How Real Estate Professionals Could Get Burned by RESPA

Do You Know How RESPA Impacts the Real Estate Profession?

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Congress enacted the Real Estate Settlement Procedures Act, commonly referred to as RESPA, to curb unethical practices and consumer abuse in real estate settlement charges. Before the law was enacted, consumers were subject to abuses by real estate professionals and closing service providers when it came to the costs they paid to close on their homes. 

Prior to RESPA

Unnecessary costs billed to consumers typically included:

  • Kickbacks paid for referrals to closing agents.
  • Business arrangements that resulted in charges for sham services of no value.
  • Affiliated business arrangements that saw real estate agents refer clients to services they owned fully or partially.
  • Undisclosed marketing arrangements between service providers.

Activities Prohibited by RESPA 

As a result of RESPA, agents are prohibited from the following:

  • Accepting anything of value for referrals to closing agents.
  • Accepting marketing help or ad space from a settlement service provider.
  • Having ownership interest in a settlement service and referring clients to use the service without proper disclosure.
  • Participating in any marketing or service that results in charges to the consumer that are not normal or for services of no value.

There is not necessarily a problem if you have ownership interest in a title company and refer business to that company. However, there are very clear rules for when and how you must disclose your relationship with the business to the consumer.

You also cannot force a client to use a service simply because you have an ownership interest in it. As far as marketing relationships between service providers go, there are gray areas, so be careful. The fines are stiff, and some real estate professionals have lost their licenses due to violations of shared marketing rules.

Additionally, it is not legal for a title company to:

  • Provide real estate professionals with free marketing or ad space in exchange for referrals.
  • Provide free food to open houses.
  • Sponsor sports outings, such as a real estate brokerage firm's annual golf tournament.
  • Provide anything of value in exchange for a real estate professional's referrals.

Activities Allowed by RESPA

Real estate brokers can engage in cooperative marketing with title companies and have them present at open houses, but compliance rules are strict. Real estate agents and closing service providers may engage in the following activities:

  • Real estate service providers, such as closing agents, can share ad space with real estate agents who pay their pro-rata share of the cost.
  • Real estate service providers can provide handouts/promotional items bearing their logos to real estate agents. The items cannot bear the real estate agent or broker's logo.
  • Service providers can co-op direct mail if the real estate agent pays her share of the cost.
  • Service providers may attend open houses and promote their businesses only.

These are just a few of the marketing areas that have been a problem for real estate brokers in the past. Business relationships can get complicated, so run any decisions about marketing or business referrals by an attorney knowledgeable about RESPA if you have any questions or concerns.