Settlement service providers who gift consumers for using its services is fine, but there are certain conditions.
May a real estate broker, lender, or other settlement service provider give a gift, rebate, or discount to a consumer for purchasing its services (or its affiliated services) under Section 8 of RESPA?
“Generally, yes,” said the Consumer Financial Protection Bureau (CFPB) in its RESPA Frequently Asked Questions (FAQs) published on October 7.
The FAQs were released in the same CFPB blog post that rescinded its controversial 2015 Marketing Services Agreement (MSA) Bulletin. As discussed, in the November and December 2020 REAL Trends Newsletters, they also provided guidance for MSAs and for gifts and promotional activities.
The CFPB FAQs on Consumer Incentives
The CFPB’s new FAQs provide the following regarding consumer incentives under RESPA:
Q: Under the Real Estate Settlement and Procedures Act (RESPA) Section 8, may a lender or other settlement service provider give a gift, refund or discount to a consumer for using that lender or provider?
A: Generally, yes. RESPA Section 8 does not prohibit a lender or other settlement service provider from giving a consumer a gift or an incentive (e.g., a discount, refund of fees, chance to win a prize, etc.) for doing business with that entity. However, RESPA Section 8 prohibits, for example, giving an incentive to a consumer in exchange for the consumer referring other business to that lender or other settlement service provider. Other federal and state laws may also have restrictions that apply and should consulted.
The CFPB’s interpretation is consistent with guidance provided by the Department of Housing and Urban Development (HUD) when it was responsible for administering RESPA.
Examples of Consumer Gifts, Rebates, or Discounts
While consumer incentives in the real estate industry can take many forms, here are some examples of gifts, rebates, and discounts provided by real estate brokers and agents that could be allowable under RESPA given the right circumstances:
- Closing gifts: A real estate broker or agent may give a $500 gift certificate to the client as an expression of the broker’s or agent’s appreciation for the client’s business without violating RESPA. But, the gift certificate should not be an expression of appreciation for referring other clients, even under an unspoken understanding. The basic rule of the IRS is that if you give someone a gift for business purposes, your business expense deduction is limited to $25 per person per year.
- Real estate commission rebates: Real estate agent or broker commission rebates to borrowers would not violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business. However, many states forbid sharing fees with anyone who doesn’t hold a real estate license. If allowed under state law, the rebate must be listed as a credit on the Closing Disclosure and the name of the party giving the credit must be identified.
- Incentives to consumers who use the affiliated company. A gift card, discount, free service, or payment of closing costs to a consumer who uses a real estate broker’s affiliated mortgage or title company is allowed under RESPA as long as the consumer is not required to use the affiliated service (although if an incentive becomes too great it could be viewed as a required use); the incentive is bona fide (meaning that its value is not made up by increasing costs elsewhere in the transaction); and the affiliated service separately is available at prevailing market prices.
- Discounts on a package of affiliated services: Since 1992, RESPA regulations have said that the offering of a package or combination of settlement services or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use, which is prohibited under RESPA affiliated business regulations. However, any package or discount must be optional to the purchaser, the discount must be a true discount below the prices that otherwise are generally available, and the discount must not be made up by higher costs elsewhere in the settlement process.
Beware of State Restrictions!
The CFPB FAQs make clear that one should always check with state laws and regulations when offering consumer incentives, even if they are allowed under Section 8 of RESPA. As noted above, some states forbid sharing fees and/or providing gifts to anyone who doesn’t hold a real estate license, and many states that permit it require that any rebates be disclosed to all parties in the transaction. Some state regulators may totally prohibit consumer incentives in a particular industry. As always, consult with your attorney before proceeding with a consumer incentive program.
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.