Kickbacks are illegal in commercial transactions too

For the past six months or so, much attention has been paid on the impending regulatory changes that will fundamentally affect residential real estate transactions.

While the time devoted to preaching and teaching about those changes is both necessary and well-spent, we cannot forget about our commercial practitioner friends.

Recently, I was included in a conversation through which a very disturbing and troubling practice was revealed. A title agent shared that she was being pressured to pay a “referral fee” to a commercial real estate licensee. If the title agent refuses to pay, then the licensee will take his commercial business elsewhere. The commercial licensee is claiming that such kickbacks are not illegal because RESPA (the Real Estate Settlement Procedures Act) does not apply to commercial transactions.

While the commercial licensee is correct that the limitations existing under RESPA on the federal level do not apply to commercial real estate transactions, kickbacks from title agents and title companies are illegal in Pennsylvania. PERIOD.

The regulations promulgated by the Pennsylvania Insurance Commission specifically prohibit title agents and title companies from paying real estate brokers and agents any money resulting from an application for title insurance. More specifically, the regulations provide, “participation by a person in any of the fees charged by a title insurance company or agent thereof for title insurance, …, is an illegal rebate and inducement.” If the title agent pays this “referral fee” simply because the licensee referred the transaction to this title company, the title agent will break the law and put both her individual title agent license, as well as her title company’s license at risk.

Real estate licensees who participate in such a kickback scheme are also exposed and risk prosecution by the State Real Estate Commission. Real estate licensees are prohibited from engaging in conduct that demonstrates bad faith, dishonesty, untrustworthiness or incompetence.

Licensees must timely disclose any conflicts of interest that arise, including purely financial conflicts of interest, such as money earned from an affiliated business arrangement or joint venture. Licensees are obliged to advise consumers about various real estate-related laws (without giving legal advice, of course); and licensees are further obligated to disclose to the consumer any financial interest that they might have in a transaction. This disclosure must be made when the service in question is first discussed.

To summarize: While real estate licensees are permitted to accept referral fees from other real estate licensees, it is against the law for a title agent or a title company to pay referral fees to anyone, including commercial real estate agents. Real estate agents have a duty to make their client aware that title agents are prohibited from paying referral fees, just as agents have a duty to disclose to that client that they are receiving a (unlawful) referral fee from that same title agent or title company.

Don’t forget, there is an overarching prohibition against real estate agents acting dishonestly or incompetently, in bad faith or in an untrustworthy manner. Brokers have a duty to supervise their licensees, and may be exposed to sanctions for failure to supervise licensees who may be engaging in otherwise illegal activity.

“Pay-to-play” schemes such as the one identified in this article are not only offensive, they are unlawful. (Remember, these are neither affiliated businesses nor joint ventures.) It is important that real estate licensees do not adopt a myopic view about what laws may or may not apply to a transaction.

Although RESPA, the CFPB and the new regulatory changes are limited to the residential real estate universe, it is critical not to overlook the myriad of laws that affect real estate licensees, title agents and title companies, insurance agents, lenders, mortgage brokers, attorneys and all of the settlement service providers that are involved in a real estate transaction regardless of whether it is for commercial or residential property. Of course, you don’t have to take my word for it; consult your own attorney.