Most people, including REALTORS®, would jump at the chance for free sporting event tickets or a restaurant gift certificate. But if those items are from a settlement service provider, agents must be careful in accepting the gift.
The reason lies in the Real Estate Settlement Procedures Act (RESPA). Passed in 1974, the Act sought to address abusive practices, such as referral fees between settlement service providers, that increased costs to homebuyers.
Recently, HUD has stepped up its RESPA enforcement, and has made it clear that ignorance of the law is not a defense for committing a violation. Such violations should be taken seriously by REALTORS®; the anti-kick-back provisions in section 8 of RESPA may result in both criminal and substantial civil penalties.
Even though the law has been in place for 30 years, there still is a great deal of uncertainty over which fees are permitted and which are prohibited. To ensure that you are complying with the provisions of the Act, take the following RESPA Reality Check quiz to test your knowledge on settlements and fees.
Which of the following is NOT a settlement service that is covered by RESPA?
A. Mortgage loan origination
B. Furniture moving
C. Real estate brokerage services
D. Lender's credit report
(B.) Furniture moving
"Settlement services" relate to the federally-related mortgages covered under RESPA. Services that occur at or prior to the purchase of a home are typically considered settlement services. These services include title insurance, mortgage loans, appraisals, abstracts, and home inspections. Services that occur after closing, such as moving, generally are not considered settlement services.
Under RESPA, what may a real estate professional give to a colleague who refers real estate settlement service business?
A. A thank you
B. A thing of value
C. A kickback
D. A fee
(A.) A thank you
RESPA prohibits any person from giving or receiving a fee, kickback, or "a thing of value" for referring business to a settlement service provider, or SSP, such as a mortgage banker, mortgage broker, title company, or title agent. Saying thank you is not considered a thing of value for purposes of the Act.
RESPA rules do NOT cover this type of transaction:
A. Purchase of a small warehouse financed with a Small Business Administration loan
B. Purchase of a condominium with a Federal Housing Administration mortgage
C. Purchase of a single-family home with a Veteran's Administration loan
D. Purchase of a two-flat that the owners plan to live in and rent out the other unit financed with a conventional loan
(A.) Purchase of a small warehouse financed with a Small Business Administration loan
RESPA's coverage is limited to transactions involving a federally-related mortgage with a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of one to four families. This includes any loan that is used to prepay or pay off an existing loan secured by the same property. Properties used for business purposes are not covered by RESPA.
The penalty for illegally giving or receiving a kickback, which is covered in Section 8 of RESPA, is:
A. Up to 90 hours of community service
B. Loss of real estate license
C. Requirement to attend a RESPA education program
D. A fine of up to $10,000 or up to one year in prison, or both
(D.) A fine of up to $10,000 or up to one year in prison, or both.
Before undertaking any activity with a settlement service provider or accepting any payments, goods, or services from a provider, NAR recommends speaking with an attorney familiar with RESPA and making sure that the activity complies with state and local laws. Some of these laws prohibit activities that are otherwise permissible under RESPA.
When are perks and gifts considered kickbacks? What about the in-house settlement services that my brokerage provides? We'll dive into RESPA's Section 8 in our second half of the RESPA Reality Check. Look for part two in our next issue of Update.
For more information on RESPA compliance, please contact Mike Thiel in NAR's Legal Department at 312/329-8373 or MThiel@REALTORS.org