Business Relationships” in Real Estate Practice
A growing practice among real estate brokers, attorneys,
and mortgage brokers in the State of
When lawmakers make a decision to regulate a profession one of the common themes is to provide for licensure. Typically a candidate for admission to the regulated profession must obtain some education, take a test, and in some instances, serve something akin to an apprenticeship. Licensure grants permission to practice in the profession and the unlicensed are excluded. An important consideration becomes the meaning of exclusion and the enforcement structure. If the unlicensed are permitted to freely earn referral fees, commissions, or the like, then the significance of obtaining the license is diminished. For example, if a real estate agent could freely pay referral fees to non-licensees then the licensee could employ several non-licensees that would show houses and negotiate contracts, and the licensee could simply pay the lion’s share of the commission to these “assistants” who might not qualify for the professional license. The State’s ability to effect consumer protection would be significantly diminished. Therefore it is observed that how a professional licensure body of law deals with referral fees sometimes becomes a central part of the regulatory scheme.
Title Insurance is Big Business
Premiums charged by title insurance companies are an interesting and somewhat arcane topic. In the highly regulated world of insurance the premiums and commissions charged and paid by title insurance companies are essentially unregulated. Some title carriers charge $2.50 per thousand dollars of purchase price for coverage to the buyer, so-called owner’s coverage. They may charge $0.50 per thousand dollars borrowed for coverage to the lender, so-called lender’s coverage. Those carriers frequently allow an agent to sell the lender’s coverage for as much as $1.00 per thousand dollars borrowed. Other carriers have a schedule with rates typically set somewhat lower than $2.50 per thousand for owner’s coverage and $1.00 per thousand for lender’s coverage. These carriers will typically allow an agent to sell their coverage at the $2.50 and $1.00 respective rates. These rates have become something of an industry standard or benchmark. The interesting part comes when considering the impact on commissions of selling the coverages at prices higher than the rack rate.
Title insurance is a lucrative business for some. Title insurance commissions are high. Small agents, that write relatively small volumes of coverage annually, get a 50% - 90% commissions, $200 - $400 for an average transaction. Larger law firms are able to negotiate better commission percentages. Some firms retain all of the overage between the scheduled rate and the price charged to the borrower or lender, other firms settle for 70% of the difference, give or take a few percentage points.
Title insurance is big business.
The First Multiple Listing Service (“FMLS”) reports total 2003 sales
volume of single family detached homes at almost 12 billion dollars.
If one assumes “standard” rates, over fourty-one million dollars of
title insurance is being sold annually in the FMLS coverage area, that includes
The Regulatory Environment
The complexity of residential real estate closings and the
economics involved have made mandatory lawyer involvement in closings an issue
for quite some time. Basic
residential real estate closings are quite standardized.
The documents are not overly complex, and terms are typically not
negotiable. A typical fee paid to an
attorney in a real estate closing in metro
Through Formal Advisory Opinions, the Supreme Court of
Georgia has declared that conducting closings is the practice of law and must be
performed by a lawyer. The
Supreme Court provided that “[t]his does not mean that certain tasks cannot be
delegated to non-lawyers, subject to the type of supervision outlined in State
Advisory Opinion 21. The lawyer
cannot, however, delegate to a non-lawyer the responsibility to “close” the
real estate transaction without the participation of an attorney.”
Supreme Court of
A lawyer cannot practice law in an entity with a non-lawyer owner.
Also a lawyer cannot split legal fees with a non-lawyer.
Until 1996 attorneys were exempt from the general
requirement to be licensed to sell, solicit, or negotiate in connection with
title insurance. Since then
attorneys wishing to sell title insurance have been required to become licensed.
The current law is embodied in O.C.G.A. 33-23-1 et. seq.
No pre-license education is required of attorneys seeking to become title agents. No continuing education is required. The licensing process is quite simple, fill out a form, pay a $75.00 fee and get a license to sell title insurance. Despite the simplicity of the process, supervisors with the Insurance and Fire Safety Commissioner’s office report that many lawyers that issue, sell, and receive commissions on the sale of title insurance are still not licensed.
Splitting of insurance commissions is illegal in
Real Estate and Mortgage Brokerage
Real estate brokers and agents must be licensed and are generally prohibited from paying referral fees. O.C.G.A. 43-40-30 and 43-40-1.
Mortgage brokers are subject to a somewhat different
regulatory framework. O.C.G.A.
For purposes of ABRs in real estate practice, the Real Estate Settlement Procedures Act (“RESPA”), 12 USC § 2601 et. seq. is the primary Federal legislation. Much of meat of RESPA is contained in the regulations, 24 C.F.R. 3500. RESPA and its accompanying regulations contain a robust ABR regulatory structure, complete with such details as the amount of office space rent that may be paid.
Regarding ABRs the basic RESPA commands are 1) do not require a referred consumer to use an ABR and 2) make a detailed disclosure of all ABRs. A significant exception to the prohibition against requiring a referred consumer to use a particular ABR is for a lender may require a borrower to pay for the services of an attorney, credit reporting agency, or real estate appraiser to represent the interests of the lender.
While the complete scope of RESPA regulation of ABRs is
beyond the scope of an article of this nature, suffice it to say that at the
Federal level there is just as much concern about the consumer protection
implications of ABRs as at the state level.
Missing Regulation ?
At the heart of professional licensure regulation, fee/commission
splitting/referral fee legislation, and ABR limitation is a governmental
consumer protection concern and suspicion when a professional refers another
professional driven by a profit motive as opposed to a real concern for ensuring
the consumer receive the highest value services.
Splitting insurance commissions, real estate commission, or legal fees
with a non-licensee is illegal. The
intriguing area comes at the nexus between practicing law and selling title
insurance and how each discipline is regulated by the State.
As set forth above, the rendering of opinion on title is the practice of
law. Title companies typically only
allow licensed attorneys carrying errors and omission insurance to become agents
The average consumer is relatively unsophisticated in real estate transactions. The typical consumer purchases two to three parcels of real property in a lifetime. Frequently the purchase occurs in a community in which the consumer has no pre-established ties or professional contacts. Despite disclosure requirements, the consumer is commonly unaware of why they are being guided by real estate agents or mortgage brokers to use the services of a particular attorney. This turf is becoming more hotly contested, the latest revision of the Georgia Association of Realtors sales contract now provides for the selection of the closing attorney. Buyers and sellers usually yield to their respective real estate agent’s or mortgage broker’s opinions without appreciating that the referring party has a financial interest for making the referral.
The title insurance commission money being paid combined with the current regulatory environment has been sufficient to encourage the development many affiliated business relationships. Today it is not uncommon to see a large real estate brokerage with an office that is co-located with a mortgage brokerage and a law firm. The home buying and selling consumer is almost always oblivious to the fact that the title insurance he is paying for at closing typically carries a 70% or greater commission rate and that a significant portion of the commission is many times being paid to the real estate broker or mortgage broker that referred the title agent pursuant to an ABR.
The status quo may not cry out for reform but some changes
in the law may be called for over time. From
About the Author
David J. Reed, Esq.
is a real estate litigator, a licensed real estate broker, an active real estate
investor, and a pilot. For inquiries
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