Joint Advertising: Marketing Opportunity or RESPA Violation?
by THOMAS J. PRENOVOST, JR., ESQ. and BENJAMIN K. GRIFFIN, ESQ.
Facts
A REALTOR® wishes to jointly issue advertising, consisting of newspaper advertisements, local neighborhood flyers, or postcards, with one side containing the REALTOR®’s contact information and photo, and the half of the advertising containing a mortgage broker's contact information. Is this a cross-marketing opportunity or a RESPA violation?
Background on RESPA
The Real Estate Settlement Procedures Act of 1974, known universally to REALTORS® as RESPA specifically prohibits any kickbacks or value offered from other Settlement Service Providers (real estate related entities such as real estate agents, mortgage brokers, title and escrow companies) when the good or service is done without being earned per 12 U.S.C. ' 2601 et seq. With this background, there is no RESPA violation when each separate entity pays for their own advertising for actual fair market value payments in return for goods provided or services performed. With joint advertising, there must be full value paid by each entity, and there can never be any referral fees or kickbacks between those providers after a closed sale.
Full Value Payments between Providers
The guiding principle of marketing opportunities such as these, is that any amounts paid to a REALTOR® or other provider must be commensurate with the value of those goods and services. If the payment exceeds market value, for whatever the service or product, the excess will be considered a kickback and is a RESPA violation. Also, payments may not be tied to the success of the REALTOR® or other provider=s efforts, but must be a flat fee that represents fair market value.
For any marketing opportunity that includes joint advertising between a REALTOR® and a mortgage broker or other provider must be paid for by each separate entity, and records must be kept indicating that the fair market value was paid by each separate entity for its advertising. Record keeping is particularly important if litigation is filed or the applicable governmental regulators initiate an investigation. Additionally, if one provider provides in-house printing, that provider could not discount the cost to the other provider for the joint advertising. The one provider must charge full value to the other provider, or it would be considered a kickback.
Conclusion
RESPA would not be violated in this situation if a REALTOR® and a mortgage broker jointly paid the proportional, fair market value for advertising, whether in a newspaper, postcard, or business card, as long as records are kept of the separate payments made by both entities. Further, REALTORS® and loan officers would have to be prohibited from entering into any side arrangements, referrals, unwritten agreements to refer business for this joint advertising.
Please be aware that a risk remains that an outside regulator may uncover situations where REALTORS® and other providers, in violation of law and their Company Policies, agree to quid pro quo situations arising from joint advertising, in violation of RESPA. Our recommendation is when engaging in joint advertising, it must be at arms= length and must be approved in advance, in writing, by the respective management of the providers, with adequate records documenting full value.
Example of Permissible Activities and Payments
A real estate agent and mortgage broker jointly advertise their services in a real estate magazine, provided that each individual pays a share of the costs in proportion with his or her prominence in the advertisement.
Example of Prohibited Activities and Payments
A mortgage lender only pays a real estate agent for taking the loan application and collecting credit documents if the activity results in a loan.
Thomas J. Prenovost, Jr. is a principal with Prenovost, Normandin, Bergh & Dawe, APC, an AAV@ rated law firm in Santa Ana, CA, with over 30 years of experience specializing in commercial and real estate litigation, and has worked with RESPA issues in various contexts in representing real estate companies, escrow companies, title insurers, and lender, in addition to The Inland Gateway Association of REALTORS®. His email address is TPrenovost@pnbd.com.
Benjamin K. Griffin is a litigation associate with Prenovost, Normandin, Bergh & Dawe, APC, with practice areas including the representation of real estate companies, lenders, and escrow companies. His email address is BGriffin@pnbd.com. More information about this law firm can be obtained at www.pnbd.com or (714) 547-2444.
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