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YSPs and Broker Fees
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YSPs and Broker Fees

 

FINDER’S FEES, YSP’S & RESPA

  California Allows Payment of Referral Fees to Unlicensed Finders 

California has a well-established body of law upholding payment of a finder’s fee by a real estate broker to a non-licensed individual whose sole participation in the loan process is finding a borrower.  More recent cases required that the finder’s agreement be in writing.  The critical fact that allowed the unlicensed finder to receive a fee was that the finder did not take part in any negotiation, which would require a real estate broker’s license.[1]

   RESPA Prohibits Referral Fees on Certain Loans

 RESPA was initially focused on preventing kickbacks by title companies and other settlement providers.  As RESPA was amended, broadening its scope to include fees paid to mortgage brokers, the kickback rules banned payment of a referral fee. (See:  24 C.F.R. § 3500.14(b).)  At present, a broker negotiating a “federally related mortgage loan[2]” who wishes to legally compensate the person who brought the loan to the brokerage, needs to demonstrate that the referring party actually provided goods, services or facilities, and that the payment received was reasonably related to the goods, services or facilities actually provided.  Significant payments to a non-licensed “finder” would be difficult to justify without including negotiation services requiring a license, which would invalidate the finder’s fee.

   The Employee Referral Fee Exception

 RESPA permits “An employer’s payment to its own employees for any referral activities.” (24 C.F.R. § 3500.14(g)(1)(viii).)  However, the activities an unlicensed employee may perform are limited, and such an employee must be subject to tax withholding, unemployment and worker’s compensation insurance.  (See:  10 C.C.R. § 2841.)  The limits of the employer payment exception are uncertain and the exception may not apply to a licensed salesperson working on commission under the mortgage broker’s license.  Payment of a referral fee to a salesperson working under another broker’s license is forbidden.  (B & P Code § 10137.)

   YSP As A Referral Fee

Payment of a Yield Spread Premium (YSP) or a servicing release premium by a lender to a mortgage broker is frequently alleged to be an illegal referral fee, especially where the YSP amount is calculated from a rate sheet, rather than a listing of goods, services and facilities provided by the broker.  To be safe, and perhaps in anticipation of adoption of some of HUD’s proposed RESPA rule changes, brokers should endeavor to document the goods, services and facilities they provided and the reduction in closing costs to the borrower which resulted from the interest rate differential reflected in the YSP.

[1] Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, Tyrone v. Kelley (1973) 9 Cal.3d 1, Zappas v. King Williams Press, Inc. (1970) 10 Cal.App.3d 768.

[2] Most non-business purpose loans for purchase or construction of a 1-4 unit residential dwelling are covered.  24 C.F.R. § 3500.2(b).

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