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Legal IssuesUnderstanding commission rebates and refunds
The PAR Legal Hotline often receives calls asking whether it is legal for a salesperson to refund or rebate a portion of his earned commission to his client. One issue is whether refunding the commission would be considered an illegal kickback under RESPA but there is a second issue involving the prohibition against paying non-licensees commissions.
Does refunding or rebating part of your commission to your client fall within the umbrella of these two prohibitions?
The short answer is no. A broker may refund all or part of the commissions he earns to his client without violating either RESPA or RELRA. How can this be when RELRA prohibits a broker from paying a “commission or any valuable consideration to anyone other than his licensed employees or another broker…?”
RELRA also makes it a criminal act to perform licensed activity without a real estate license, further suggesting that rebating commission to a consumer is “bad mojo.” The reason that rebating or refunding part of your earned commission to your client does not violate RELRA is because you are not paying anything to anyone for performing or undertaking licensed activity. Likewise, rebating your earned commission is not paying for a referral so it does not implicate RESPA.
There is no prohibition against a broker voluntarily reducing the commission he earns and returning (think rebate) what he was paid to the person who paid him. It does not matter, in the case of a buyer’s broker, that the commission was paid by the seller; it was paid on behalf of the buyer, so it is considered (for this purpose) to be the buyer’s money.
Because most residential real estate transactions involve federally funded mortgages, it is essential that such rebates be reflected on the HUD-1 settlement sheet because failing to disclose that rebate may violate RESPA. It also is important to discuss any intended rebates to buyers with the buyers’ lenders to ensure that any rebates do not affect their loan.
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Brett Woodburn, Esq. is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. |
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It depends on the context. The HUD-1 settlement statement should accurately reflect where the money is being directed. If you have an arrangement or understanding with your Buyer (or Seller) that you will refund or rebate a part of your commission, then is should be on the settlement statement. If the decision to refund is truly gratuitous and is made after settlement, then it is very unlikely that it will draw criticism from any governing body.
Remember, context is critical. If you engage in a regular practice of “deciding” after settlement to rebate part of your commission, then the “decision” may be viewed as pretextual and may be problematic.
Ok, question: You’re an agent with XYZ Realty, you go to closing, give the Broker the check from settlement and then the Broker pays you. You want to give your Buyer a thank you card and in it is a check for X amount. It that breaking the law?