A kickback in real estate is when an agent receives benefits or items of value from a settlement service for referring clients to them.
This practice is highly illegal in real estate, so it’s essential for students to learn this term before the exam. To fully understand kickbacks and how they work, you’ll need the guidance of real estate professionals. Luckily, our team is here to educate you on kickback fees and why we should avoid them at all costs.
In this post, we’ll define kickbacks, provide examples of how they work, and explain why fair lending laws prohibit them.
What Is a Kickback?
A kickback is when a real estate agent receives financial benefits or items of value for referring clients to a business or service. This practice is called a kickback because it kicks some of the profit gained from referrals back to the agent who helped them get it.
While it may sound like a great way to make extra cash, it is highly illegal. The following professionals should never give or receive kickbacks:
- Real estate agents
- Real estate salespersons
- Real estate brokers
- Mortgage brokers
- Escrow companies
- Title insurance companies
Examples of Kickbacks in Real Estate
A kickback occurs when a settlement service offers a real estate agent a “thing of value” in exchange for referrals. Because a “thing of value” can be interpreted in different ways, we’ve provided some common examples of kickbacks below:
- A monetary gift
- Web page production
- Production of marketing materials
- A reduced escrow fee
- Tickets to sporting events or concerts
- Fancy dinners
- Donations to an agent’s charity event
- Interactions on social media
- Gifts to the real estate agent for birthdays, holidays, and any occasion
Of course, these items are only considered kickbacks if they are given in exchange for referrals.
Now that we’ve covered the basics let’s check out a real-life example of how kickbacks work in real estate.
Real Estate Agent Imprisoned for Illegal Kickback Scheme
According to the U.S. Department of Justice, a real estate consultant from Michigan was severely penalized for engaging in a kickback scheme in July of 2022. Steven A. Mills asked for and received around $577,000 in kickbacks from real estate agents that he was supposed to supervise. He also failed to report these kickback fees as income on his tax return.
As a result, the court sentenced Mills to 18 months in prison for committing tax fraud and violating the Real Estate Settlement Procedures Act. This case exemplifies the importance of avoiding kickback schemes as a real estate professional.
Why Are Kickbacks Illegal?
Kickbacks are illegal because real estate agents are responsible for being transparent with their clients. When an agent only refers a business to homebuyers because they are incentivized to, it’s a conflict of interest. Real estate agents should make referrals based on the best option for homebuyers- not themselves.
Essentially, a kickback is a real estate bribe that enables homebuyers to sign settlement contracts without full context. It can also be a form of tax evasion, as we saw in the court case exemplified above.
Luckily, laws are set in place to prevent this predatory practice and promote fair housing.
What Law Prohibits Kickbacks in Real Estate?
Kickbacks violate the Real Estate Settlement Procedures Act (RESPA). RESPA is a law that requires lenders and real estate agents to provide homebuyers with disclosures of the settlement terms. This ensures that borrowers are protected from kickback fees and other abusive lending practices.
Who Enforces RESPA?
The Consumer Financial Protection Bureau (CFPB) enforces RESPA. If a real estate agent gives or takes a kickback, homebuyers can file a claim with the CFPB. The CFPB will investigate whether the law has been violated and penalize the offender accordingly.
Penalties for Violating RESPA
The consequences for violating RESPA range in severity depending on the nature of the crime. Penalties include:
- Around $94 fines for accidental violations
- $10,000 fines and imprisonment for up to one year
- Fines of an equal amount or three times as much as the charge for the service
Are There Legal Kickbacks?
In real estate, there is no such thing as a legal kickback. However, real estate settlement services can still market themselves by offering the following benefits to everyone:
- Educational seminars to the entire realty board
- Food and catering for events held by the whole realty board
- Donated gifts or prizes at real estate events where anyone can win
- Discounted escrow fees for both parties in a settlement
The key to avoiding a kickback scheme is ensuring that benefits are available for all, not just one real estate agent or group.
What Other Acts Violate RESPA?
