Can a Realtor pay referral fees to non-licensees?

I’m a Realtor who would like to pay referral fees.   If you are not a licensed Realtor, can I pay you a referral fee for sending me business?   The answer may fascinate you.  It certainly fascinates me.

Referral Fees in Washington

Both state and federal law restrict the payment of a referral fee to an unlicensed third party, although it appears neither jurisdiction will enforce the restrictions.   I’m not interested in violating the law, even if it is unenforced, but there is more to the story.   Read on, because it turns out that I can pay referrals fees, provided they are paid under very specific circumstances.   As a retired real estate attorney I must admit I get a real kick out of these exceptions.

Washington State Law on Referral Fees

The Department of Licensing describes the practice of promising to pay a gift to an unlicensed person as unlawful under Washington law. However, under existing Department practices, it is not likely that this conduct will be prosecuted because it does not harm consumers. At its core, the Department of Licensing is a consumer protection agency. While the strict language of the Licensing Law prohibits an organized and advertised plan to pay a referral fee to an unlicensed third party, the Department believes that this conduct causes no harm to consumers. With limited resources available to prosecute real estate agent misconduct, the Department is likely to expend its prosecution efforts on violations that result in real harm to consumers. That is the current stated position of the Department. It could change.  

If the referral fee is paid spontaneously, in other words, the agent had not promised to pay a referral fee in exchange for the giving of a referral, then the Department’s position is that it is lawful to pay such a referral fee.

Federal Law on Referral Fees

RESPA (The Real Estate Settlement and Procedures Act), a federal law, dictates that any payment made to another settlement service provider (except a licensed broker or agent), in direct exchange for a referral, is prohibited. The definition of a settlement service provider seems to be broad enough to include unlicensed, third parties. Nevertheless, payment of referral fees to friends and past clients is a common practice among agents  across the country.  HUD does not prosecute agents for this practice.   It may be that HUD does not prosecute real estate agents for the payment of referral fees to third parties because, like the Department of Licensing, HUD believes there is no harm to consumers from this action. Or, it could be that HUD’s prosecution resources are dedicated to other violations and HUD will prosecute agents for these payments when resources become available. If HUD has reason to believe that such payments result in a higher fee to a consumer, HUD will be more likely to prosecute.

Conclusion

Referral fees to non-licensees are not legal under state law, but referral fees to non-licensees are legal if they are “spontaneous.”  You couldn’t make this stuff up.   Truth really is stranger than fiction.   I love this stuff!   Mostly because it could mean money for you and me, but also because stupid laws deserve loopholes.   What do you think?   Want to send me some referrals.   No I can’t promise you anything . . . but you might check your mailbox shortly after the transaction closes.   That’s not a contractual promise, nor is it a subtle promise.   It is only a veiled hint of a potential “spontaneous” referral fee.   Sorry, just trying to comply with the law here.

[Source of State and Federal law:   Washington Realtor magazine, May/June of 2008]

Referral Fees can be paid if done correctly.

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