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Are Referral Fees Legal on Commercial Loans?

Insights» Legal Insights

November 3, 2017by George Blackburne III and Marketing

Is it legal to pay referral fees for commercial mortgage referrals?

Yes! Even in states where a license is required to broker commercial loans (California, Florida, Nevada, Arizona, etc.), you can legally pay a referral fee on a commercial mortgage loan, as long as the referring source does nothing more than call you with a name and phone number of a prospective borrower.

However, if the referral source — say, a commercial real estate broker — starts to negotiate terms (rate, points, term, etc.), then he is working as a commercial mortgage broker. In those states requiring a license to broker commercial loans, the referral source is now breaking the law. Therefore, don’t let your referral sources gather documents for you or issue loan quotes.

When is it illegal for a mortgage broker to pay a referral fee?

Under RESPA (Real Estate Settlement Procedures Act), it is illegal to pay a referral fee (called a kickback) on a residential loan. A residential loan is a mortgage loan on a house, condo, townhouse, duplex, triplex, or four-plex. In the parlance of the Federal government, such loans are called loans on one-to-four family dwellings.

Is it legal to pay a banker a referral fee for a commercial mortgage referral?

Never be the first to suggest a referral fee to a banker!Most bankers consider referral fees — even on commercial loans — to be kickbacks. A kickback is an illegal and immoral payment to a real estate broker to steer his trusting buyers to a particular lender. So, if you offer a referral fee to a banker, 90 percent of them will be horrified and probably cut you off.

Most banks also forbid their loan officers from receiving referral fees because of the potential liability. Many banks have been sued for referring customers to mortgage companies. For example, if the mortgage company is negligent, and the borrower loses a large purchase deposit, the borrowers may sue the bank for a negligent recommendation.

So while it is NOT illegal to pay a banker a referral fee on a commercial mortgage referral, the loan officer can still get in trouble because it is against the policy of most banks for their loan officers to receive referral fees.

However, if the banker asks for a referral fee, you should gladly pay it. It’s perfectly legal, and there is nothing sweeter than a banker sending you one or two referrals every business day.

How large should the referral fee be?

It’s whatever you negotiate, but the standard commercial mortgage referral fee is 20% of your company’s gross commission. A small, flat fee or 10 percent is also common.