RESPA Section 8 Contractor Referral Fee

Posted By: Bailey Stratton

RESPA Section 8 Contractor Referral Fee - 06/23/21 09:24 PM

Listed on a cost breakdown in a consumer construction file, one of the line items was listed "New Construction Realtor Referral Fee". The contractor is charging the consumer a 1.5% fee to be paid to the realtor because their realtor referred them to the contractor.

Is this a section 8 violation? Contractors are never listed in section 8 as a settlement person. Would this cause concern for our bank since we would have to disburse the money to the realtor?
Posted By: Inspector

Re: RESPA Section 8 Contractor Referral Fee - 06/23/21 09:49 PM

Construction contractors do not typically provide settlement services and a payment for referral that does not involve a settlement service would not be covered by RESPA.
Posted By: Bailey Stratton

Re: RESPA Section 8 Contractor Referral Fee - 06/23/21 09:53 PM

Thank you! So should I be concerned about this being on the cost break down? Are we okay to issue a check to the realtor for the referral fee?
Posted By: TMatt87

Re: RESPA Section 8 Contractor Referral Fee - 06/23/21 10:17 PM

Originally Posted by Inspector
Construction contractors do not typically provide settlement services and a payment for referral that does not involve a settlement service would not be covered by RESPA.

So new home builders are not settlement service providers? We could pay a referral fee to a builder to send his or her customers to us for a loan?
Posted By: rlcarey

Re: RESPA Section 8 Contractor Referral Fee - 06/23/21 10:45 PM

The construction contract is between the borrower and the builder. What builder charges the borrower and who he pays is between the two of them. It has nothing to do with the loan. I would however, might not be including that 1.5% in the acquisition price of the property for LTV consideration. Whether you agree to fund that payment is also a business decision. Other than that, if it is not legal, then it would be a State law issue.
Posted By: Inspector

Re: RESPA Section 8 Contractor Referral Fee - 06/24/21 12:20 AM

For RESPA it doesn't matter if the person being paid for the referral is a settlement service provider themselves but the referral has to be for some kind of settlement service.

A home builder is not a settlement service provider, but a lender would be. If the referral involves a settlement service then it would be RESPA covered. So if the builder is paid a referral fee for referring to the lender that is a referral involving a settlement service and would be a Section 8 violation. On the other hand, if the bank was paid by the builder to refer customers to the builder for construction services then (assuming there are NO other arrangements trying to tie this activity to some thing of value or referral back to the bank for lending services) this would not create an issue because the referral does not involve a settlement service. Builders are a common source of Section 8 violations but this is because lenders go out to give them things of value for the referrals of settlement services.

To make the example more extreme, it wouldn't be a RESPA issue if the bank received a thing of value to recommend a landscaping company just because the bank makes mortgage loans.

In the OPs example, it looks like the builder is paying the realtor for a referral related to construction services which are not settlement services. If the arrangement was turned around and the realtor was paying the builder for referrals this could be covered and represent a Section 8 violation. Although, as it was pointed out, this would not involve the bank.