Would you be suspicious if your real estate agent recommended a particular mortgage company? With under the table payments, “favors,” and kickbacks being a common practice in some businesses, it can be difficult to know who’s working for you and who are working for themselves. Let’s take a look at the ways in which real estate agents can recommend other professionals as well as the illegal practices some unscrupulous agents might engage in.
Do Real Estate Agents Get Kickbacks From Lenders? There are strict laws in place that govern how a real estate agent can recommend other professionals in the property transaction. For example, the sale must not be conditional on the use of the agents recommended professional and the real estate agent must not receive any economic benefit from the referral.
This seems straightforward enough. However, where there is a law there will also be someone trying to circumnavigate it, and there are ways that real estate agents can and can’t work with other people in their network. Could you spot an illegal practice from a legal one? Don’t worry. Not only am I about to tell you how to spot any suspect practices but I tell you what to do about them too.
Do Real Estate Agents Get Kickbacks From Lenders?
First of all, let’s talk about what we mean by “kickback.” Technically speaking any kickback is illegal because the definition of the word is:
“money that is paid to someone illegally in exchange for secret help or work”
But, in popular use the word has taken on a slightly broader meaning so that a kickback doesn’t have to be a cash payment, it could be a favor, a gift, or a service in return for an “under the table” or illicit piece of assistance.
So, do real estate agents get kickbacks from lenders? Generally speaking, no. While it is impossible to say that it never happens, under any circumstances, it is illegal and the vast majority of real estate agents are as law-abiding as the rest of us. They are unlikely to risk their license to work, their livelihood, a criminal record, and jail-time just for a couple of extra bucks. Not only that but the lenders are also prosecuted.
And Even The Big Players Get Caught
Recent Prosecutions And Investigations
The Real Estate Settlement Procedures Act, or RESPA as it has become known, says that all mortgage brokers and lenders must tell borrowers about the true nature and cost of their real estate settlement process. It specifically prohibits kickbacks.
Prospect Mortgage was recently fined $3.5 million for breaching this legislation, and the Consumer Financial Protection Bureau, which enforces RESPA, is currently investigating Zillow. No company within the real estate universe is too big or too small to get away with illegal practices forever.
In the case of Prospect Mortgage Brokers, real estate agents were routinely paid for “hot leads.” They provided the personal details of house hunters and Prospect Mortgage loan officers then made contact. It is said that brokers from Prospect only handed out bundles of cash to real estate agents visiting the company offices.
They also paid agents to insist that any prospective buyers were preapproved by Prospect before the agent would consider submitting an offer on a house and paid for the marketing expenses of a number of agents.
Can A Real Estate Agent Recommend A Lender?
Yes, a real estate agent can recommend a lender to a potential buyer. In fact, your real estate agent can, and probably will share the details of any number of professionals involved in the property transaction. The question is not really “can” they recommend a lender but “why” they are suggesting one lender over another.
Why You Might Need Suggestions
Home buyers are generally advised to shop around for a lender, and not just sign-up with the first company they contact. You should be asking your loan officer plenty of questions about their products and the terms and conditions of the loan they suggest. Once you have interviewed a few different lenders you will be in a better position to choose what is the best all round, long-term deal for you.
Life has a funny way of eating up all of your time. You have to go to work in order to be able to afford the loan you are applying for. There are family commitments and other things such as medical appointments which you can’t shuffle around. While it is easy to talk about interviewing plenty of loan officers, it takes time and if you can get a short list of recommended lenders it cuts down your loan shopping workload and timeline.
Why Real Estate Agents Make Recommendations
Although it is illegal for real estate agents to take kickbacks from lenders, plenty of people are suspicious creatures at heart. They cannot get past that suspicion that, even though it is against the law, there MUST, be something in it for the real estate agent. Why else would they make that particular recommendation? Especially if they seem to suggest the same lender to every buyer they work with.
I’ll let you in on a secret.
There is something in it for them. There. I said it. The secret is out.
Real estate agents usually advise their clients to work with a particular lender because the agent has enjoyed a good working relationship with them on previous sales.
It’s as simple as that.
A friend of mine was planning to apply for their loan with one of the big, national banks. The real estate agent advised against this and suggested a smaller, local lender with whom they had an existing working relationship.
Said friend was suspicious of the real estate agents motives and stuck with their big lender. The lender was hideous to work with, they rarely answered the phone or emails in a timely manner, paperwork was “lost” or misplaced and the sale fell through when the buyers’ lender could not complete on time.
On the other hand, the clients of the local lender had never had a complaint about the standard of customer care and had never had a sale fall through as a result of lender ineptitude.
Yes They Receive Benefits
As a general rule, real estate agents are just like the rest of us. They want their job to go smoothly and to avoid any unnecessary stress or upsets for themselves and their clients.
By giving details of lenders they have previously worked with, who carry out their tasks in a timely and efficient manner, a real estate agent decreases the likelihood of problems in the process. They are also hoping to avoid something untoward sinking the sale and having the entire thing fall through.
A smooth and speedy sale means the agent has fewer headaches with which they have to deal, and a successful sale means a happy buyer and a secured commission. This is why the average real estate makes recommendations, they want the sale to succeed or they don’t get paid.
