Referral Fees and Non-Licensees: What Everyone Should Know

The legality of referral fees in California is a tricky issue and one that can frequently trip up agents and brokers.  This is because of the difference between federal and state law. The California Attorney General’s office has written a detailed opinion stating that a real estate broker can pay a referral fee to an unlicensed person with the Department of Real Estate (Now Bureau of Real Estate) only if the referring person simply made an introduction on behalf of the compensating broker and did no work of any kind that would require a license. (78 Ops. Cal. Gen. 71).

It would seem relatively simple then, that as long the person getting the referral simply made an introduction, it is legal.  However, while that is true as far as California law is concerned, it is not where the story ends.  Under the Federal Real Estate Settlement Procedures Act (“RESPA”) even if you comply with California law, you can still break the law federally.

That is because RESPA prohibits real estate licensees from paying – or providing – anything of value to a non-licensee for the referral for business if the referral was done with the expectation of gaining compensation and the transaction is “federally related.” The issue here is that the terms federally related is so broad (encompassing any bank that is ensured by the FDIC) that effectively any loan by a reputable bank will be federally related.  Accordingly, any agent should assume that RESPA applies unless any of the exceptions listed below are present.

RESPA only applies to sales of buyer occupied residential property with 4 or fewer units.  RESPA does not apply to commercial property, vacant land, apartments, or apartments with 5 or more units or all-cash transactions.   Therefore, paying a referral fee for say a 5-unit property or a property that is an all cash transaction (and thus does not require a loan from a bank that is federal regulated) will not implicate RESPA. Outside of these limited scenarios, referral fees are a risky and potentially illegal gamble that agents and brokers should not take.

 

About Blake McCay

As a licensed attorney, Blake dedicates his practice to all aspects of legal compliance. Prior to JohnHart, Blake was an associate at Baker Marquart LLP, where his practice focused on complex commercial litigation, labor and employment litigation, international litigation, and appellate law.

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