Referrals to local service providers can be a sticky situation for many REALTORS®. Local service providers such as handymen, landscapers, fuel providers, contractors and others are lucrative sources of business for REALTORS®, and are often in a REALTOR®’s social circle as friends, acquaintances and fellow club members. It is obviously quite tempting to set up mutually beneficial referral networks with these professionals, and many REALTORS® do, whether they realize it or not. BNI groups, Mastermind groups and other professional networking organizations are great areas for REALTORS® to generate business.
The downside is these types of relationships can sometimes stray into a gray area or can create confusion about whether a referral from one of these sources constitutes a RESPA violation. This legal question is highly relevant on Cape Cod and the Islands, where our small towns and tightly-knit business communities heightens the possibility that a violation could be committed inadvertently. MAR uses the example of an oil company providing a $200 gift card to REALTORS® in exchange for referrals. Is this a RESPA violation? Here’s MAR’s verdict:
No. The Real Estate Settlement Procedures Act (RESPA) prohibits real estate professionals from accepting things of value in exchange for referring clients to a settlement service provider. Because the oil company is not a settlement service provider, RESPA does not apply in this situation. Generally, services that occur after closing are not considered settlement services. For example, moving companies, gardeners, painters, decorating companies, and home improvement contractors are typically not considered settlement service providers.
So, network and refer away! However, if you are going to enter into a formal referral relationship with a
non-settlement service provider, it is important to keep yourself protected by disclosing this relationship to your customer. MAR’s opinion goes on to specify that under Article 6 of the REALTOR® Code of Ethics, REALTORS® “shall not accept any commission, rebate, or profit on expenditures made for their client, without the client’s knowledge and consent.”
So to summarize, you can receive compensation for referrals to non-settlement service providers, but you must disclose this relationship to your customer. However, you cannot accept items of value in exchange for referring a client to a settlement service provider such as an attorney, appraiser, or generally anyone involved during or prior to a closing.
Additionally, we have heard a lot of questions about Zillow’s co-marketing plan and whether or not they constitute a RESPA violation. Essentially, Zillow’s co-marketing plan allows a real estate agent to share the cost of an ad on its website with a preferred lender. From this, leads generated through the website can be shared between lender and real estate agents. Although questions have been raised on how this practice comports with RESPA, to date, the Consumer Financial Protection Bureau (CFPB) has not issued any guidance in regards to whether Zillow’s co-marketing program is a RESPA violation.
Generally, lead forwarding between agents and lenders can be legal but the more specific the information is that is contained in the lead, the more likely it is to be a payment for a referral, a practice that is prohibited by RESPA. Selling a lead to a lender for a buyer who is about to make an offer on a property is not recommended. Best practice is to buy or sell leads that are simple lists of contact information. Anything beyond simple contact information could be considered a referral, and thus, a RESPA violation.