California Lawyer Warns Mortgage Lenders of Referral Fee Prohibitions in Federal Law

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A conference of loan officers was warned by Beverly Hills Attorney Lawrence H. Jacobson that referral fees and splitting of fees with realtors and others in most regulated mortgage transactions is illegal.

The collaboration between a mortgage lender and a real estate broker generally works to benefit home buyers, enabling them to complete a purchase or refinancing transaction at favorable terms.

But not if that collaboration get too cozy and involves a referral fee, whether disclosed or not to the borrower. In that scenario, not only does the home buyer pay, but it’s even more expensive for the lender and the real estate broker. That’s because referral fees and splitting of fees in most regulated mortgage transactions are illegal under federal law and subject to criminal and civil penalties.

Lawrence H. Jacobson, Beverly Hills, California real estate attorney, today spelled out the prohibitions of the law – the Real Estate Settlement Procedures Act (RESPA) – to loan officers attending the annual “Turn OnYour Million Dollar Brain” workshop in Fort Lauderdale.

Not only are referral fees in cash illegal, said Jacobson, but even if disguised as gifts or entertainment, they’re still a violation of RESPA. He warned that investigators of the Housing and Urban Development Department (HUD) “know what to examine.” The ban on referral fees also encompasses other service providers in home purchases, including title insurers and escrow companies, Jacobson said.

Where actual work of value was performed by a service provider, the law does sometimes permit a disclosed sharing of fees, he said. “Under no circumstance, however, can a fee be paid by or to a broker or lender for simply referring a prospective borrower. There is no free lunch; such costs ultimately are passed onto the borrower. That’s what led to RESPA’s adoption.”

Lawrence H. Jacobson has practiced law in California since 1968 and is a former Vice President -- Legal Affairs of the California Association of Realtors. Mr. Jacobson’s practice focuses primarily on real estate transactions and real estate and mortgage brokerage. He also is a frequent expert witness in real estate court cases.

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Paul Spindler

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Paul Spindler