Can a loan originator or title agent give referral sources, such as real estate agents, tickets to sporting events, trips, restaurant meals, sponsorship of events, or the opportunity to win prizes in a drawing or contest?
The Consumer Financial Protection Agency (CFPB) offered guidance in 2020 on gifts and promotions to referral sources by publishing Frequently Asked Questions (FAQs) designed to answer questions about which gifts and promotional activities are allowed under RESPA – and which are not. Like most arrangements under RESPA, the answer depends on the facts.
A general prohibition
The FAQs say that Section 8(a) of RESPA generally prohibits gifts and promotions if they are given or accepted as part of an agreement or understanding for the referral of settlement service business.
They emphasize that no exception to this rule exists for gifts or promotions below a certain value. The agreement or understanding need not be written or oral and can be established by a practice, pattern, or course of conduct.
The exception: normal promotional or educational activities
But there is one notable exception for “normal promotional and educational activities,” which are allowed under two conditions:
- The activities are not conditioned on the referral of business. To determine whether this first condition is met, the CFPB will look to:
* Whether the gift or promotion is targeted narrowly towards companies or individuals that have made referrals in the past (or are targeted for future referrals), or whether it is provided to a broader set of recipients, such as the general public or all referral sources offering similar services in a given locality.
* Whether certain companies or individuals are routinely and frequently given a gift or included in the activity, or whether they receive gifts or are included in activities more than other persons.
- The activity does not defray expenses that otherwise would be incurred by the referral source: In other words, does the gift or promotion involve a good or service that the real estate agent or other referral source otherwise have to pay for themselves?
Examples of compliant and non-compliant gifts and promotions
The FAQs provides examples of how one particular activity could be a compliant “normal promotional or educational expense” or, under a slightly different set of facts, a prohibited activity under RESPA.
- Free Office Supplies: A settlement service provider supplies a real estate agent with office supplies that feature the settlement service provider’s name, contact information, and/or logo. This gift likely would likely be compliant with RESPA since it does not defray the real estate agent’s expenses — the real estate agent would not likely use his/her own funds to purchase office supplies featuring the name and information of another individual or company.
But, if the settlement service provider pays for a real estate agent’s office supplies branded with the real estate agent’s name, contact information, and/or logo, the payment would likely be considered to defray the real estate agent’s expenses and the gift would be suspect under RESPA.
- Seminars: A title company routinely hosts a free continuing education course that real estate agents use to meet their license requirements. The seminars are open to the public and they are advertised to all of the area’s real estate agents, regardless of they refer business to the title company. These course are likely to be compliant with RESPA because: admission is not conditioned on referrals and the courses are not defraying expenses that otherwise would be incurred by the real estate agents since the courses are provided free of charge for everyone.
But, if the title company offers the same continuing education course to the public for a fee but waives the fee for real estate agents (regardless of whether they have or will refer business to the title company), the course would not likely comply with RESPA because the fee waiver would defray the real estate agents’ expense as they otherwise would need to pay for the course.
- Prize Drawings: A settlement agent hosts a one-time-only drawing for a basketball set. The settlement agent advertises the drawing to all previous customers and all loan originators in the city summarizing the settlement agent’s services and providing the agent’s contact information.
The entries to the drawing are automatically made for every previous customer and loan originator in the city, regardless of whether the prior customer or loan originator has made or will make a referral to the settlement agent.
The agent also includes a drawing entry submission form on their website. The drawing is more likely to be a “normal promotional and educational activity” because the drawing entry is not conditioned on referrals and the prize would not defray expenses as the basketball set is not an expense that persons in a position to refer business to the settlement agent would otherwise incur.
But, if the settlement agent promotes its drawing only to select mortgage loan originators and only gives drawing entries for each referral the loan originator makes to the settlement agent, it likely is not a “normal promotional or educational activity” because the opportunity to win the basketball set is given only to persons who made referrals. It also may trigger a violation of RESPA’s Section 8(a) referral fee prohibition.
While the FAQs don’t cover all possible scenarios involving gifts and promotions, anyone who provides (or receives) gifts and promotions should be familiar with the CFPB guidance, consult with reputable RESPA counsel, and be aware of state laws that may have their own restrictions.
Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council, Inc. She retired in 2015 and is now a strategic alliance consultant.