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Quick Tips - Understanding HUD’s Consumer Protection
Real Estate Settlement Procedures Act
RESPA stands for the Real Estate Settlement Procedures Act. Introduced in 1974, RESPA law is designed to protect consumers in the process of purchasing a home. RESPA requires lenders to provide consumers with disclosures (Truth-in-Lending Disclosure Statement) at various stages throughout the loan process, and also prohibits kickbacks and referral fees that would increase the cost of settlement services for consumers.
There are two main points of the law that affect referral relationships between parties involved in the selling of a home:
Prohibition of kickbacks. RESPA states that no one can give any "thing of value" in exchange for referrals. According to RESPA, if a Real Estate Agent refers business to me, I cannot even send them a gift certificate as a way of saying thanks. This applies to any people involved in a Real Estate transaction. If a client of yours refers another person to you, you can't reward them with any "thing of value" in exchange for the referral.
Can you have a party and invite all your past clients and include referral sources? Yes. But you cannot exclusively invite referral sources, as this would constitute a provision of something of value in exchange for referrals according to RESPA.
Can you give a client a thank you gift after a transaction closes? Yes. Giving new homeowners a house-warming gift is great marketing tool to implement after the deal is closed. However, you cannot give them a thank you gift in exchange for referring additional business to you.
Prohibition of defraying costs. RESPA law indicates that normal promotional and educational practices are permissible, as long as there is no defrayment of cost involved. If you enter into a cooperative marketing campaign with a Loan Officer, Title Rep, or any other professional, the other party cannot pay for your portion of the costs. Costs for advertising and distribution must be divided proportionately. For example, if your name and image branding takes up ¼ of the advertising space in a co-op marketing campaign with a Loan Executive, then the LO should pay 75% and you should pay 25% of the costs, based upon fair market values.
In many states, Real Estate licenses are granted without close examination of an applicant's knowledge of RESPA guidelines. As a result, many Real Estate Agents go into business unaware that certain practices are prohibited via Federal statutes enacted by the US Department of Housing and Urban Development.
