced with this "opportunity," you have three choices: Agree to pay the referral fee (provided the other licensee is actually licensed) Refuse, in which case the buyer will likely shop for another representative Try to talk the buyer into forgetting about the referral fee, or limiting it to a nominal fee You might say, "But wait! What about the RESPA prohibition of paying for services that are not actually provided?" This refers to payments between settlement service providers, which this technically is, but it does not relate to payment between real estate licensees. You can argue that the so-called "referring" licensee is on shaky ethical grounds, and you'd be right. But it's not illegal, nor is there any obvious code of ethics violation at work here. note_icon NOTE: California has a different take oreferral fees to unlicensed individuals. While it is illegal under California law to give referral fees to unlicensed individuals for activities requiring a license, California allows payments to "finders." The key to complying with California law is to make certain that the finder is not engaging in licensed activity by selling or negotiating. However, even if it is legal in California, paying referral fees for RESPA-covered transactions (those involving federally related loans, which nearly all transactions are) is a RESPA violation (outside of referral fees between licensed real estate brokers, that is). Keep in mind that state law is preempted by federal law when legislation conflicts.

Section 8 of RESPA makes it illegal for settlement service providers, including real estate agents, to give or receive anything of value for a referral for any transactions covered by RESPA. A "thing of value" can include lottery tickets, food, marketing materials and tools, and ad space. It can even include a reciprocal referral. Violations of RESPA include paying sham employees for referrals. For certain services (title, escrow, home warranty, and pest control), California does not limit the referral restriction to one to four properties; it applies to any real estate referral to or from these providers. In California, commission rebates to the consumer are allowed. It is illegal under RESPA to give referral fees to unlicensed individuals for RESPA-covered transactions. California allows payment of a "finder's fee." The key to complying with California law is to ensure that the "finder" is not engaging in licensed activity by selling or negotiating. However, this would still be a RESPA violation if it were a RESPA-covered transaction. Real estate licensees may pay one another for referrals, provided their license status is current and active. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Two case studies involving sham AfBAs. Sue was intrigued with these sham entities, and wanted to find some related court cases. She located a couple of older ones in HUD's archives. In the first case she reviewed, Carter v. Welles-Bowen Realty, the Carters were the purchasers of real estate, represented by Welles-Bowen Realty. The title company that closed the transaction was WB Title, an AfBA owned by Welles-Bowen Investors and Chicago Title. The Carters were given an AfBA Disclosure Statement noting the Welles-Bowen/WB Title affiliation. The suit alleged that WB Title was a sham title company because the entity itself didn't provide settlement services, but still received unearned revenues while Chicago Title actually did the settlement work. Further, the suit alleged that Chicago Title provided illegal kickbacks to WB Realty in exchange for the referral of settlement work. Although initially dismissed on appeal, the plaintiffs found favor with the district court, even though no overcharges occurred. In a summary statement, the court said, "The plain meaning of the statutory language and the persuasive authorities examined by the court indicate that Congress created a private right of action to impose damages where kickbacks and unearned fees have occurred—even where there is no overcharge. Accordingly, the district court's determination is reversed, and the case is remanded for action consistent with the conclusions herein." In a second case, HUD determined that TitleVentures.com (a title insurance agency located in Kingsport, Tennessee) established dozens of sham title insurance companies for the purpose of paying kickbacks to real estate and mortgage brokers in five states for the referral of title business. As principal owner of TitleVentures.com, Jerry D. Holmes, Jr. joined with real estate and mortgage brokers to establish sham title companies in North Carolina, South Carolina, Tennessee, Georgia, and Ohio. As part of the settlement, Holmes agreed to pay $7,500 to the U.S. Department of the Treasury and to cease using fictional agencies as a vehicle for facilitating referrals from real estate licensees and mortgage brokers. The bogus title companies in this case had few or no employees and no office space, and did little or no title work, while collecting 80% of title insurance premiums that borrowers paid. Under the settlement agreement, Holmes was required to shut down 36 affiliated title companies established with real estate and mortgage brokers. Holmes further agreed that all title agencies through which he conducted future business would have sufficient capital, be independent, be staffed by qualified employees, would perform core title work, and would obtain at least 40% of gross revenues from independent sources. Source: HUD Archives.

