Illegal Kickbacks and Referral Fees - The Request Absolutely Drives Me Crazy and I Just Don't Get It

By
Mortgage and Lending with Branch Manager NMLS 557050

Last week, I got a call from a real estate agent who wants to interview me to be one of his referral partners, one of his preferred lenders.

"Aaron, I have heard great things about you.  I read your newsletter each month.  I know you know what you are doing and in today's market, that's what I need," he said.

I was thrilled.  I love getting those calls.  We set up a meeting for this Wednesday at Starbucks.  Doesn't every real estate meeting take place there?

Anyway, today, this agent calls me.  "Aaron, I have a client for you. Give him a call."

Even better.  We haven't even met yet and I am already getting business from him.  I was thrilled again.

Then he said, "By the way, we can discuss my referral fee on Wednesday when we meet."   Before I could say another word he hung up.

I could only shake my head in amazement.  Wednesday's meeting is not going to go as well as I originally expected.  I now know why this guy needs a new lender as a referral partner. 

This isn't the first guy who has asked me for a referral fee.  I would say in my career, no less than 20 agents have asked me.

I would never, have never, and will never pay someone money or a gift or anything for a referral.  Period.  End of story. 

Why?

Because it's illegal.  The funny thing is I shouldn't even have to write this blog because everyone knows it.  So thank you for letting me blow off some steam.

The Real Estate Settlement Procedures Act (RESPA)

Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan.

Violationsof Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties.

In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.

Now, I have seen enough episodes of "Oz" to realize I wouldn't last very long in prison.  And if the additional threat of huge fines and loss of income in the career I have chosen and have spent years building isn't enough to dissuade me from giving you a measly kickback, one more thing is....fairness to the borrower.

Let's just play a quick numbers game. 

First, you need to understand that most responsible, respected mortgage lenders, who do any real volume, get nowhere close to 3% on a deal like a lot of agents do.    If we are lucky, we get to 1-2%.  Sometimes even less than 1%.  

However, let's say we get to 1.5% on your deal and the rate for your client is 6.500%.

On a $300,000 loan this is $4500.  Now certainly this lender has some brokerage to split with, like you do, so let's say he gets 65% of that.  Now he is at $2925.  Now, he has to pay taxes, so let's say he is now down to $2200 or so.  Now you want your kickback.  How much will you ask for?  $1000 per deal?  Half of the deal?

Now he is down to $1100 or so.   But you still made somewhere between $7000-9000 in all likelihood before your split.

What the lender will do next and I have seen this happen too many times is he will increase his gross commission to pay you.   How does he do this?  By raising the rate or fees of the borrower.  

Now instead of a 6.500% rate, your client should have gotten, he now gets a 7.000% rate.  But what happens now if the payment is too high for the borrower? What if his closing costs are too high for him now?  Are you willing to lose this client and lose this deal for $1000? 

If the lender is only making $1000, he may be willing to let your client walk, but are you?

My very first real estate coach told me that, if you do a great job, every person you deal with is good for three total transactions over his lifetime.  He will either refer you to friends and family or come back himself.  I can tell you from experience, he is right.

Are you willing to trade these three transactions for $1000 today?  As soon as this borrower closes, and he tells anyone about the high rate he got, or increased fees, and they tell him he got ripped off, you will never get another referral from him again.  

I believe the performance of your referral partners is a reflection of you.

Of those 20 agents who asked me for referral fees, I would say half of them ended up using me anyway and most still do.  

Just as I will do on Wednesday, I explained to each that the most important thing when picking a lender is to pick one who will inevitably pay you handsomely by providing your clients amazing customer service, communication and, most importantly, by closing your deals. 

When you have a strong lending referral partner, your referrals increase as well and your clients will come back to you both time and again.

Don't ask your lender for a kickback or a "referral fee."   Its offensive to an experienced lender, its ethically wrong for your client, you can lose your license, and its ILLEGAL!!!

 

 

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Anonymous
Natalie Feldman, Broker and Title Co. Owner, Clearwater, FL

Aaron,

Kick backs are rampant in this business.  It's wrong, as you've pointed out it hurts the clients and our industry and your post is spot on.  

Good mortgage brokers are worth their weight in gold and are very very very hard to find.  I don't pay kickbacks, I don't take kickbacks and if you do a good job and keep your eyes focused on the client, none of it is necessary.

