While in a fiduciary relationship do you think it is right for an agent to accept money from a vendor when the agents' client purchases a product from that vendor?

Example:

A home warranty company will give you up to $70 for every home warranty you sell to your clients.

Or

A mortgage bank will pay you a commission for submitting a loan application for a client.

Let me ask you this question: We have an attorney who is a licensed RE broker, he owns the RE company, title co., lender etc., he charges his clients for all these services, although he does not do the work himself (his employees do), should he profit from them? He does disclose this relationship to his clients.

That is a very good question and a hard one to answer, but my answer is no, I don't think he should profit from them all.

Hypotheticaly (I am not implying that this man has done anything but act ethically) I see potential for a conflict of interest.

An example:

Before I opened my own brokerage I was an agent at a company who's parent company also did title and mortgage. This relationship was disclosed and agents where encouraged to recommend both subsidiaries.

I and some of the other agents felt the mortgage company was not very good. In fact it seemed to be a big problem for the parent company getting the agents to recommend the mortgage company.
Why? Because there was no positive incentive for the agents to recommend the mortgage company. The agent got nothing out of the deal and the agents client was likely to get bad service from the mortgage company, another negative incentive for the agent.

So here is what the parent company did, they started having raffles with BIG prizes. The winner was chosen at random, BUT for every client that an agent "recommended" to the mortgage company and wrote a loan for, the agent received another entry in the raffle. Sure enough, the numbers of referrals went up.

What that suggested to me is that some of the agents started to recommend the mortgage company not because they felt that was the best choice but because it was an OK choice with an incentive. This I consider to be a conflict of interest.

Had they felt that the mortgage company was the best choice, would the incentive been ok?

If the agent recommends the mortgage company because he truly feels that mortgage company is worth recommending on its own merits then the incentive I believe, is irrelevant. However from a practical standpoint it is impossible to determine how much the incentive influenced the decision, agents after all are only human.

Freak,
Let me guess you are opposed to one stop shoppingor bundled services. Real Estate Brokerages that also own title companies, mortgage brokerages, etc..

So if the buyer client uses my services as Realtor and also uses me to do the title work as my prices are comparable and the relationship between realty & title company was fully disclosed you feel this is unethical to profit from both even though the work for both was done.

A mortgage company paying money to an agent for applications is illegal. That is a clear violation of RESPA. Now, affiliated business relationships (ABA's) are extremely legal. The problem which has occurred in the industry is that is is ILLEGAL to get paid on a PER DEAL basis. If you own 10% of the company, you get 10% of the profit. That 10% payout has no bearing on how many deals you sent that month. RESPA is the yellow brick road...

Several years ago, I was working at an independent CB office, we had an internal mortgage loan dept. and the agents got paid ½ the loan orig. fee when they had a buyer, and all agents were “employees” of the mortgage co. Naturally, the business relationship was disclosed to the buyers in writing.

RESPA may be the yellow brick road, but the clearly other legal paths that can be taken.

Below is a transcript from a conversation with a representative from a company that will in essence pay an agent for a referral:

------------ : hi
[17:27] RealtyFreak: I was wondering about your program for real estate agents
[17:28] ------------ : well, in a nutshell, i represent a marketing arm for a mortgage bank...we were working with a broker but switched in the last couple months....
[17:29] RealtyFreak: how can a real estate agent get paid for selling mortgages?
[17:29] ------------ : basically we're allowing our reps to submit loans and the bank handles the processing....
[17:29] RealtyFreak: Is that legal?
[17:30] ------------ : absolutely
[17:30] RealtyFreak: as long as it is disclosed?
[17:30] ------------ : correct...for RE agents we have a disclosure statement that your clients sign
[17:31] RealtyFreak: So basically I just fill out a loan application for my clients and I get a commission for that?
[17:33] ------------ : either you or your client can fill out the app (they're one page unless the client has extra info...plus there's the borrower auth form) and fax it in...the bank prices the loan and you let the client know the rate/term....
[17:33] ------------ : then inform the client of what docs they need to submit
[17:33] RealtyFreak: interesting
[17:33] ------------ : the bank handles the processing
[17:34] RealtyFreak: how much can one make doing this?
[17:35] ------------ : well since we just switched to the bank i haven't seen the official commission structure
[17:35] ------------ : but
[17:36] ------------ : i'm guessing when we have our marketing arm "launch" in january the starting commission should be around 20-30%
[17:37] ------------ : but your commission will go up after a certain amount of production....just as in most companies with good loan officers
[17:37] ------------ : but as soon as i know the exact percentage i can let you know
[17:37] RealtyFreak: and all I have to do is help fill out the loan app?
[17:38] ------------ : yep

As for getting by a percentage of an ABA's profit, the question is not if it is legal (your right it is) but should it be? Getting payed a percentage does not remove the incentive from referring the business.

Do you think there was the potential for a conflict of interest with this arrangement?

