How to Stay RESPA Compliant… A RESPA Attorney Unpacks Section 8 Rules & Regulations
By Loretta Salzano
Attorney and Founding Partner, Franzen and Salzano, P.C.
In an ongoing initiative to offer up expert commentary and opinion, we feature authorities on our blog. In the past, we have turned to trusted Cook & James experts to blog about cyber insurance, taxes, the ins and outs of closing and, today, we present our friend and colleague Loretta Salzano, a RESPA attorney. Here is a compilation of her thoughts on some real estate best practices and common pitfalls to stay RESPA compliant.
~ Kara Cook and Heather James
The Real Estate Settlement Procedures Act (RESPA) is a federal law one purpose of which is to protect borrowers from unnecessarily high residential real estate settlement costs, especially due to “steering,” or the attempt to influence the selection of a settlement service provider. Section 8 of RESPA contains two prohibitions aimed precisely at this goal, and it is a federal crime (for real!) to violate Section 8.
Because the stakes are high, I get many inquiries about the nitty gritty details of proposed ideas and interactions between real estate professionals and other settlement service providers, such as lenders, law firms and other settlement service providers. While there are firm and fast rules, there are also plenty of gray areas and you should always research individual situations. This blog in no way, shape, or form intends to be legal advice, but rather offers general guidelines from my years of industry experience advising clients about their individual situations. You should always consult your attorney for feedback on your individual situation.
What’s Allowed and What’s Not?
This is the Holy Grail of questions and one I get all the time: what’s allowed and what’s not? And the unfortunate, but honest answer, is that each situation is different. I’ve compiled an easy “red light, green light” game below to illustrate how nuanced each situation can be. I’ll start with some general no-nos first.
Overall, section 8(a) of RESPA specifically prohibits anyone from giving or receiving a fee, kickback or thing of value, pursuant to an agreement or understanding, in exchange for a referral of settlement service business. The prohibition applies even to non-settlement service referrers which can be customers, charities, schools, churches and more.
In short, referrals and endorsements are ok as long as they are “free,” meaning: no thing of value (payment advance, funds, loan, service or other consideration) was exchanged. The list of “things of value” is long, has no “de minimus” threshold or exception, and includes, but is not limited to:
Free or discounted services
Leads or referrals
Opportunity to win a prize
Payment of expenses (education credits, caterer, copying, etc.)
Furthermore, agreements or understandings do not have to be in writing or even verbalized and can be established by practice or over the course of conduct.
There is another prohibition in Section 8(b) against fee splitting and unearned fees. So, you see, the pitfalls are many and there are often as many interpretations as there are parties who weigh in. While there are exclusions from these prohibitions, it’s wise to consult an expert.
Exclusions from Prohibitions, Including for MSAs and Co-Marketing
Gratefully, RESPA offers some exclusions from the above prohibitions. One exclusion that’s particularly significant is the one that supports Marketing Service Agreements (MSAs), desk rentals, leases, sponsorships and more.
In essence, it says it’s ok to pay for goods, facilities or services actually provided. They must be actual, necessary and nonduplicative service. Plus, the payment must be the reasonable fair market value, separate from referrals.
Listed below are a few best practice guidelines for MSAs and co-marketing. These should keep professionals in the clear, but, again, always double check your individual situation.
Marketing Services Agreements Best Practices
Describe services clearly and precisely.
Contract only for actual marketing services to the general public.
Be clear it is an ad.
Obtain 3rd party or other valuation.
Careful with adjustments to value.
Pay only for verified services post-performance.
Do not contract month-to-month.
Do not “couple” or layer arrangements.
Co-Marketing Best Practices
Consider services shared.
Be clear an ad or disclose payment.
Obtain 3rd party or other valuation.
Contract to approve message and prohibit profit center or subsidization of referral source.
Pay only for verified services.
Best if pay non-referring service provider.
Do not “couple” or layer arrangements.
Consider UDAAP, licensing and advertising laws.
Follow NAR* RESPA Do’s and Don’ts for Co-Marketing & Social Media!
Red Light, Green Light
The RESPA playing field is fraught with nuances and you need to cultivate a team of good, knowledgeable coaches to help navigate the turf. While there are no guarantees, here are some real life examples to illustrate what’s probably ok and what’s not.
GREEN LIGHT: Title agent takes broker to lunch to introduce self and services.
RED LIGHT: Title Agent sends broker restaurant gift card as a thank you for closing.
GREEN LIGHT: Law firm provides content, coffee and doughnuts for training on new laws.
RED LIGHT: Law firm pays each attendee’s CE credit and filing fees.
GREEN LIGHT: Lender leases space in broker’s office and pays fair market rent.
RED LIGHT: Lender rents conference room in broker’s office for agent’s closings.
GREEN LIGHT: Law firm sponsors broker’s holiday party and receives recognition on invitations, program and signage; receives tickets to attend; is able to set up table to exhibit/display marketing materials; is given “the floor” to address all attendees, show a video, etc.
RED LIGHT: Law firm pays bar tab for broker’s monthly agent happy hour.
GREEN LIGHT: Law firm sends brokers and agents seasonal candy bearing law firm’s logo.
RED LIGHT: Law firm sends only referring agents 10-pound box of Godiva as holiday gift.
GREEN LIGHT: Settlement agent attends and caters agent’s caravan with signage touting promotional consideration beside displayed business cards.
RED LIGHT: Settlement agent pays caterer for agent’s open house.
GREEN LIGHT: Loan originator creates open house flyer featuring herself and agent and emails to agent to print and distribute.
RED LIGHT: Loan originator creates, prints, mails and pays for postcard featuring loan originator, lender and agent.
GREEN LIGHT: Broker advertises on lender’s website and pays for the ad space.
RED LIGHT: Lender features referral partners on its website with testimonials.
GREEN LIGHT: Law firm gives homeowner congratulatory bottle of champagne at closing.
RED LIGHT: Law firm gives champagne to agent who sent borrower.
GREEN LIGHT: Lender and agent share equally all rights, privileges and prominence in third party web platform providing leads and CRM and split cost 50/50.
RED LIGHT: Lender pays a share more than its prominence on or does not have equal access to leads from third party web platform.
GREEN LIGHT: Marketing Services Agreements done right! See NAR* Do’s as a start.
RED LIGHT: Marketing Services Agreements done wrong. See NAR* Don’ts as a start.
*NAR has provided permission to link to their site with the following disclaimer: This document is provided for informational/instructional purposes only and does not constitute the giving of legal advice by NAR. Consult with a RESPA attorney to make sure you understand and properly comply with any and all applicable laws. As a reminder, some state and local laws prohibit or otherwise restrict activities that may be permissible under RESPA.
**Comments in this post are presented for informational purposes only and are not intended to constitute legal advice.
Loretta Salzano is founding partner at Franzen and Salzano, P.C. whose practice includes RESPA-related matter and she is proud to work often with Cook & James. She brings more than 30 years’ experience to the real estate industry and advises banks, mortgage lenders, real estate brokers, title agents and other settlement service providers on how to stay within the confines of the laws of all 50 states and federal law including, but not limited to, TILA, RESPA, ECOA and HMDA. She was named a Top Compliance Lawyer by Mortgage Compliance Magazine, is a Fellow of the American College of Consumer Financial Services Attorneys, and serves as Legal Counsel to the Mortgage Bankers Association of Georgia and to Rainbow Village, a transitional housing program. She is active in many industry, professional and civic associations and frequently speaks on mortgage issues nationwide. Loretta received her B.A. with High Distinction from the University of Michigan and her J.D. from the University of Michigan Law School.