But you wouldn't believe the number of mortgage brokers that ask our Title company to give them kick backs or ask us to let them "close the file" and give them the processing fee.  So it happens in the mortgage industry too!

I went out on my own as a (real estate) broker 2 years ago.  Last year I purchased an ownership interest in a title company.  In marketing my Title company's services. I made a call on my former brokerage office (it's the top Remax brokerage office in Palm Harbor, Florida) to let my colleagues know that I now owned a title company (that broker too has an ownership in a title company and although they don't give clear kick backs - I know for a fact that they reduce the rent charged to the agents in the office for office space if they use the title company).   My former threw away the file folders and easter candy we left for the agents in the office.  They threw it in the trash rather than give it to the agents!

Oh well not surprising.  He's the reason I left that Remax office.  I had a transaction with one of the agents in that office years ago (she was the seller representing herself in the sale of her own home) and she committed practically every illegal/unethical act in the book and it was the messiest transaction I had ever had and he renegged on a committment he personally had made to my buyer.  I immediately left the firm.

It's competitive out there.  But at the end of the day, quality of work product should be what we build our business own.

Sep 03, 2007 10:38 AM #76
Rainmaker
651,655
Fran Gaspari
Patriot Land Transfer, Inc. - Limerick, PA
"The Title Man" - Title Insurance - PA & NJ

Aaron,

In regards to Natalie's insightful comment above, I've always wondered how one can juggle competing interests when problems arise. Isn't it human nature to protect the 6% commission on a $200,000. sale, than say, the approximate 1% title premium should this dilemma arise? As Lenn always says, arms length is key. Thanks,   Fran

Sep 03, 2007 10:49 AM #77
Rainer
36,906
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV

Natalie--- Thank you for the post.  I agree with you, its rampant.  I think people justify in their head when "its only a few hundred here or there" because they think "who really gets hurt?"  Its incredible to me.  To me, the person who gets hurt most, aside from the client, is that person's reputation.  

When I am asked for a kickback of any kind, I look at that person with disdain and some pity that they need to dip in my pocket.   Quality of work always wins in the end. 

Fran--- That is 100% the point. 

Like these guys that want to do your mortgage and be your agent on your transaction.   Who is representing your best interests?  What if the appraisal comes in too low?  Do you believe that the double mortgage/licensee agent for one second is going to let you know?    No way.  He is going to call every appraiser he knows to get the value pushed up as high as possible.   

How about the seller's interest?  What if the buyer really doesnt qualify but the lender/licensee is trying to make a square peg fit a round hole?  With a sales commission on the line how long until that news gets delivered? 

The real estate transaction is the biggest financial transaction most people will do in their lifetime.  I like to tell people to take a step back and think even bigger.  

What if they had a rich uncle die, left them millions, and then they decided to invest all of these millions into buying a hotel.   Would they hire the same one guy to find the hotel for them, do the financing and then be the lawyer on it?   Of course not.  Its just a bad idea.

Sep 03, 2007 12:38 PM #78
Rainmaker
325,147
Esko Kiuru
Bethesda, MD

Aaron,

Good reminder to agents out there. This issue seems to have a life of its own. It's a clear RESPA violation and professional lenders don't go for it. They don't need to. There must, however, be enough mortgage originators who will accept these types of arrangements, otherwise the issue would be dead. Very risky proposition.

Sep 03, 2007 12:49 PM #79
Rainer
36,906
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV
Esko--- No doubt.  I am very disappointed that no one who engages in this practice has the courage to post here anonymously even though I invited them.  We know there are a ton of them out there and I would love to hear from one mortgage guy, agent, or title rep who believes its just a part of business.   
Sep 03, 2007 12:53 PM #80
Rainmaker
651,655
Fran Gaspari
Patriot Land Transfer, Inc. - Limerick, PA
"The Title Man" - Title Insurance - PA & NJ

Aaron,

To state it simply, if God wanted us to wear 2 hats at the same time, He would have given us 2 heads. Thanks,   Fran

Sep 03, 2007 01:02 PM #81
Rainer
68,899
Spokane Home Loans Spokane Mortgage
Spokane Mortgage - Spokane, WA
Great post, Some agents just dont get it.
Sep 03, 2007 01:17 PM #82
Rainer
36,906
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV

Fran--- Funny!!

Scott--- As well as some lenders. 

