RESPA Section 8 and Gift Giving: Keeping Holiday Cheer Compliant
Every year, the end-of-year rush brings a mix of closings, planning, and the usual exchange of small holiday gifts among industry contacts to foster better business relationships. It’s a familiar practice, but one that can pose risk under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) if not handled carefully. Understanding how RESPA Section 8 treats gifts can help companies avoid unintended compliance issues.
Unwrapping RESPA’s Gift Rules
RESPA Section 8(a) prohibits giving or receiving a “thing of value” if it is tied to an “agreement or understanding” that “settlement service” business will be referred. A “settlement service” is basically any service that is provided in connection with a settlement, including mortgage origination, title services, closing services, and real estate brokerage services, and if you’re reading this blog, there’s a good chance your services are subject to this prohibition. What makes this section tricky are two things. First, the definition of a “thing of value” is broad and includes far more than cash. Regulation X, the Consumer Financial Protection Bureau’s (“CFPB”) regulation that implements RESPA, lists examples including discounts, trips, and even “things.” Second, the “agreement or understanding” of an exchange for referrals can be inferred from conduct, according to the CFPB’s Regulation X, and does not need to be in writing.
Given the broad nature of this statutory and regulatory text, the CFPB has helpfully put on its website “Frequently Asked Questions” (“FAQs”) about RESPA Section 8. The CFPB’s FAQs state plainly that RESPA does not contain a de minimis exception (e.g., a small-gift exception), and the value of an item does not determine whether it is permissible or a “thing of value.” A $5 latte is treated the same way as a $2,000 door prize under the regulation. This means even a modest holiday gesture can potentially be scrutinized by regulators if the surrounding circumstances suggest it is in return for referrals.
RESPA Section 8 and Regulation X contain a number of exceptions from this prohibition. The exception that is most applicable to holiday gift-giving is the exception allowing for “normal promotional and educational activities” directed to people in a position to refer business, but only if two conditions are met:
The item or activity is not conditioned on referrals, and
It does not defray expenses the recipient would otherwise incur.
Both conditions must be satisfied to take advantage of this exception.
For the first element, the CFPB’s FAQs point to several factors to determine whether this element is satisfied, including whether the item is given selectively to active referral partners, whether more active referrers receive more valuable items, and whether gifts recur in a way that mirrors referral activity. Even without explicit discussion between the parties, these patterns can signal that referrals are part of the arrangement, because the CFPB’s Regulation X looks to actual conduct to determine whether the “agreement or understanding” element is met.
For the second element, the CFPB’s FAQs also point to several factors, including whether the item is a substitute for something the recipient would normally pay for, such as licensing, continuing education, dues, or other required business costs. When the gift effectively reduces the recipient’s own operating expenses, it would appear to likely fall outside the exception.
Naughty or Nice? Examples from the CFPB
The CFPB’s FAQs include several illustrations of how the promotional-activity exception can apply in practice. A few of the CFPB’s examples may be especially useful to keep in mind when evaluating holiday appreciation plans, because they show how broad distribution, lack of referral-based selection, and avoidance of expense defrayal factor into the analysis.
What Lands You on the Naughty List
Drawings specifically tied to referral activity
A settlement agent limits a drawing to selected loan originators and gives extra entries for each referral. The FAQs state that this likely violates Section 8(a), because the benefit tracks referral activity.
Waiving admission fees to an event in exchange for referrals
A title company waives admission to a continuing education course if a real estate agent makes a certain number of referrals. The FAQs characterize this as likely non-compliant, because it involves both referral conditioning and expense defrayal.
Defraying business expenses even without referral conditions
A provider waives fees for all real estate agents to attend a publicly available continuing education event. The FAQs point out that, even without referral requirements for the waiver, the waiver reduces a cost the agents would normally pay and likely does not fall under the promotional exception.
What Might Qualify for the Nice List
Wide distribution without referral-based selection
A settlement agent runs a drawing for a small promotional prize and includes all prior customers and all loan originators in the city. The FAQs note that eligibility does not depend on referrals, and the prize is not an expense the recipients would normally incur.
Educational events that do not reduce the attendee’s business costs
A title company hosts a continuing-education course, charges fair market value, and invites all local real estate agents. Agents pay their own admission fee. The FAQs note that the company is not defraying a required licensing expense of agents, and attendance is not tied to referrals.
Information sessions offered to everyone
A provider offers free seminars on market developments that are open to the public. The sessions do not relate to required licensing costs and do not depend on referral activity. The FAQs note that this likely satisfies the exception, because it is not defraying expenses and not provided only to referral sources.
Make Your Gift List, but Check it Twice
Regulators often evaluate promotional and gift activity as part of a pattern and practice, not as a single event. What appears permissible in one instance may look different when it becomes an annual or frequent practice with the same referral sources. Also, the types of promotional materials and gifts provided can affect a regulator’s analysis. A review of holiday gift giving plans and broader trends can help identify issues before regulators spot them in an examination.
We regularly assist clients with assessing their risks and obligations under RESPA Section 8. If you have questions about your holiday practices or RESPA Section 8 in general, email me at rich@garrishorn.com.
