The minimum level of service to clients that real estate agents may perform in order to legally accept referral fees from lenders has been tested by a dispute between the Department of Housing and Urban Development and a lender, broker and agents, which may open more scrutiny of one-stop-shopping services offered by real estate professionals.

According to a HUD spokesperson, an Atlanta-based lender, Znet Financial and a real estate broker, ReMax of Atlanta, and certain of their officers and affiliated companies, as well as 14 ReMax real estate agents allegedly violated the anti-kickback and unearned fee provisions of the Real Estate Settlement Procedures Act (RESPA.).

HUD's investigation, said a spokesperson, found that Znet represented the ReMax of Atlanta agents as "employees," paying them $400 for each consumer referred to Znet. However, investigators found the agents performed little or no origination work other than filling out loan application forms, which is not considered by the HUD to be enough work to earn compensation.

Unknown is how the improper referral fees were discovered and whether consumers were told that their real estate agents would be receiving compensation from Znet. It is unknown whether the lender reported the referral fees on HUD-1 statements. If the real estate agents were presented as employees, then it is possible the $400 in loan origination services/earnings were paid by the consumer, possibly without their knowledge. The questions are many -- were the fees disclosed to the consumer as loan origination fees? Did the brokers and agents inform consumers that they would be receiving fees for referring the consumers to Znet? Were the fees left off the settlement documents because the real estate agents were represented as employees?

What is known is that the HUD says that RESPA prohibits kickbacks for the referral of real estate settlement business as well as the giving and receiving of a portion of real estate settlement charges for which no services are performed.

"What defines a compensatory service?" suggests the HUD spokesperson. "It's fact specific to this case, but it is also reasonable to ask -- who are these people? What do they do for a living and in this particular case? The answers should be clear to consumers."

The trend of one-stop-shopping is making the notion of a real estate agent that can also originate loans more attractive to consumers and to their brokers who rely on ancillary services to boost flagging commission rates on resales. In some states, such as California, a license to sell real estate also allows licensees to originate loans. HUD does not require that agents be licensed as mortgage brokers in order to originate loans, because that is a provision of state law, but it can bring actions against companies that violate RESPA rules.

According to RESPA regulations, real estate brokers and agents can collect fees if they perform actual work. The question is -- what is work? How much is too little? Agents must check their own state laws for the answers.

"RESPA is very clear that creating the illusion of employment to mask otherwise illegal referral fees is not permitted," said John C. Weicher, HUD Assistant Secretary for Housing -- Federal Housing Commissioner. "Real estate agents, brokers and lenders should know that they will be held accountable for kickbacks and unearned fees."

While details of the settlement are under nondisclosure, the HUD spokesperson did acknowledge that the case may have been fact-specific, and not necessarily related to a minimum service level that the real estate agents did or not perform.

Znet and the other defendants did not admit to RESPA violations as part of the settlement, but they did agree to pay back the referral fees to consumers, among other restitution including $15,000 to the U.S. Treasury.

It's very simple, says HUD. "We try to match the referral fee with the service being referred. If there was no service, there should be no referral fee."

Published: September 30, 2003

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