Fee Splitting and Referral Fees

QUESTION:
What is RESPA’s fee splitting prohibition? Also, what is the definition of a “referral fee” and which referral fees are permitted?

ANSWER:
The provisions on prohibition of fee splitting and the definition of a referral fee are set forth in Section 8 of the Real Estate Settlement Procedures Act (RESPA). 

RESPA prohibits fee splitting. Specifically, the applicable section states that “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 settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” [12 CFR § 3500.14(c)] 

This prohibition has been clarified by the Department of Housing and Urban Development (HUD) a number of times over the years, and it has been the subject of considerable litigation. Essentially, HUD maintains that a fee for which no (or a nominal) service is conducted, or is duplicative of any other fee charged, is an unearned fee, which would therefore violate RESPA’s fee splitting provision. [For but one of numerous citations, see HUD’s Statement of Policy 2001-1]

Intrinsically, a “referral fee” is the giving or accepting of “any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.” [12 CFR § 3500.14(b)] The litigation involving this subject is extensive.

Any referral of a settlement service, except for certain exemptions, between one settlement service provider and another, is not a compensable service.

The permitted exemptions are [12 CFR § 3500.14(g)(1)]:

1. A payment to an attorney at law for services actually rendered.

2. A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.

3. A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan.

4. A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.

5. A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (Only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.)

6. Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto.

7. An employer's payment to its own employees for any referral activities.

Jonathan Foxx

President & Managing Director
Lenders Compliance Group