Question: There has been a lot of litigation and concerns involving referral fees. One of the areas of confusion relates to what is the so-called “agreement” or “understanding” involving a referral of business. So, what do these terms mean?
Answer: RESPA defines a “referral” to a settlement service provider in two ways:
1. A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.
2. A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business incident thereto. (Emphasis added.) [24 CFR 3500.14(f)]
The required use concept is significant. This doctrine holds that “required use” means “a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.” [24 CFR 3500.2]
However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.
An “agreement” or “understanding” in this context means “the referral of business incident to or part of a settlement service,” and it need not be written or verbalized, but may be established by a practice, pattern or course of conduct. When a “thing of value” (i.e., any payment, advance, funds, loan, service, or other consideration) is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business. [24 CFR 3500.14(e)]
Jonathan Foxx is president and managing director of Lenders Compliance Group and Brokers Compliance Group, mortgage risk management firms devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or e-mail [email protected]