Section 8 of RESPA provides the specifics. Sue went to Section 8 of RESPA to inspect the law's legal teeth to make sure she understood the link between the law and its real-world application: (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. ... (d)(2) Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

The Dodd Frank Act prohibits abusive practices that take unreasonable advantage of the consumer. Sue was familiar with the Dodd-Frank Act, which is a financial reform act that heightened consumer protection. It prohibits an act or practice that takes unreasonable advantage of consumers' inability to protect their own interest in selecting or using a consumer financial product. This is termed "abusive" under Dodd-Frank, and, Sue noted, it would specifically apply to a real estate broker or mortgage broker. Section 1403 of the Dodd-Frank Act, Prohibition on Steering Incentives, reads: Section 129B of the Truth in Lending Act [as added by section 1402(a)] is amended by inserting after subsection (b) the following new subsection: "(4)(c) restricting a consumer's ability to finance, at the option of the consumer, including through principal or rate, any origination fees or costs permitted under this subsection, or the mortgage originator's right to receive such fees or costs (including compensation) from any person, subject to paragraph (2)(b), so long as such fees or costs do not vary based on the terms of the loan (other than the amount of the principal) or the consumer's decision about whether to finance such fees or costs." Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Section 9 of RESPA prohibits sellers from dictating buyer's choice of settlement service providers. Sue had worked with sellers and some builders who had very strong opinions about how things should work. She recognized her job was to give good advice, and while she couldn't provide legal advice, she could explain what acts and practices can run afoul of the law. For one, lender choice should not be dictated on MLS postings. Some builders will ask that buyers go through a specific title company because the builder is receiving incentives from that title company. This is illegal and in violation of RESPA. Consumers must have the choice of settlement service providers. Another aspect of this is a seller who requests that the buyer use a specific lender, that the buyer include with the offer an application with the lender of the seller's choice, or that the buyer be pre-qualified with the seller's lender. Often, this is an attempt to get the buyer to use that specific lender. After all, if the buyer is going through the trouble to get pre-qualified through a specific lender, why not simply go with that lender? There is also the issue of the seller's lender now having access to the buyer's Social Security number and other private information. In a competitive bidding situation, refusing to comply with this request can lose your client the deal. When a licensee is representing a buyer in this situation, proceed with caution. Although Section 9 only mentions title companies, not lenders, the intent of RESPA was to allow consumers free choice to shop for their own settlement service providers. Sue knew that builders and lenders selling REOs often offer incentives to buyers who use their choice of title companies or lenders (usually affiliated with the builder's company). The legality of this may be called into question, specifically regarding whether it violates anti-trust laws under improper tying arrangements (i.e., linking service providers together with the end result that the consumer pays more). Sue made a note that if she's representing a buyer who is told which lender or title company must be used, the buyer should be advised to determine the actual costs, and whether they will be higher when using the required service provider. When in doubt, seek legal advice. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

n order to determine whether an affiliated business arrangement violates RESPA, three factors will be considered. Which of the following is NOT one of those factors? Congratulations! That's the correct answer! A. Has the consumer been given notice of the affiliated relationship within five business days of the verbal referral? B. Has the consumer been informed that t

