TREC recently amended §535.148 (and made conforming changes to §535.220) to strengthen settlement service provider independence and provide clarity about consumer protection issues when a license holder pays funds to or receives funds from another real estate settlement service provider. TREC has long had rules in place limiting an inspector’s ability to engage in what is commonly known as “pay to play.” However, TREC has not had explicit rules addressing this issue for other TREC license holders. The recent rule amendments provide parity for all license types subject to TREC’s jurisdiction.
We hosted a Facebook Live on this topic to help answer your questions, make sure you check out the video below:
What is “pay to play”?
The industry often refers to access to a brokerage and its sales agents by paying to be included in a preferred provider program as “pay to play.” By paying to play, another settlement service provider like a lender or inspector is paying to promote their services to the brokerage and its agents in exchange for potential business from the brokerage’s clients. The lines between advertising, referrals and the fiduciary duty to represent the interests of clients often get blurred in the process.
Since the recent rule changes, questions have come up like:
“What about my preferred service provider list? Can I still have one?”
Yes. But the brokerage cannot charge settlement service providers to be included on the preferred provider list.
- The referral of inspections, lenders, mortgage brokers or title companies;
- Inclusion on a list of inspectors, preferred settlement providers, or similar arrangements; or
- Inclusion on lists of inspectors or other settlement providers contingent on other financial agreements.
Wait. So I can’t maintain a preferred service provider list unless it is free to be included on it?
Free is best for settlement service providers. Charging other vendors such as moving companies or landscaping services is not prohibited because these are not settlement services. A list of settlement service providers can be provided to a client if inclusion is not conditioned on referrals. Furthermore, a brokerage will be more clearly focused on their fiduciary duty to their client if the providers on the list are chosen, not because they paid a fee, but rather because they have done good work for other clients of the brokerage in the past.
However, there is an exception for promotional advertising.
A brokerage can charge a service provider to be included on a vendors’ list (preferred or not) if it is made clear on the face of the list, that any ranking is not based on performance but instead is based on solely on adverting rates paid by the service provider. The cost of advertising on the list must also be at market rates for settlement service providers. This promotional activity for settlement service providers falls under the limited exceptions in §535.148(h) and §535.220(e)(8). Those are: (1) engaging 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) paying market rates for goods actually furnished or for services actually performed.
Additionally, preferred provider programs often 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 considered a misleading advertisement.
If those on the list are ranked, the list must clearly state the basis on which the ranking was created. This is to ensure that the public is not misled into thinking the brokerage endorses the quality of the work of service provided on the list when the list is actually just a paid advertisement.
How can I make sure I am following the requirements?
The Commission recommends consulting an attorney familiar with these requirements 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 settlement service provider or to provide the program at no cost to the providers of settlement services. TREC promulgated these rule changes to mirror the intent of federal law (see below) and to clarify the need to uphold a license holder’s fiduciary duty to his/her client, that is, to represent the interests of the client, and to place no personal interest above the client’s interest. The financial gain from engaging in these paid preferred providers lists, if not done with great care, could be seen as a disregard of your fiduciary duty to place a license holder’s client above their own interests. Maintaining a settlement service provider’s independence of judgment in a transaction is also part of the intent of both TREC’s rule and federal law.
By the way, who are settlement service providers?
Generally speaking, it is another professional involved in providing a service for a real estate transaction. §535.148(e) says a “settlement service provider” could be any of the following, but isn’t exclusive to these: a federally related mortgage loan originator; a mortgage broker; a lender or other person who provides any service related to the origination, processing or funding of a real estate loan; a title service provider; an attorney; a person who prepares documents, including notarization, delivery, and recordation; a person who provides credit report services; an appraiser; an inspector; a settlement agent; a person who provides mortgage insurance services; a person who provides services involving hazard, flood, or other casualty insurance; homeowner's warranties or residential service contracts; a real estate agent or broker; and a person who provides any other services for which a settlement service provider requires a borrower or seller to pay.
A broker who offers this type of “preferred provider” program or a similar arrangement to home inspectors or other settlement service providers may also violate the Federal Real Estate Settlement Procedures Act (RESPA), which prohibits certain referral fees and kickbacks. See our previous article for details.