A seller of mine received an offer recently with the following clause in it:

Seller to contribute 10,000 referral fee to [deleted] Financial at close of escrow.

Where do I begin? According to the attorney I spoke to (disclaimer: I am not a lawyer), believe it or not this may not be a RESPA violation according to the letter of the law, inasmuch as it’s not one settlement provider providing a kickback to another settlement provider, but one of the parties to the transaction doing the kickback. However, this certainly violates the spirit of RESPA, the intent of which was to lower consumers’ settlement costs.

As it turns out, however, the purpose of this “referral fee”, was to refund cash to the buyer. As the lawyer was nice enough to confirm for me, that pretty much unambiguously constitutes loan fraud, since money in the settlement statement going to some third party lender was actually being returned to the buyer. That’s a no-no, as you can read about here, or in even more detail here.

There’s also a possible code of ethics violation here, inasmuch as section 16.16 of the Realtor® code of ethics prevents the buyer’s agent from using the purchase agreement to negotiate a commission, which this offer effectively does. But let’s leave that aside for a moment, because the agent in this transaction was writing up the offer the buyer asked her to write. (Actually, the agent in this case struck me as pretty much an honest albeit newer agent who was being asked to do dishonest things — not as the one leading the charge over the cliff).

So, back to the loan fraud issue. Naturally, I advised the seller to counter out this part of the agreement, and we did so. This is when things really got entertaining. Through her agent, the buyer sent me a letter telling me that this “referral fee” must be included. When his agent educated him that doing business this way was illegal, the buyer’s response was — as you may have guessed from the title — “everybody does it”. We suggested a few different ways we might legally put the transaction together, but the buyer was adamant.

“Everybody does it.” Try that on the IRS when you evade your taxes. Or even better, try it on the policeman next time you’re caught doing 90 in a 65 mile per hour zone. Well, gee, officer, everybody does it.

When the agent discussed the issue with the buyer’s mortgage broker, the mortgage broker’s proposed “solution” was to have the seller just kick back the money to the buyer outside of escrow, without writing anything up. No doubt this approach was informed by the age-old ethical principle: “Murder is not a crime if you bury the bodies deeply enough so you don’t get caught.”

Interestingly, California’s Department of Real Estate, which lists for public use the license history and disciplinary actions against any licensee you may want to look up, shows for “[deleted] Financial” that one of the corporate officers had a suspension of his real estate license at one point.

Consumers, a good starting point when you’re selecting a real estate company or mortgage broker is to check the Department of Real Estate’s license information. Anyone who was crooked enough, often enough, to get the DRE’s attention probably is a bit shadier than you might feel comfortable with. Yet there are literally thousands of licensees in there who don’t have any disciplinary remarks in there.

And the reason? Everybody doesn’t do it.

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