Sham AfBA Arrangements Beware of sham AfBA arrangements. trap Sue's research underscored an important point: Compliance with RESPA conditions for an AfBA, such as disclosing the relationship, not forcing the consumer to use the affiliate, or not paying or receiving referral fees from the affiliate, still doesn't mean that the spirit of the law is being followed. In the past, HUD made it clear that the AfBA exemption may not be used to promote referral fee payments through what it called "sham arrangements" or "shell entities." In a policy statement HUD issued in 1996, HUD listed the factors it would use to determine whether a joint venture created by two existing settlement service providers is a bona fide provider of settlement services, or a sham entity designed to facilitate payment of illegal fees, in which case that entity wouldn't be entitled to the benefit of the AfBA exemption! What factors determine whether a sham AfBA exists? Does the new entity have sufficient initial capital and net worth, typical in the industry, to conduct the settlement service business for which it was created? Or is it under-capitalized to do that work? Is the new entity staffed with its own employees to perform the services it provides, or are the employees "loaned" from one of the parent providers? Does the new entity manage its own business affairs, or is an entity that helped create the new entity running it for the parent provider making the referrals? Does the new entity have an office from which to conduct business separately from one of the parent providers? If the new entity is located at the same business address as one of the parent providers, does the new entity pay market value rent for use of its space? Is the new entity providing the substantial, essential functions of the real estate settlement service for which a fee is received? Does it incur the risks and receive the rewards of any comparable enterprise operating in the marketplace? Does the new entity perform all of the substantial services itself, or does it contract out part of the work? If so, how much is contracted out? If the new entity contracts out some of its essential functions, does it do so from an independent third party, or from a parent, affiliated provider or an entity that helped create the controlled entity? If the new entity contracts out work to a parent, affiliated provider, or an entity that helped create it, does the new entity provide any functions that are of value to the settlement process? If the new entity contracts out work to another party, is that party receiving a payment for services or facilities provided that bears a reasonable relationship to the value of the services or goods received, or is the contractor providing services or goods at a charge such that the new entity is receiving a "thing of value" for referring settlement service business to the party performing the service? Is the new entity actively competing in the marketplace for business? Does the new entity receive or attempt to obtain business from settlement service providers other than one of the settlement service providers that created the new entity? Is the new entity sending business exclusively to one of the settlement service providers that created it (such as a loan package to a lender), or does the new entity send business to a number of entities, which may include one of the providers that created it? Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Here are some referral fee alternatives to reward unlicensed individuals for referrals. Sue did some additional research to come up with a list of referral fee alternatives: Instead of giving your referral sources gift cards or other tangible tokens of appreciation, take them out to lunch. Your presence at the lunch makes it a promotional, marketing meeting, and not a gift. Not only is taking a referral source to lunch an acceptable form of saying "thank you," it also provides an additional opportunity to meet with your source face-to-face, which may lead to more referrals. Mention the person who gave you the referral by name in your client newsletter or e-newsletter. People love to see their name in print, especially when it is tied to praise. Have a "clients and friends" appreciation party where you invite everyone who has helped support your business to a seasonal party or BBQ. Take this time to genuinely thank them for helping your business grow. (Note that limiting the party to only those who have referred business to you would violate RESPA. Including clients and referral sources would not.) Cross-refer whenever you can. Small business owners, especially, appreciate your referrals. Make certain that you only refer quality individuals and businesses. It's also wise to give more than one name (three is a good rule of thumb). Providing three names allows your client to make the selection. If you provide only one name, and the referral does not work out, it could come back to haunt you.

State penalties for paying illegal referral fees may include fines and suspension. Sue learned that a complaint to the real estate commission, regardless of the outcome, often requires hiring an attorney, submitting to an investigation, and attending a disciplinary hearing. If you are found to have violated state license law, the penalty may include fines and license suspension. Furthermore, you may find your name printed under the "Disciplinary Action" section of the commission newsletter. Not where you want to see your name in print! It's exciting to get a referral, but before proceeding, licensees must make sure to perform their due diligence to avoid a potential RESPA violation. To limit your risk of paying illegal referral fees, you should: Ask the referring party for broker contact information and license number. Verify license status with the referrer's real estate association. Retain any proof of licensing documents in your transaction file. Know state laws regarding the paying of referral fees, appropriate disclosure, and Internet advertising. Know state laws about referrals originating from foreign countries that don't license real estate professionals (Mexico, the United Kingdom, Venezuela, and many others). The express language of the law doesn't always address this situation.

Sue found an article that provided the following red flags that will pique the interest of RESPA enforcers: Juggling shares. Don't rearrange share percentages in an affiliated service business each year based on the volume of business a salesperson submitted the previous year, or divide profits based on referrals instead of ownership interest in the venture. Delaying affiliated business arrangement disclosures. Don't wait until closing to reveal that a service is provided by an AfBA. Disclose the fact at or before the time of referral. Tying the monthly marketing agreement fee to referrals. Don't make the mistake of basing the next year's marketing fee on the number of referrals received in the previous year. Paying third-party sales representatives on a commission basis. Only W-2 employees may receive transaction-based compensation under RESPA. Using a real estate practitioner as a mortgage broker. Taking a loan application is an actual and necessary service, compensable under RESPA, but most states require anyone acting as a loan officer or negotiating a residential loan for compensation to have an active mortgage loan originator's license. Receiving less than market value for services, such as payroll, performed for an affiliated business. Make sure the fee bears a reasonable relationship to the value of the service. Basing office rental rates to third-party service providers at a brokerage on a monthly services fee similar to that charged to real estate agents at the company. Calculate charges for space on the fair market value of the square footage under the lease. Compensating referrals from past customers. Giving a gift certificate to a past customer, as opposed to a current one, for every friend or relative of theirs who closes with your title agency violates Section 8(a) of RESPA. Contracting out substantive services. Affiliated businesses are expected to use their own employees to provide such core services to the public. Offering sales associates office-wide incentives for referrals to the broker's affiliate service business. Source: "10 AfBA Mistakes That Violate RESPA," REALTOR®.org magazine.