Kickbacks aren’t the only RESPA violation that can get settlement services and agents into trouble. Other examples of RESPA violations include:
- Requiring large escrows
- Inflating service costs
- Bribing agents in exchange for referrals
- Failing to disclose good faith estimated settlement costs
- Demanding title insurance
- Including hidden balloon loans
What Is a Balloon Loan?
A balloon loan is a mortgage loan that does not fully amortize over its term. This loan type allows borrowers to start with low payments but requires a large lump sum at the end. Balloon loans are legal in real estate, but only when properly disclosed in the settlement contract. Homebuyers should fully understand all terms of the agreement before closing on the house.
How to Avoid Kickbacks in Real Estate
Real estate professionals must follow RESPA and other fair lending acts. To avoid kickbacks, real estate agents should not accept fees or other things of value from settlement services, especially on the contingency of a referral.
Of course, real estate agents can still recommend businesses and services to their clients. As long as the agent doesn’t have a deal with the company and recommends them in good faith, it is entirely legal.
How to Spot Predatory Lending Practices
Real estate professionals can protect their clients from predatory lending practices by keeping an eye out for the following:
- High or undisclosed interest rates
- A requirement that the entire premium is paid in advance
- Aggressive sales tactics
- High loan fees
- Businesses offering benefits in exchange for referrals
If an agent suspects a settlement service is subjecting homebuyers to abusive terms, they should avoid working with or promoting this business.
What Are the Other Fair Lending Laws?
The Real Estate Settlement Procedures Act is only one of the lending laws that ban abusive practices. Other examples of fair lending laws include:
- The Fair Housing Act
- The Truth in Lending Act
Let’s dive deeper into each act and how they promote fair housing in real estate.
Fair Housing Act
- National origin
- Sex (including sexual orientation and gender identity)
- Family status
Equal Credit Opportunity Act
The Equal Credit Opportunity Act (ECOA) prohibits mortgage companies from discriminating against protected classes. Under the ECOA, protected characteristics include:
- National origin
- Sex (including sexual orientation and gender identity)
- Receipt of income from a public assistance program
- The borrower’s exercise of any right under the Credit Consumer Protection Act
Other acts designed to protect homebuyers include:
- Fair Credit Reporting Act
- Fair Credit Billing Act
- Fair Debt Collection Practices Act
Frequently Asked Questions
Let’s review some frequently asked questions real estate students have about kickbacks.
What Is the Difference Between a Kickback and a Referral Fee?
Many students get kickbacks and referral fees confused, as both practices operate similarly. However, a referral fee is when real estate brokers receive a set commission for referrals. This is different from kickbacks – when agents receive bribes or items of value in exchange for referrals.
There are also some states where referral fees, also known as finder’s fees, are legal. For example, if all parties are aware of the referral fees and take no issue with them, this does not violate RESPA. However, a kickback fee is always against the law.
Can Real Estate Agents Give Gifts to Clients?
A real estate agent can give clients gifts as long as no strings are attached. For example, real estate agents often gift clients a celebratory bottle of champagne after closing on a home. But this gift should only serve as a token of appreciation rather than an obligation for further business.
What Is the Difference Between a Kickback and a Rebate?
A rebate is a refund that the homebuyer will receive from their real estate agent during closing. Rebates come from part of the agent’s commission and are used to attract more business.
Unlike kickbacks, rebates are legal because they are not secret deals that the buyer is unaware of. Instead, rebates benefit homebuyers by rewarding them with more money after closing.
What to Know Before the Real Estate Exam
A kickback is when a real estate agent receives benefits from lending companies in exchange for referrals. This abusive lending practice violates the Real Estate Settlement Practices Act and results in serious penalties.
Real estate professionals must avoid taking part in kickback schemes and other predatory tactics. It’s important to recommend real estate settlement services to clients in good faith and with their best interests at heart.
Kickbacks are a crucial topic to understand before the real estate exam, but this isn’t the only term you’ll need to know. Quiz yourself on more essential terms using our online Real Estate Flashcards today!