Kickback

Key Takeaways

• A kickback is a fee, payment, or other thing of value given or accepted in exchange for referring settlement-service business, and Section 8 of RESPA bans it in federally related mortgage loans.
• RESPA separately bans splitting any charge for a settlement service with someone who did not perform the work, which is the unearned fee half of the rule.
• A RESPA Section 8 violation carries a fine of up to $10,000, imprisonment of up to one year, or both, plus liability to the consumer for three times the charge paid for that settlement service.
• Washington adds its own rule: sending a client's business to a lender or escrow company while expecting a kickback or rebate is grounds for discipline unless the broker discloses the expectation first.

What It Means

A kickback is a fee, payment, or other thing of value handed over in exchange for steering settlement-service business to a particular provider. Section 8 of the Real Estate Settlement Procedures Act is the anti-kickback rule, and it applies to any federally related mortgage loan. Two distinct things are prohibited. The first is giving or accepting anything of value under an agreement or understanding that business incident to a settlement service will be referred to a particular person. The second is giving or accepting any portion, split, or percentage of a charge made for a settlement service other than for services actually performed.

The reach of the rule surprises people. Under 12 CFR 1024.14(d) a thing of value is defined broadly, and it includes discounts, salaries, commissions, duplicate payments of a charge, stock, dividends, and credits representing money payable later. There is no minimum dollar amount when a payment is tied to referrals. What makes a payment lawful is work. Federal law at 12 U.S.C. 2607(c) permits payment for services actually rendered, and it expressly permits payments under cooperative brokerage and referral arrangements between real estate agents and brokers. That is why a commission split between a Listing Broker's firm and the cooperating firm is legitimate, while a flat payment per file from an Escrow company for directing closings there is not.

How It Works in Washington

Washington layers license law on top of the federal rule, and the state version reaches conduct RESPA may never touch. RCW 18.85.361(20) makes it grounds for disciplinary action to direct any transaction involving a broker's principal to any lending institution for financing or to any escrow company in expectation of receiving a kickback or rebate, without first disclosing that expectation to the principal. RCW 18.85.361(11) reaches a related move: accepting, taking, or charging any undisclosed commission, rebate, or direct profit on expenditures made for the principal. RCW 18.85.053 addresses title business specifically, barring a licensee from giving any fee, kickback, payment, or other thing of value to another real estate licensee as an inducement or reward for placing or referring title insurance business.

The compensation plumbing is regulated too. RCW 18.85.301(1) makes it unlawful for a licensed firm, broker, or managing broker to pay any part of a commission or other compensation to a person who performs real estate brokerage services and is not licensed, and RCW 18.85.301(3) requires that a licensee's share come through the firm's designated broker. Discipline under these sections is administered by the Washington State Department of Licensing, which can act on a violation whether or not a federal loan was involved. Brokers building referral relationships should work through the conflict of interest rules under Washington's agency law before any money moves.

Example

Renata Ortiz is a broker in Spokane. Latah Escrow offers her $250 for every client whose closing she sends its way, and over a year she directs 14 closings there and collects $3,500. Each of those buyers paid Latah an $795 escrow fee. That arrangement is a kickback under Section 8 of RESPA, so Renata faces a fine of up to $10,000, up to a year in prison, or both, and each buyer can sue for three times the $795 charge, which is $2,385 per file. On top of that, RCW 18.85.361(20) exposes her Washington license to discipline, because she directed her principals to an escrow company expecting a rebate without disclosing it first. Compare that with the $16,950 commission her firm received from the listing firm on a $565,000 sale. That split is a cooperative brokerage arrangement permitted by 12 U.S.C. 2607(c), and no part of it is a kickback.

Common Mistakes and Exam Traps

• A commission split between the listing firm and the cooperating firm is not a kickback. 12 U.S.C. 2607(c) expressly permits cooperative brokerage and referral arrangements between real estate agents and brokers.
• There is no small-dollar exemption. RESPA reaches any fee or thing of value tied to a referral, and 12 CFR 1024.14(d) defines thing of value broadly enough to cover discounts and credits payable later.
• Disclosure does not cure a kickback under RESPA. The affiliated business arrangement safe harbor has its own conditions and does not authorize kickbacks or referral fees.
• Paying an unlicensed person a finder's fee is a Washington license law problem under RCW 18.85.301 even when no federally related mortgage loan is in the deal.