Under what circumstances may a real estate licensee receive a fee for mortgage loan origination? D. Only with an MLOS endorsement and mortgage loan origination license, even if the licensee is not already representing the buyer or seller in the same real estate transaction Feedback: A licensee with appropriate endorsement and licensure may receive fees for providing both real estate and loan origination services in a single transaction provided appropriate disclosure is made.

The following two examples allege illegal referral schemes. Transamerica Corp. was accused of running a referral scheme on flood and tax services for local lenders. It agreed to pay $500,000 to nonprofit housing groups, and $113,000 to the U.S. Treasury in settlement payments. Conseco Finance Corp., formerly known as Green Tree Financial Corp., was accused of subsidizing manufactured home dealers' floor plan inventories in exchange for referral of business on new loans to home-buyers. The company agreed to pay $190,000 to the government in settlement payments. See related articles in Realty Times.

Unit 2: Referrals and RESPA » » Lesson: RESPA Referral Violations Page 4 of 5 Slide: U3C1L4S4 • Print Slide In another example, virtual tours were said to be provided in exchange for business referrals. Real estate agents for two companies, Coldwell Banker United and Coldwell Banker Richard Smith Realtors, accepted free Internet-based virtual home tours from title companies in the Austin, Texas area. HUD alleged that the real estate agents accepted virtual tours in exchange for the referral of business, in violation of Section 8(a) of RESPA. In two separate settlement agreements, the brokers agreed to stop the practice and to notify their agents in writing that accepting virtual tours at a discount or for no cost violated RESPA. Combined, they agreed to make payments to the U.S. Treasury totaling $19,200. HUD settled with the seven Austin-area title companies that provided these free virtual tours as an incentive to refer business. The companies agreed that if they provide virtual tours in the future, they would charge a fee that, at a minimum, represented their actual cost. In addition, the title companies agreed to pay more than $130,000 in settlement payments and would alert real estate agents and brokers that these virtual tours come with no expectation of potential business. Source: HUD Archives

Shawna is a real estate licensee who has accepted a referral from Alex, a licensee in another town. Before she pays Alex a referral fee, what should Shawna do? B. Make certain Alex is licensed

Unlike RESPA, California`s "RESPA-like" law __________. A. Is not limited to one- to four-unit residential properties This is the correct answer

Charging Clients Administrative Fees dollar Real estate brokers faced with higher costs of doing business have looked for ways to supplement their income. Some licensees have begun charging ancillary fees in addition to real estate commissions. These fees are often referred to as administrative fees. They are usually in the $100 to $250 range and purport to cover costs for increased overhead and costs incurred for complying with the myriad of federal and state laws affecting the sale of residential real estate. While federal circuit courts and district courts have not found these administrative fees to be in violation of RESPA, the U.S. Department of Housing and Urban Development, and more recently, the Consumer Financial Protection Bureau, have consistently maintained that fees charged for nominal or duplicative work violate the act. To safeguard the public from excessive and duplicative fees, HUD issued a statement of policy adding unearned or excessive fees to the list of RESPA violations. note_icon NOTE: While charging clients an administrative fee may be legal, many clients will balk at paying such a fee, and may look elsewhere for their real estate assistance. This fee is something that would be negotiable.

Use caution when charging administrative fees. Let's step back a moment and take a look at Section 8(b) of RESPA, which provides that "no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service ... other than for services actually performed." On its face, this provision would appear to prohibit only the splitting or sharing of charges. It does not prohibit the mere receipt of unearned fees. However, RESPA regulations go further by providing that a charge for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates Section 8(b). The issue, then, is whether a real estate broker's $250 administrative fee violates RESPA. If it's not split with others, it would seem to be in compliance with the act. However, if the CFPB determines that the fee was unearned, it would likely conclude that the charge violated RESPA regulations. The distinction is important: Violations of Section 8 may lead to imprisonment, fines, or an injunction; consumers can sue real estate brokers who violate RESPA for three times the amount of the settlement service charge.

