Kickbacks and Referral Fees can be Ethical?

The Real Estate Settlement Procedures Act (RESPA) and Code of Ethics imposed the prohibition of  receiving or payment of referral fees from individuals other than from Real Estate Brokers.  They are formulated and implemented because the need for them arises, presumably.

RESPA was enacted because Congress felt that consumers needed protection. It is illegal under RESPA for anyone to pay or receive a fee or kickback of anything of value because they agree to refer settlement service business to a particular person or organization. For example, your mortgage lender may not pay your real estate broker $250 for referring you to the lender.

It is also illegal for anyone to accept a fee or part of a fee for services if that person has not actually performed settlement services for the fee. For example, a lender may not add an amount to a third party’s fee, such as an appraisal fee, and then keep the difference.

Co-branding is also illegal if only one entity pays for the advertisement. It is considered as receiving something of value in exchange for a business referral. To make the co-branding legal, both parties should pay the advertisement in proportionate to the cost of the size of the advertisement.

The question is what makes these referral fees, kickbacks and co-branding illegal when technically both parties are exchanging something of value for their mutual benefits. We don’t create laws and Code of Ethics as mere exercise in futility. Certainly, professional’s conduct of business has been abused that only consumers have become the unsuspecting victims of the malpractice.

In 1974, Congress enacted RESPA primarily to address abusive practices, promote greater understanding to home buyers and prohibit practices such as kickbacks or referral fees that result in higher costs.

RESPA was created in the first place partly because various types of entities involved in the purchase and sale of real estate such as realtors, lenders, construction companies, and title insurance companies were often engaged in providing undisclosed kickbacks to each other, thereby inflating the costs of real estate transactions. What is drafted in RESPA is mirrored in the Code of Ethics for Realtors.

Based on the logic behind the enactment of RESPA, the inflated costs incurred by the consumers seem to be the only concern the rule or law is attempting to address. If the costs of referrals incurred by the realtors and by the mortgage brokers are not passed on to the consumer, doesn’t this enactment become inutile?

Now, if I am a non-realtor and I am given a choice to refer between two equally competent realtors in almost every aspect except that the other one is giving something in consideration, whom do you think I would choose?

The proponents of RESPA surmised that the referral fees, kickbacks and paid co-branding distort the client-professional relationship: that the gifts and pecuniary consideration given to referring individuals provides an unlevel playing field for other professionals. This part is a purported argument. Most professionals like realtors and mortgage brokers thrive on word of mouth. This is the most effective and cheapest way of increasing business.

RESPA has been criticized for failing to prevent what it was meant to prevent. Lenders and other service providers in the real estate industry, for instance, still see customers go with the service providers associated with a lender or realtor, albeit the explicit language on the documents the home buyer signs that he can choose any service provider he wants.

A referring person would not refer a person, family or relative to a realtor simply because of that something of value in exchange for the referral. Realistically, if I am referring an acquaintance, friend and family to a professional, if something goes wrong, I will feel fully responsible.

Equality here is paving the level playing field for all the professionals in the real estate. All professionals are at liberty to practice and compete without impinging others or inflicting harm directly. Referral fees are marketing tools if I have to add. This is not an unfair or unethical practice unless the referral fees translate into additional costs to the consumers on top of the standard, competitive and uniform costs. This is economic liberty.

By receiving something of value in exchange for something is utilizing the concept of efficiency. According to James O’ Toole, a corporatist who believes in economic growth, “A simple act of exchange of value makes an economic sense to both parties.”

Corporatist values are efficiency, productivity, competitiveness, high standard of living and economic growth, (O’Toole, 1995). Corporatist shares the belief of the libertarian that market should be left alone where it works well.

Communitarians have meant two things when they say community: first, the Jeffersonian face-to-face community of neighbors; second, the broader world; community and the human family. For communitarians, the key issue is to distinguish what is rightly mine and what is rightly yours. That a design or work should be intrinsically rewarding for all those who do it, (O’Toole, 1995).

The most appropriate prescriptive policy as an amendment on the RESPA law and Code of Ethics is to legalize referrals, kickbacks and co-branding as long as the costs of the gifts and fees are not passed on to the consumers. The standard of professional practice should suffice to serve as guidelines for the conduct of services to the public.

In the real world, there are so many loopholes and grey areas to circumvent the referrals, kickbacks and sponsored co-branding. We should eliminate this prohibition with a caveat: a provision discouraging a practice that would inflict pecuniary harm or infringe the rights of the consumer.

Do I see EYEBROWS raising? Hey, I can rationalize. Speak your minds!!


About Maria Gilda Racelis

I am a full-time realtor and a no-nonsense individual when it comes to rendering services to my clients. I take my job and the responsibility it entails seriously. My clients come first. I ensure that they know and feel I am working for their best interest. However, I do not carry out tasks to compromise my principle. I conduct my business with pride, honesty and integrity. I will do whatever it takes to meet their goals while adhering to my principle. "And the connection I make with the clients throughout the process, that to me is how I define success." Buying and selling homes can be very stressful. It is my job to make the process easy and fun as can possibly be for my clients. I take personal gratification from the smile on the faces of highly satisfied clients. I have amassed 100% positive and rewarding testimonials from my clients after many years of experience in real estate business. To enhance competency in the field for my clients' benefit, I continually seek to further my knowledge and expertise. With this in mind, I hold the following designations and expect to add more as the need for them arise. If you are looking to work with a competent professional realtor who will put the best foot forward for your best interest, you have just read her profile. I am always available to listen to your concerns and questions. Please do not hesitate to contact me anytime.
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2 Responses to Kickbacks and Referral Fees can be Ethical?

  1. What a great article it really explains the topic in a very well written . Great job Maria

  2. Great blog, very informative, You did a great job explaining RESPA

    Jeff Heidtmann

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