The Commission has received several questions about whether a broker may advertise about a service provider (such as a real estate inspector) and, if allowed, are there any limits to this type of activity?
If a broker offers, recommends, or promotes the use of a service provider and expects to receive compensation from the service provider when a party uses the service, the advertisement regarding the service must disclose that the broker may receive the compensation. [See Rule 535.155] In addition, the party, as the broker’s client, must consent to the payment of the compensation. [See Rule 535.148(b)] Rule 535.148(d) also provides that a “license holder may not accept a fee or payment for services provided for or on behalf of a service provider to a real estate transaction the payment of which is contingent upon a party to the real estate transaction purchasing a contract or services from the service provider.”
So how does this apply to a broker offering promotional services to a real estate inspector?
A broker may advertise an inspector’s services, however, an inspector may not pay a fee or other valuable consideration for (1) a referral, (2) inclusion on a list of inspectors or preferred providers, or a similar arrangement; or (3) inclusion on a list of inspectors contingent on other financial agreements. An inspector may be violating Commission Rules by entering into “preferred provider” arrangement with a brokerage [See Rule 535.220(e)(3)]. Many of the questions we receive relate to preferred provider programs operated by a brokerage that require inspectors to pay for access to that brokerage and its sponsored sales agents. Often paying to be included in the preferred provider program is the sole means by which an inspector may “advertise” their services to the brokerage and its agents. Some of the questioners call this “pay to play.”
In addition, some of these “preferred provider” programs also contain an implied “ranking” of service providers by classifying them in “silver, gold or platinum levels” or some similar indication of implied quality or relative value. Under Section 1101.652(b)(23) of The Texas Real Estate License Act and Commission Rule 535.155(d)(19), an advertisement may be misleading if it contains a claim to a special or relative quality standard (a “ranking”) unless it includes a reference to the specific source (“objective criteria”) upon which the claim is based. Implying relative quality based solely on the price charged or paid for inclusion in a specific select category on an exclusive list may be a misleading advertisement.
Under Commission Rules, there are two limited exceptions that would allow an inspector to interact for marketing purposes with other real estate service providers and not be in violation of Commission Rules regarding “preferred providers”. Those would be: (1) allowing the inspector to engage in legal promotional or educational activity to or with settlement service providers in ways that are not conditioned on the referral of business; or (2) purchasing advertising and promoting the inspector at market rates from any person in any publication, event or media. [See Rule 535.220(e)(8)(A)&(B)]
What about RESPA?
A broker who offers this type of “preferred provider” program or a similar arrangement to home inspectors or other service providers may also violate the Federal Real Estate Settlement Procedures Act (RESPA), which prohibits certain referral fees and kickbacks.
What is considered a referral under RESPA?
A “referral” includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident. Additionally, a referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business incident thereto.
Who is considered a Service Provider under RESPA?
A person or company that provides settlement services is considered a service provider. Generally, settlement services that occur at or before the purchase of a home are typically considered settlement services. This covers services provided by a real estate agent as well as title insurance, mortgage loans, appraisals, abstracts, and inspections (including inspections required by applicable law or any inspections required by the sales contract or mortgage documents before transfer of title). Services that occur after closing generally are not considered settlement services. Therefore, it would not include, for example, an alarm company, moving company, contractor, or lawn mowing service.
Under RESPA there are a few exceptions. The most common exceptions are as follows. First, RESPA allows for normal promotional or education activity. However, this activity only falls under this exemption if it meets the following requirements: (1) it is a normal promotional or education activity; (2) it is not directly conditioned on the referral of business; and (3) it does not defray expenses that otherwise would be incurred by the referring party.
Second, RESPA allows for payment in return for goods provided or services performed. For this exception, the broker or agent must provide goods, facilities, and services that are actual, necessary, and distinct from what they already provide. The amount paid to a real estate broker or agent must be commensurate with the value of those goods and services. The payment should not exceed market value. This is analogous with the exception under the Commission’s rule that an inspector paying for an advertisement at market rates is not a violation. [See §535.220)(e)(8)(B)]
Additionally, any payments should not be “transactionally based.” Therefore, the payment cannot be dependent on whether the real estate transaction was successful; instead it would likely need to be a flat fee based on fair market value.
Finally, RESPA allows for certain affiliated business arrangements under specific conditions. This final common exception has several requirements and you should consult an attorney familiar with RESPA regulations regarding this exception.
So what should I do before developing a vendor or service provider type of program?
The Commission recommends consulting an attorney familiar with RESPA regulations and to contact the Commission regarding Commission Rules. If you are unsure, it may be best to limit your vendor or service provider program to parties that are not considered a service provider under RESPA.