Which referral fee is legal? A. Title company to mortgage company B. Inspector to mortgage company C. Real estate licensee to real estate licensee Congratulations, this is the correct answer! D. Mortgage company to real estate licensee 2. Susan wants to thank her client for referring another client. She purchases a gift card. What dollar value would be completely safe, according to RESPA? A. $25 This was your answer, which is incorrect. B. $10 C. $0 This is the correct answer D. $20 Feedback: RESPA does not state any exact cost of an item of value; it is possible that giving anything of value may violate RESPA. 3. If a real estate licensee violates California`s RESPA-like laws, all of the following may occur EXCEPT _______. A. License suspension B. License revocation C. Disciplinary action by the California Department of Real Estate D. State expulsion Congratulations, this is the correct answer! 4. RESPA violations committed by real estate licensees are usually reported by _________. A. Other licensees Congratulations, this is the correct answer! B. Title companies C. Sellers D. Buyers and sellers 5. Shawna is a real estate licensee who has accepted a referral from Alex, a licensee in another town. Before she pays Alex a referral fee, what should Shawna do? A. Send him a thank you card B. Make certain Alex is licensed This is the correct answer C. Require a reciprocal referral This was your answer, which is incorrect. D. Send the client a token of appreciation Feedback: Before paying a referral fee, make certain the individual is licensed (and the license is current). 6. If a title company lists real estate agents as employees and pays them a bonus for each referral, is this a RESPA violation? D. Yes This is the correct answer Feedback: This is a RESPA violation involving what are considered sham employees. 7. A settlement service may be thought of as a _________. A. Legal service B. Financial service C. Tax service D. Closing service Congratulations, this is the correct answer! 8. Which of the following statements is TRUE regarding California`s "RESPA-like" laws and RESPA itself? A. RESPA includes more property types than California`s laws. B. California includes more property types than RESPA does. This is the correct answer Feedback: Unlike RESPA, California state law is�not limited to one-to-four residential units. 9. In California, it is legal for a settlement service provider, on behalf of real estate licensees, to incur moderate expense for food, meals, beverages and similar items in the context of educational, customary business, or promotional purposes unless the service provider is a _________. A. Competing firm B. Title insurer Congratulations, this is the correct answer! C. Mortgage broker D. Non-resident

What dollar limit cap does RESPA place on items of value given for referrals? B. $10 C. None

You may wish to moonlight as a licensed appraiser. "Licensed" is the key word here—don't promote yourself as an appraiser or charge for appraisals if you're not certified and licensed as an appraiser! Becoming dual-licensed as an appraiser, however, can open up revenue streams, even in the commercial market, which follows a different cycle than the residential market. Banks holding foreclosure properties are in need of appraisal services in order to value their portfolios. Even consumers concerned about the changing value of their home in the current market will often pay an appraiser for an assessment.

Many of the requirements of the Real Estate Settlement Procedures Act (RESPA) conflict with the instincts of real estate brokers, who are used to receiving referral fees for work referred to other brokers (permitted under a specific RESPA exception). In a competitive market, aggressive settlement service providers push the RESPA envelope. The cat-and-mouse game between the regulators and aggressive competitors makes the rules complicated. Each situation is different. Brokers should consult their own attorneys before accepting fees for services or entering into an affiliated business arrangement.History of RESPA gavel Congress enacted RESPA, which is a federal law administered and enforced by the Consumer Financial Protection Bureau (CFPB), in 1974. RESPA was designed to provide consumer protection by: Regulating the disclosure of all costs and business arrangements in a real estate transaction settlement process Prohibiting kickbacks for referrals Prior to the enactment of RESPA, some major issues impacted consumers. For one, the nature and costs of settlement services in a real estate transaction were unclear. For another, unnecessarily high settlement costs were the result of certain abusive practices—the kickbacks and fees related to the referral of business that often weren't properly disclosed. Consumers generally had to cover the inflated costs of closing transactions. They needed to have accurate numbers for the actual costs of settlement, and they needed those figures in a timely manner. The end result was that RESPA brought a level of transparency for consumers throughout the financial process for what is likely to be the biggest purchase of their lives.

efore we get started: Meet Sue. sue Say hello to Sue. Sue had great timing: She got her license just as the housing market entered the sales stratosphere. Wow, did she ever crank in the sales—hand over fist! Then came the downturn. And a pregnancy. Sue was put on bedrest, and then had to extend her leave when her mother became ill and Sue needed to help her out. Her business suffered as a result, but she managed to maintain her license during that difficult time. Before Sue knew it, little baby Ren was starting school, expenses for everything kept climbing, and she was anxious to re-launch her career. Sue was ready to develop a business plan, and she wanted to grow her business by developing more relationships, building her network, and investigating new revenue streams. Sue was a very thorough, methodical person, so before she did anything, she wanted to do her research to make sure she understood RESPA and referrals in order to safeguard her license. Let's find out what she discovered related to RESPA ...

