Can a Mortgage Broker Accept a Referral Fee From a Debt Reduction Company?

Paying someone to recommend your company to possible customers is often illegal. There are laws against your mortgage lender or broker taking referral fees --- also called kickbacks --- from companies involved in closing on your loan The laws do not prohibit collecting a fee for recommending you to a debt-reduction company when you're in financial trouble.

RESPA

The Real Estate Settlement Procedures Act applies federal rules to several aspects of closing, including referral fees. Under RESPA, companies involved in closing can't pay referral fees to each other: If your broker recommends or insists you use a particular title company, she cannot receive anything of value in return for the referral. RESPA applies specifically to mortgage settlements --- not to debt reduction companies, which aren't part of the closing process.

FTC

In 2010, the Federal Trade Commission added several new regulations on for-profit debt-reduction firms to its Telemarketing Sales Rule. One change is that if the company requires you set aside money for debt reduction in a dedicated account, it cannot take kickbacks from the bank holding the account. The new rules don't include any other restrictions on mortgage brokers, or anyone else, accepting referral fees from debt reduction companies.

Restrictions

If your broker insists you use a particular debt-reduction firm, the new FTC rules give you some protection against the debt reduction company cheating you. Before you sign anything, the company must inform you what its service costs are, and how long it will take to see results. You don't have to pay any fees until the company has successfully negotiated some of your debts down, and if the company requires a dedicated account, you must be free to withdraw the money from it at any time.

Referrals

Banning referral fees is meant to reduce costs to consumers: RESPA prevents mortgage brokers from requiring you to use an overpriced title company, then splitting the overage, for example. Mortgage expert Jack Guttentag says on his website that what matters is referral power: As long as a broker or lender can recommend or pressure you to use a particular company, that company will find a way to curry favor with the broker, even if there's no outright kickback fee.