NOTE: In response to the numerous inquiries NAR received concerning mortgage
origination services and RESPA compliance, we have asked a known RESPA expert to develop
some guidance for NAR members on these and other internet programs. This information is
deemed reliable, we suggest you consult with an attorney concerning your specific business
plan. Philip Schulman, a partner in the Washington, D.C. office of Kirkpatrick &
Lockhart LLP. Mr. Schulman specializes in a range of issues relating to housing, mortgage
finance, general corporate law and mortgage banking. He is a frequent lecturer on RESPA
and has authored numerous articles on issues affecting the real estate industry.
INTERNET-BASED LOAN ORIGINATION PROGRAMS
Mortgage bankers need leads. Real estate agents have them.
That's why Internet-based loan origination programs are being so heavily marketed to real
estate agents. Some programs offer agents large origination fees for relatively little
work. Others promise to make agents "part-time" employees or pay top dollar for
customer leads. Beware, some of these programs may violate the Real Estate Settlement
Procedures Act ("RESPA").
RESPA
RESPA is a consumer disclosure and anti-kickback act. On the consumer disclosure side, the act requires lenders to provide buyers and sellers with full disclosure of the costs of the transaction. That means consumers receive Special Information Booklets, Good Faith Estimates and HUD-1 Settlement Statements, all spelling out the charges to be incurred by the buyers and sellers.
RESPA is also an anti-kickback act. The idea here is to prevent the payment of kick-backs and other fees which drive up the costs of the product to consumers. Section 8 of RESPA makes it a crime for any person to give or receive a thing of value for the referral of settlement services in conjunction with federally related mortgage loans. The long and short of it is, that lenders may not pay, and real estate agents may not receive, fees for the referral of settlement service business.
Keep in mind that while RESPA is a consumer disclosure and anti-kickback act, disclosure does not make an improper payment legal. If a payment is prohibited by RESPA, then disclosing that you are receiving such a payment, will not change the fact that the payment is illegal.
Here are a few of the more frequently asked questions about Internet-based loan origination programs and what compensation may be paid to real estate agents.
Q: I keep hearing about "new RESPA rules" that allow real estate agents to sell a buyer a home and earn a loan origination fee from the lender. Others claim that their programs have been "blessed" by HUD. What are these new rules and have lenders received HUD approval for these programs?
A: First, there are no new changes to RESPA. Information about real estate agent and mortgage broker compensation first appeared in a 1995 HUD informal advisory opinion issued to the Independent Bankers Association of America. This letter, often referred to as the "Retsinas Letter" (after the former FHA Commissioner that issued the letter), was later incorporated by reference in a March 1, 1999, RESPA Statement of Policy Regarding Payments By Lenders To Mortgage Brokers, 64 Fed. Reg. 10080. Under these guidelines, agents and brokers may receive fees for performing loan origination work on a lender's behalf, such as taking a loan application, counseling borrowers, ordering credit reports and appraisals, and completing loan documents used to process the loan. The fees must be "reasonably related to the value of the services performed."
Finally, many of the promotional materials claim their compensation programs have received HUD "approval." While HUD may provide general guidance, the Department does not approve individual business plans, and generally does not opine as to what amounts constitute fair and reasonable compensation. Before accepting the claim at face value, ask to see a copy of HUD's approval.
Q: Can I accept compensation for "originating" loans for lenders?
A: Several programs offer real estate agents substantial fees for "originating" mortgage loans. Be aware, however, that in many states, individuals that assist borrowers in finding a mortgage loan must be licensed as mortgage brokers. Second, if a real estate agent is to be paid a percentage of the origination fee, they likely will have to do a lot more than merely take a loan application. According to HUD's March 1, 1999, Statement of Policy, to be eligible to receive fair and reasonable compensation, a mortgage broker must take the loan application, plus perform an additional five services from a list of 13 mortgage origination functions. These duties include counseling borrowers, issuing Good Faith Estimates, and ordering credit reports and appraisals. HUD recognizes however, that reasonable compensation is ultimately a function of the marketplace.
Q: Some programs offer to make real estate agents part-time employees of the lender. How does this work and is it legal?
A: Since RESPA exempts payments by an employer to its employees, several programs offer to make the real estate agent a part-time employee of the lender. However, only bona fide employees are covered by this exemption.
The Internal Revenue Service sets strict standards for employment. Although HUD has never published criteria, it's likely the IRS rules would prevail. That means in order to be considered an employee, rather than an independent contractor, the agent/loan officer must: (1) be under the supervision and control of a lender's office; (2) use the lender's equipment; (3) have set hours; (4) receive a W-2 form; (5) receive standard employee benefits; and (6) have the lender be liable for the employee's conduct. That means that a real estate agent that becomes a "loan officer" only after selling a property, is unlikely to be considered a true employee, and therefore, would not be covered by the RESPA exemption.
Q: What about programs that offer to pay a real estate agent for names of potential borrowers?
A: In one informal HUD interpretation, the Department indicated that a sale of a list of consumers to a settlement service provider did not violate RESPA provided the payment is for the use of the list and is not further conditioned upon the number of closed transactions resulting from the list, or any other consideration, such as an endorsement of the product being offered by the seller of the list.
Thus, a real estate agent could receive nominal compensation, for supplying a lender with certain basic information about a customer (i.e., name, address, telephone number, price of the newly purchased home, etc.). However, under the circumstances, the real estate agent should not promote the lender or its services to the customer, and the payment must be made to the agent, regardless of whether the lead ultimately turns into a closed loan.
Q: Even if I do not perform the requisite number of functions to be considered a mortgage broker or do not become a true part-time employee of the lender, can I still be paid something for the work I perform for the lender?
A: While real estate agents will find it difficult to serve as both real estate agents and mortgage brokers, or real estate agents and part-time lender employees, agents may still be paid under a RESPA exemption that permits persons (even ones that refer lenders business) to be paid for services rendered, so long as the payment is commensurate with the services provided.
A real estate agent that spends an hour with a customer taking a preliminary credit application and collecting certain credit documents (i.e. W-2s, paystubs, bank statements) has performed a genuine service for the lender that is actual, necessary and distinct from the agent's normal duties. Reasonable compensation (generally a flat fee, not a percentage of the loan amount) may be justified. Note, however, that real estate agents may not take loan applications in connection with FHA-insured loans.
Q: A lender wants to advertise on my website. Do I need to worry about RESPA in determining the advertising fee?
A: Any time a real estate broker in a position to refer mortgage business to a lender is paid a "thing of value" by the lender, the RESPA rules come into play. Brokers may charge lenders an advertising fee to place their banners or hyper-links on the broker's website. The payment, however, must be reasonable and commensurate with the value of the service. Transactionally based fees would be prohibited; thus, a REALTORŪ could not charge the lender a fee for every "hit" that resulted in a closed loan. A flat fee, not tied to business will suffice. Some brokers will charge a small fee every time an individual clicks through to the lender's website. As long as the fee is minimal, and not tied to whether that click results in a loan, that method of compensation would appear to be lawful.
Internet-based loan origination programs will provide
marketing opportunities for real estate agents. Beware, however, of those offering large
sums for little or no work. Those offers will likely run afoul of RESPA.