Realty Freak!
hey, i like what you had to say. i am a mortgage broker in ohio and mortgage lender in the state of florida. i was looking into setting up a structure in which the agent sold the deal and i processed it and then paid the agent on the loan. before moving forward with that, i called the Ohio Department of Financial Institutions and discussed the relationship. The Department told me that it is truly a "gray" area. If the agent is an "employee" of my company and is licensed as a loan officer, can they get paid for doing a mortgage loan, yes; however, can they get paid on their own transaction - "gray". The department said that they believed that i was looking for a way to essentially hide a kickback. In conclusion, I was told that if audited, the state would probably call it a violation of RESPA and i would probably be selling cars the next day.

I am glad you are not selling cars!

The potential for a conflict of interest can be anywhere, just look at our own Realtor (pac) contributions to politicians.
I believe that the reason and motivation have to be considered. However, since they are not that transparent, it can become judgmental.

cardinal1,
If the agent actually does the loan origination paperwork and submits it to his mortgage broker then there as No RESPA issues as the agent has done what they got paid for...got this from a RESPA Compliance Officer at HUD.

Paul,
you are correct - i agree; however, the reality is markedly different. again, this is why the state was saying it is "gray". does having a customer fill out a 1003 loan application deem getting paid a commission on a loan? why is licensing required then (which, by the way, is a joke (send in $100 dollars and you are a loan officer))? i could simply have a bum on the street copy someone's information down and pay him on it. when you are dealing with someone getting paid money, no one would agree that they do not legitimately deserve it. what prevents me from saying to an agent, "i will pay you $1,000 for every customer you send me. we'll just put your name on the bottom of the 1003 and suddenly it's not a kickback." that is pathetically what is happening, the customer's interests are not looked after, and that is why the industry is perceived in the manner that it is.

When we pay referral fees to other agents, isn't that a "kickback" of sorts?
Do you pay referral fees to other lenders?

hey pike!
not at all. truthfully, that has always thrown me for a loop that real estate agents can pay other agents a "referral" fee. i'll get shot for doing that on my side of the fence.

cardinal1,
I asked the question directly to the HUD RESPA Compliance Officer and she said that was the reality! If you do the work you can be paid for it...sounds like that person in your state office needs to actually check with RESPA and not make a guess on their own.

As long as you can verify that the work was completed it is legal.

Maybe not.

http://www.ag.ca.gov/opinions/published/97-901.htm

In my area, we currently have a Realtor whose spouse owns a mortgage company and the Realtor 'works' for them. Our issue is confidentiality. Realtor says "I'm not being an agent today, I'm working for the mortgage company" and asks for information that the agent shouldn't have. THAT gray area is going to get someone in trouble. I don't give out the info.

Referral Fees or Kickback?

My former branch broker, a favorite of FNMA & FHLMC, specified contractors for me to use and award property preservation assignments to.

Upon learning he was taking a 5% overide on trash-out, final maid clean and repairs from vendors and contractors, I confronted him and ask him to stop.

I was subsequently terminated against public policy after 6 years of service and not paid for my last month there, which amounted to some $25K in BPO fees & closed sales commissions.

That was 12 months ago with his attempt to restrain & place a gag order on me and the proceedings, which was thrown out of court.

The trial date is to be set this Thursday. We find almost 1000 REO property files are affected with Lender clients overpaying for work that was not performed. The broker did not do any work so to me there are some (980) fraudulent violations of RESPA on the HUD 1 statements.

Is it a kickback per RESPA or a referral fee similiar to that of Safeguard when they hit their service contractors up for 30% referral fee for assigning them the work?

I wonder what the official RESPA answer on this would be ?

Retsof Yor, please let us know how things turn out for you. Best of luck on Thursday.

The thing that bugs me is when agents or loan officers arrange a "pre-payment" penalty for a client so they can recieve a paycheck from the bank. Many of them don't even disclose the fact that the borrower doesn't NEED the penalty. The borrower just assumes it's required to refinance. It's written in the contract that they will recieve money from the bank, but the agent doesn't bother to discuss it or point it out. And since the contract is so long and full of "legalize" language, most borrowers just sign and don't question it.

Someone's going to burn the banks for pulling that one.....

Loan officers have no reason to intentionally put a prepayment penalty on a mortgage. Prepayment penalties are paid to the bank, not the loan officer. Most sub-prime (bad credit) mortgages will usually have prepayment penalties because the lenders know the borrower will refinance out of the mortgage as soon as they can, so the only way they can make any money is to assess a prepayment penalty. Sometimes borrowers want prepayment penalties because they can get a lower interest rate.

With that said, sometimes bad loan officers do not properly disclose that some loans may have a prepayment penalty. However, consumers need to take more responsibility for knowing what they are getting.

Would it be OK to have Real Estate related sites that advertise / profit from affiliate programs for lenders? For example, a city directory which promotes local businesses and also has access to the MLS, but is operated by a licensed Real Estate agent.

BTW, I am a new agent, and this is my first post. I have so much to learn...

Welcome to the forum!