What Is Allowed Under RESPA?
Under section 8 of the Real Estate Settlement Procedures Act your real estate agent is not allowed to receive compensation or an “inducement” of any kind in exchange for a referral on a federal mortgage loan. As almost every loan is either a VA loan, an FHA loan or is sold to Fannie Mae or Freddie Mac, this legislation applies to virtually every mortgage in the US.
This does not mean that real estate agents, lenders, title companies, and others cannot work together. It simply means that if they do so, it must be made crystal clear to everyone involved and no element of the real estate agents service to you can be reliant on you using their recommended vendor.
You will, no doubt, still see plenty of collaborations. These are the type of thing that is allowed under RESPA:
- A mortgage broker may provide the refreshments at an open house if they post a sign in a prominent location saying that they are catering the event, and someone from the brokerage is in attendance to hand out brochures and answer questions.
- A local real estate agents group holds a “lunch and learn” event which is paid for by a title company. A member of the title company speaks at the event and everyone in attendance is clearly notified that it a sponsored luncheon. One exception to this would be if the lunch were part of the real estate agents continuing education requirement for their license. In this case, it could be seen as paying for something that the real estate agents should have paid for themselves.
- An insurance company provides sponsored office materials such as pens, notepads or calendars which are branded with the insurance companies name.
- A mortgage broker and a real estate broker jointly advertiser in a local paper. As long as each of them pay a percentage of the advertising costs that reflect their companies prominence in the ad, this is acceptable.
- A lender pays fair market value in order to rent a desk, a copy machine, and internet connection in the real estate agents office. A loan officer resides at this desk in order to prequalify applicants.
What Is Not Allowed Under RESPA?
The law was written with people who would try to circumnavigate it in mind. It specifically states that any inducement is illegal. The legislation was phrased this way to prevent real estate agents, mortgage lenders, and other professionals involved in the home buying process from trading things other than cash, or from making payments and disguising them as something else.
For example. All of these were activities that took place before the legislation was enacted, that would now be considered illegal under RESPA:
- A title company hosted a monthly dinner and reception for local real estate agents.
- One mortgage lender provided lunches and other refreshments at open houses held by real estate agents who sent them business.
- A particular home inspection company held regular “outings” for real estate agents, including to expensive sporting events, concerts, and family theme park events.
- Another title company paid a lump sum towards an event hosted by a real estate brokerage but did not attend, give a presentation or provide advertising materials. In fact, there was no indication anywhere that it had been mostly paid for by the title company.
- A large mortgage lender sponsored a “professional development retreat” for the agents who sent them the most clients. This ten day break at a tropical resort involved a single, one hour “ product briefing” and the res of the time was the real estate agents own.
As you can see, there were plenty of ways around the ban on straightforward payments and this is the area that RESPA most seeks to address.
What To Do If You Want To Go Elsewhere
Although buyers might question their real estae agents motives when making a recommendation, it is not always this that actually bothers them. More frequently it is being put under undu pressure, by the real estate agent, to work with the suggested lender, title company, home inspector, or whoever else they are advocating for.
This situation can result in buyers making decisions based on what will be the least stressful choice for them right now, instead of what will be financially best for them in the long term.
One couple I know had an excellent relationship with their regular bank. They had purchased a number of homes over the years and had been very happy with both the rates and the customer service they received.
The real estate agent thay had previously used had moved away and they signed-up with an agent who was recommended by a friend. This agent suggested they go to “her” lender for the loan, despite the fact it would have cost them more in the long term. The couple politely declined and said they would be staying with their existing lender. In response the real estate agent put a great deal of pressure on them, calling and emailing constantly and threatened to walk away from the deal if they did not “do what they were advised.” My friends told the agent that they would sign with her lender IF she agreed to pay them the difference over the life of the loan. Needless to say, she declined and as it was they walked away from the deal anyway, but you should never be afraid to stand your ground with a pushy agent. If you are in doubt:
- Ask the agent for written details of why they are recommending a particular professional and what the benefit will be to you.
- Along with this information ask the agent, clearly, what their existing relationship is with the professional, and whether either party will benefit in anyway from your business, outside of the fee you are paying.
- Then ask the agent to also let you know if any of their services are dependant on your use of a recommended professional.
Most agents will be happy to provide this information and will be able to do so quickly. If there are any inducements being offered, the fact that you are asking such pointed questions demonstrates your level of knowledge and is usually enough to shut down any shenanigans.
What To Do If You Think Your Agent Is Breaching RESPA
If you are suspicious that your agent is flaunting the RESPA rules then you can always contact the Consumer Financial Protection Bureau. A simple Google search takes you straight to their page and you can submit a complaint online.
You may not feel it is worth submitting a complaint if you have not suffered any loss but other people may not have the level of knowledge with which to defend themselves that you do. By helping to ensure any professional that violates the regulations is dealt with, you are also helping to make sure that others will not be taken advantage of.
Yes, there is always the possibility that your real estate agent is the one bad apple in the barrel. However, it is far more likely they are suggesting a particular lender because they have a good working relationship and they know things will go as smoothly as possible if you all work together. And after all, isn’t that what we all want when we are buying a home – as little stress as possible?
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.