Washington State Department of Financial Institutions

Escrow Agent Letter 97-09ES

TO: All Escrow Agents, Designated Escrow Officers, and Other Interested Parties

FROM: Mark Thomson, Assistant Director

DATE: July 28, 1997

SUBJECT: Referral Fees

Question: When has an apparent violation occurred in the referral of settlement services?

Analysis: Pursuant to RCW 18.44.145(2), "[n]o real property lender, escrow agent, or officer or employee of any escrow agent or real property lender may give or agree to pay or give any money, service, or object of value to any real estate agent or broker, to any real property lender, or to any officer or employee of any agent, broker, or lender in return for the referral of any real estate escrow services."

Clearly this section is provided to prevent escrow agents from paying referral fees to certain service providers in exchange for escrow business. In certain situations the Department has noted that discount coupons have been given to Realtors in conjunction with business referrals. In one such situation, the Realtor subsequently provided the coupon to the consumer to be used as a reduction in cost during the closing of the referred transaction. To be determined in these situations is not whether an "object" has been given to the Realtor, but whether that object is an "object of value."

The primary law governing issues of referrals and things of value is the Real Estate Settlement Procedures Act ("RESPA"). Although RESPA is not directly mentioned in chapter 18.44 RCW, the Escrow Agent Registration Act, RESPA is the governing statute for referral fees, and it is to RESPA we must look to determine an "object of value." §3500.14 of Regulation X (the rules to RESPA) PROHIBITION AGAINST KICKBACKS AND UNEARNED FEES defines "thing of value," as follows: "Thing of value. This term is broadly defined in section 3(2) of RESPA ({12 USC 2602(2)}). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. The term "payment" is used throughout Secs. 3500.14 and {3500.15}as synonymous with the giving or receiving any "thing of value" and does not require transfer of money."

This definition covers the giving of a discount (coupon) to a Realtor even if the Realtor passes the discount along to their client. The value of the coupon to the Realtor as a device to solicit business is clear. The fact that the coupon is given in return for the referral of business is also clear because the Realtor must refer the borrower to the escrow agent in order for the coupon to be honored. While the scenario of Realtor referred business presents a clear and convenient format for the analysis of the issue of referrals, this interpretation is not limited to Realtor/escrow agent interactions. Giving objects of value to real property lenders (including mortgage brokers) is considered a violation of RCW 18.44.145(2) as well. Additionally, RESPA prohibits referral fees to/from any settlement service provider and any individual or entity including consumers or others not directly involved in the settlement process. While the Escrow Agent Registration Act does not require your compliance with RESPA, the penalties for violating the federal law are severe and include civil as well as criminal remedies. For this reason the Department is concerned with our licensee’s compliance with RESPA as well as RCW 18.44.145(2).