That is a great question. I think if the owner of the site is only receiving payment for the ad space and the ad is clearly marked as an ad (as apposed to an endorsement), I see no conflict.

Here is a legal point of view about RESPA & payments.
http://www.frascona.com/resource/jag_daf705respa1.htm

How can you check something out with RESPA when it isn't anything more than an acronym for a federal statute. Real Estate Settlement Procedures Act.

Try checking things out through HUD as HUD enforces this law.

NewsFlash Kathy!

HUD is the enforcement body but HUD has a RESPA Compliance Department and it is staffed by RESPA Compliance Officers whose sole job is RESPA. That is how it is Done. I have on several occassions spoken to the RESPA Compliance Officer, How about you? Maybe you should know your facts before attempting to correct a post that you have no knowledge of!

I can't figure out what your arguement is Paul....I mean if you read what you wrote in response to what I wrote and then compare it to what I wrote aren't they pretty much saying the same thing? ......what's the problem?!

No don't tell me....I really don't care to communicate with you because you obviously have your panties in a twist for some reason and I am obviously the one who twisted them.

Kathy,
I don't have an arguement. Still trying to figure out why you posted what you did at all. Go back and read the first part of the sentence. The part where I spoke of the HUD RESPA Compliance Officer..before the part where you copied my out of context comment. We are all aware that RESPA is an Act administered by HUD.

Are we? You and I are so when I say we I don't mean us. Read the thread about the Wells Fargo thing....Many refer to RESPA as being a group of trouble makers akin to the IRS (not that the IRS are trouble makers...I would NEVER say anything like that ) or the FTC or some real body or office of government initself. so when I read "check with RESPA" it had a ring of implying it was someone you could look up in the phone book under "R" and get a number for.

I honestly did not mean to pick on your post...re-reading it I can see where you thought I was coming off as snotty. I'm sorry. If you can or want to scan back through the Wells Fargo thread and see if maybe you get the same impression I did in a few of the posts. It kind of got to me and I finally had to point it out. NOT because it was YOUR post or because I wanted to attack you personally either, so again I truly apologize that I came across that way.

Here I have posted this a few times:

A Realtor HAS to do five items in addition to filling out the application in order to be compensated by the LO.

http://www.hud.gov/offices/hsg/sfh/res/resp0222.cfm
Section C

In the determination of whether payments from lenders to mortgage brokers are permissible under Section 8 of RESPA, the threshold question is whether there were goods or facilities actually furnished or services actually performed for the total compensation paid to the mortgage broker. In making the determination of whether compensable services are performed, HUD´s letter to the Independent Bankers Association of America, dated February 14, 1995 (IBAA letter) may be useful. In that letter, HUD identified the following services normally performed in the origination of a loan:

(a) Taking information from the borrower and filling out the application;

(b) Analyzing the prospective borrower´s income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;

(c) Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;

(d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;

(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);

(f) Initiating/ordering requests for mortgage and other loan verifications;

(g) Initiating/ordering appraisals;

(h) Initiating/ordering inspections or engineering reports;

(i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;

(j) Assisting the borrower in understanding and clearing credit problems;

(k) Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed;

(l) Ordering legal documents;

(m) Determining whether the property was located in a flood zone or ordering such service; and

(n) Participating in the loan closing.

[...] HUD articulated that it generally would be satisfied that sufficient origination work was performed to justify compensation if it found that:

The lender´s agent or contractor took the application information (under item (a)); and

The lender´s agent or contractor performed at least five additional items on the list above.

I just read on page 2 that someone thinks Mortgage Brokers purposley put customer in Pre-payment penalties to get a kick back from the bank. That statment is completley false. Pre-payment penalties are used to get the customer better interest rates.

Loan officers in CA must be licensed in real estate to do loans. Just because we passed our license doesn't make us real estate agents. I, for one, have NO EXPERIENCE as an agent, therefore I would NEVER even think of advising my clients on R.E. issues, I leave that part up to the "experts in real estates"--meaning YOU the agents. Unless, you have been a loan officer, learned what, why, when etc...of the mortgage industry, I don't understand why some insist on advising our clients on what is right and what is wrong regarding the financing terms they are getting. Forming RESPA compliant alliances with lenders who have the same level of integrity, work ethics as you do is a GOOD THING. This way you will know that your clients will be treated fairly no matter what by your lender partner. Why? Because both parties will be on the same page in regards to putting the client's best interest first which in turn will generate more reciprocal referrals for all parties involved. Moreover, when this happens, agents can focus on doing their job and loan officers can focus on doing theirs without having to worry about who's gonna screw who over next. It goes both ways. Maybe not all loan officers are ethical but make no mistakes, there are just as many agents who don't have their clients' best interest at heart (i.e. "give them a neg-am and call it a day"--when people are W2 and on a budget!) This subject gets me so fired up but don't take it personal.

Peace!

"Loan officers in CA must be licensed in real estate to do loans." by Alea, CA


Not true, you have CE requirements if under a DRE. If you are under a CFL, this does not apply.