Navigating Real Estate Referral Fees
In California’s real estate industry, referral fees and commission splits are not uncommon. But while some of these arrangements are perfectly legal, others can run afoul of both state and federal laws—sometimes carrying steep penalties. Whether you’re a licensed broker or simply someone referring business, it’s important to understand when such payments are permitted and when they’re prohibited.
State Law: Who Can Be Paid?
A broker is not permitted to pay any unlicensed individual who has engaged in activities requiring a license. The California Attorney General has weighed in, opining that a broker may pay a referral fee to an unlicensed individual—but only if that person does not solicit clients or participate in the transaction beyond making the introduction. Specifically, a real estate broker can pay a commission to an unlicensed person for providing the name, telephone number and address of a prospective borrower if the unlicensed person did not obtain the information in the course of soliciting borrowers or lenders on behalf of another or others. The finder’s exemption is available only if the activity is limited to arranging an introduction between the parties. So, the unlicensed person cannot be involved in any role in the negotiation of the loan, no matter how slight. The same analysis is applicable to other licensed transactions, i.e., residential or commercial sales or leasing.
Brokers who wish to pay referral fees to unlicensed persons must take every precaution to prevent the finder from crossing the line into licensed activity. Brokers who compensate an unlicensed person who has taken any role in the loan negotiation or performed any licensed activity are subject to license discipline pursuant to the California Business and Professions Code Section 10138. The person accepting the fee is guilty of a public offense punishable by a fine, imprisonment or both.
Once the finder crosses into negotiation or communication between the parties, they’ve likely stepped into licensed activity, making any compensation illegal. But a broker who makes an otherwise lawful referral in return for a referral fee still may by law, such as Business and Professions Code Section 10176(g), have the duty to disclose that fee to the principal. A broker can legally share a commission with a party to the transaction—such as the buyer or seller—so long as that party does not perform any activity requiring a real estate license. But this area can get murky. For instance, if a buyer includes language in their offer asking for a portion of the commission, that might be interpreted as engaging in a licensed activity, particularly if the buyer drafted their own offer.
Under California law, a real estate broker may share compensation with another licensed broker or a salesperson working under that broker. A broker cannot pay a commission directly to a salesperson not employed by them. A salesperson may only accept compensation from their employing broker. Business and Professions Code Section 10137 prohibits a salesperson receiving compensation from any other source, even for seemingly minor involvement in a transaction. So, even a referral fee paid to an agent must be channeled through the agent’s broker.
Finder’s Fee Exception
California recognizes a narrow “finder’s fee” exception. A finder can be compensated so long as their role is strictly limited to introducing the parties. Courts have consistently held that once a finder participates in negotiations or communicates deal terms, they are performing licensed activity and cannot legally be compensated unless licensed. To stay on the right side of the law, brokers must ensure that unlicensed individuals being paid any fee have not crossed the line.
If they have, the broker could face license suspension or revocation, and the unlicensed person could be subject to criminal penalties.
Federal Law: RESPA’s Strict Prohibitions
Even if a referral arrangement is permissible under California law, it may still be illegal under federal law—specifically, the Real Estate Settlement Procedures Act (RESPA). RESPA applies to residential one-to-four-unit properties financed with federally related mortgage loans. That financing includes loans insured by the FDIC or intended to be sold to Fannie Mae or Freddie Mac—meaning most conventional loans fall within RESPA’s reach.
RESPA prohibits giving or accepting any “fee, kickback, or thing of value” pursuant to an agreement or understanding that business will be referred for a “settlement service.” Thing of value covers not just money, but also gifts, trips, prizes, advertising, or even future business opportunities. Settlement services governed by RESPA include title searches, appraisals, escrow services, loan origination, credit reports, inspections, and services performed by real estate brokers and agents. So, if a person receives compensation in connection with any one of these services and did not actually perform substantive work, that payment likely violates RESPA.
Creative labeling does not provide protection. For example, some parties try to disguise a kickback as a reimbursement of non-recurring closing costs or call it a marketing credit. If the substance of the transaction is a referral in exchange for something of value, it’s still a violation—regardless of how it’s characterized.
Consequences
Violating RESPA can result in steep penalties. Also, while referral fees may be permitted, there may be requirements for disclosure to the principal by each paying and receiving person that should be carefully considered. So best practice is to keep it legal and ensure compliance by considering these best practices:
• Only pay or receive referral fees through proper licensed channels.
• Do not pay unlicensed persons unless their activity is strictly limited to introductions.
• Never pay or accept anything of value in exchange for a referral related to a loan subject to RESPA.
• Avoid disguised payments and disclose the payments to all parties involved.