You may not accept a fee for referring a client to a mortgage broker or lender if the transaction is covered under RESPA. However, you may receive a bona fide payment for loan origination services actually performed. The CFPB issued guidelines for this type of arrangement, starting with a list of 14 bona fide loan origination services, which include: Taking information from a borrower and filling out the loan application Ordering verifications of employment and verifications of deposit Ordering requests for mortgage and other loan verifications Ordering appraisals Ordering inspections or engineering reports Providing disclosures to the borrower Ordering legal documents Determining whether the property is located in a flood zone or ordering such service Participating in the loan closing Analyzing the borrower's income and debt, and pre-qualifying the borrower to determine the maximum mortgage the borrower can afford Educating the borrower on the home buying and financing process, advising the borrower about available loan products, and demonstrating how closing costs and monthly payments may vary under each product Collecting financial information and related documents as part of the application process Assisting the borrower in understanding and clearing credit problems Maintaining regular contact with the borrower, licensees, and lender during the loan process to apprise them of the loan status and to gather additional information as needed note_icon NOTE: These guidelines are based upon HUD's 1999 RESPA Policy Statement and were labeled as an "unofficial interpretation." There is nothing in the Dodd-Frank rules or the CFPB overturning or withdrawing this opinion. However, under the California Business and Professions Code section 10166.01 (which implemented the federal SAFE Act), a mortgage loan originator (MLO) is defined as "an individual who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain." Given that HUD "would be satisfied" if the third party filled out the loan application, then as a practical matter, it would be necessary to obtain an appropriate mortgage loan originator license endorsement before you could legally receive a fee for loan origination. Your broker would need an MLO endorsement, as well. field trip VIRTUAL FIELD TRIP: To learn more about the California Bureau of Real Estate's licensing law for MLOs, click here to read this article that was published when the law went into effect (which explains why the bureau's former name, "DRE," is used).

ou may not accept a fee for referring a client to a mortgage broker or lender if the transaction is covered under RESPA. However, you may receive a bona fide payment for loan origination services actually performed. The CFPB issued guidelines for this type of arrangement, starting with a list of 14 bona fide loan origination services, which include: Taking information from a borrower and filling out the loan application Ordering verifications of employment and verifications of deposit Ordering requests for mortgage and other loan verifications Ordering appraisals Ordering inspections or engineering reports Providing disclosures to the borrower Ordering legal documents Determining whether the property is located in a flood zone or ordering such service Participating in the loan closing Analyzing the borrower's income and debt, and pre-qualifying the borrower to determine the maximum mortgage the borrower can afford Educating the borrower on the home buying and financing process, advising the borrower about available loan products, and demonstrating how closing costs and monthly payments may vary under each product Collecting financial information and related documents as part of the application process Assisting the borrower in understanding and clearing credit problems Maintaining regular contact with the borrower, licensees, and lender during the loan process to apprise them of the loan status and to gather additional information as needed note_icon NOTE: These guidelines are based upon HUD's 1999 RESPA Policy Statement and were labeled as an "unofficial interpretation." There is nothing in the Dodd-Frank rules or the CFPB overturning or withdrawing this opinion. However, under the California Business and Professions Code section 10166.01 (which implemented the federal SAFE Act), a mortgage loan originator (MLO) is defined as "an individual who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain." Given that HUD "would be satisfied" if the third party filled out the loan application, then as a practical matter, it would be necessary to obtain an appropriate mortgage loan originator license endorsement before you could legally receive a fee for loan origination. Your broker would need an MLO endorsement, as well. field trip VIRTUAL FIELD TRIP: To learn more about the California Bureau of Real Estate's licensing law for MLOs, click here to read this article that was published when the law went into effect (which explains why the bureau's former name, "DRE," is used). Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

RESPA, Referrals California Real Estate Exam

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