Sep 03, 2007 03:32 PM #83
Rainer
26,709
Laura Moore Godek
Laura Moore Godek, PC - McHenry, IL
"Every person you deal with is good for three total transactions over his lifetime."  Sometimes more.  I have had 18 closings with the same family.  It started with the grandparents, then the kids, then aunts and uncles and now the grandchildren are buying.
Sep 04, 2007 09:35 PM #84
Rainer
36,906
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV
Laura--- That is the perfect example of what the potential is for those who do it the "right way."   Awesome!!!
Sep 04, 2007 10:40 PM #85
Rainer
11,325
James Armstrong
Premier Alliance Title Group, LLC - Orlando, FL
I handle everything from contract to closing

I totally agree with the original post.  It amazes me how often things like 'referral fees' or 'perks' are requested amongst business associates in the field, especially from myself, the title company. 

Another thing I love is when a broker (mortgage or real estate) asks me to 'leave it off the HUD'.  Are you kidding me?   I work VERY hard and have been in this business for 9 years now, I am not risking my good name or reputation in order to make a couple dollars on a deal, it is just not worth it.  I think that more ethics courses need to be required for all licensed associates in the business, it will never stop the 'back door dealing', but at least people will be more aware of the penalties and consequences of such actions.

Sep 05, 2007 10:55 AM #86
Rainmaker
651,655
Fran Gaspari
Patriot Land Transfer, Inc. - Limerick, PA
"The Title Man" - Title Insurance - PA & NJ

Aaron,

I apologize for seemingly hijacking the title portion of this post. I am so incensed with this topic that I immediately was lead to a post the next day in which the title seemed close to yours. Sorry if this caused any confusion. Thanks,   Fran

Sep 05, 2007 11:03 AM #87
Rainer
5,016
Dave Castle
Pacific Platinum Properties - Irvine, CA
Realtor - GRI,CPM

Aaron,

 Great post and a great read.  I am a title rep and come accross this situation all to often.  Good service should be its own reward, and working together sharing referals and resources is what good business is all about. 

Take Care,

Dave

Sep 05, 2007 08:30 PM #88
Rainmaker
317,944
Roberta LaRocca
Simply Vegas Real Estate - Las Vegas, NV
REALTORĀ®, Broker, Salesperson, Property Management
AAron: I am new to the real estate business, but I know that kickbacks are illegal!  That is definitely something I learned in pre-licensing. 
Sep 05, 2007 11:20 PM #89
Rainer
1,816
Brian Foster
BFF Consulting - Bayonne, NJ
Very well put, it's not just realtors who have their hands out, it seems to come in all circles. Another thing that bothers me is when I try to setup a new referral partner with local banks for Heloc's or Personal Loans and the first thing the bank rep tells me is "I can't pay you a referral"?????? What? I asked for nothing but good service for me clients that might have this need. Frustrating, very frustrating
Sep 06, 2007 08:48 AM #90
Rainer
36,906
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV

James--- You must have seen it all!  Pretty amazing sometimes, I am sure.

Fran--- No problem!  But I agree with you!

Dave--- Agreed!

Roberta---  Best of luck in your new business!  Start with good habits and the lessons you have learned so far.

Brian--- It just goes to show you how deep it is that their first reaction is so negative.  They must get hit up all of the time.

Sep 06, 2007 09:47 AM #91
Rainer
102,782
Robert Huntsinger
Empire Realty - Upland, CA
Empire Realty Upland, CA - Full Service at a Discount

It is amazing how many people don't follow the law, the only reason they do ask is that they know many do pay.

Take care!

RJH

Sep 08, 2007 06:35 PM #92
Rainer
36,906
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV
Robert--- I think you are right!   If they were always turned down they would be afraid to ask.
Sep 09, 2007 08:42 PM #93
Rainmaker
48,828
Sherry Armstrong
RE/MAX Property Centre - Ormond Beach, FL
Daytona Beach FL real estate

I know buyers don't understand me when I tell them to check at what the rate & FEES are when they get a quote for a mortgage or why I'm so picky that they go to a particular mortgage broker or three. It's because there are no games being played with fees. I don't want anything but a great job from the lenders and title companies I work with. That's all I want.

Great post, timely and very omportant information for all of us!

Sep 09, 2007 10:21 PM #94
Rainer
36,906
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV
Sherry--- Lender shopping is an excellent idea for all borrowers but not only for rate and fees.  You also want one you feel comfortable with, seems knowledgable, communicates well, seems like a problem solver, and stays on top of his game. 
Sep 11, 2007 02:37 AM #95
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Aaron Gordon

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