In Wake Of NAR Settlement, Dual Licensing Carries RESPA, Steering Risks

In recent weeks, professionals in the housing and housing finance sectors have been speculating on the impacts to the mortgage industry stemming from the National Association of Realtors (NAR)'s $418 million settlement of several real estate commission lawsuits.

In much the same way that eighteen months of mortgage industry consolidation has separated the wheat from the chaff of loan originators, the NAR settlement has the potential to drain a bloated pool of buyers’ agents along similar professional lines. For mortgage companies built on the backs of buyers’ agent referrals, which is many, genuine risks to their referral pipelines exist.

The anticipated reduction has some in the industry, including the Mortgage Bankers Association (MBA), noting a window of opportunity for IMBs to become one-stop-shops for home buying through dual licensing. A growing number of lenders eye buyers’ agents as ideal candidates for dual-licensed loan officer-real estate agents.

“Since the NAR settlement broke, we have received tons of questions from clients that want to implement this model, where they're hiring real estate agents to be loan officers,” said Daniella Casseres, an attorney who represents independent mortgage banks (IMBs) as partner and head of the Mortgage Regulatory Practice Group at Mitchell Sandler. “I work with independent mortgage companies who rely on buyers’ agents for 90% of their business and I believe the settlement is going to change how they drum up business.”

Mostly, lenders are asking whether it is feasible to hire and pay real estate agents compliantly. Casseres says the answer is “yes,” but spurs additional questions for lenders: What will the real estate agent be doing to get compensated for their services? Are lenders comfortable creating a model where real estate agents are required to take an application?

In December 2022, the Department of Housing and Urban Development (HUD), changed its rules, with restrictions, to allow individuals to serve and be compensated as both the real estate agent and mortgage loan originator for FHA-insured home sales. “Double-dipping” had not previously been allowed for FHA-insured mortgages, given the potential for conflicts of interest to harm borrowers, though it had been for conventional loans. Some states, such as Utah and Louisiana, still prohibit dual compensation for dually licensed individuals, no matter HUD’s rules.

In addition to the phone calls, Casseres has observed mortgage lenders advertising opportunities to bring real estate agents onboard, which serves the interests of both parties because the NAR settlement threatens the supply of future home sale transactions for both.

“Real estate agents are looking for ways to get paid and mortgage companies are looking for ways to compensate them in some way, shape, or form, not so much for the referral, but to keep them in play,” Casseres said. “They're looking to find other ways to get their leads, and also looking to incentivize real estate agents who are down-and-out or worried about their potential earnings to come over and pay them at their mortgage companies.”

While, in theory, dual licensing stands to benefit both parties, Phil Crescenzo, a Mount Pleasant, South Carolina-based division manager for Nation One Mortgage Corporation, says that he’s rarely seen dual licensing create that optimal situation. 

There’s a reason, he says, professional originators are the best at what they do, and the same goes for professional real estate agents. “Lenders going back and forth, I haven't seen it work too well, at least on a big scale.”

Because of the increased industry chatter, Casseres worries that regulators will listen more closely for questionable arrangements. “If you're not doing it right, which a lot of mortgage companies won't,” she said. “I think it could create a significant risk for those companies.”

Crescenzo agrees. “I don't like the idea or thought of that, at least for myself or my team… I think it significantly diminishes both values versus the risk associated with it.”

Lenders see the value in having employees who know the entire home sale process, and offering an end-to-end service for one fee is an attractive option for borrowers. Casseres anticipates lenders may start encouraging loan officers to get real estate licenses if the “one-stop-shop” becomes a selling point for consumers. 

Crescenzo worries that dual licensing can increase confusion for borrowers, though, while that perceived added value and undermining long-built referral partnerships. Brand recognition could also be twice as difficult. Adding an extra service can make the end-to-end home-sale process more complicated – and much more complicated than the agent ever thought it would be.

“Even for seasoned professionals to dip their toes in the water to try to tackle mortgage origination, plus real estate, it's very difficult to be really good and really effective at both, particularly given the extremely challenging origination market,” he says. “I think that's going to add more work and then set some agents up to fail in some scenarios where they're damaging relationships that they spent a long time building. It has happened – I've seen it happen.”

For lenders intent on pursuing dual licensing, Casseres says a host of restrictions and compliance questions exist that, if ignored, could draw the ire of regulators.

Lenders can pay W-2 employees for referring loans, Casseres confirmed, but not a third-party, 1099-employee. Just hiring real estate agents as W-2 employees isn’t enough, either, “and this is why I think mortgage companies will get it wrong,” she said. “You're okay to pay them a referral, but if it's just a sham where you can't actually point to any services they're providing for the compensation you're paying them then it looks like a kickback.”

Casseres said that “doing it right” is complicated from a regulatory perspective.

“You are allowed to hire them and pay them as a W-2 employee if they're actually acting as a W-2 employee,” she explained. “But, if you're just hiring them so that you can pay them for referring customers to you and they're not actually working as a loan officer, they're not actually licensed and they're not actually taking the application, then the government has and will look at this as a sham arrangement, and every payment that you make to them is considered a kickback and is in violation of RESPA.”

In 2014, the Consumer Finance Protection Bureau (CFPB) issued a consent order fining Stonebridge Title Services, a title services provider, $30,000 for illegal kickbacks to referral sources that Stonebridge called W-2 employees but who “did not provide any non-referral service for Stonebridge for which they were to receive compensation,” per the consent order.

“Doing it the right way,” Casseres continued, “would make sure that you have loan officers who are actually licensed, trained, and operating as loan officers – who are also real estate agents – that are actually taking the application, working with the borrower, offering loan options, collecting their information, really acting as any other loan officer would at their company and aren't just there to be sham employees.”

There are also potential steering and disclosure risks that lenders may not be considering. Separating dually licensed employees real estate activities from loan officer activities can also be challenging when they are working directly with borrowers. To avoid liability for dually licensed, third-party real estate agents hired as loan officers, lenders should ensure that employment contracts are buttoned-up and operational controls are in place.

“This is what I'm afraid of,” Casseres said. “A lot of mortgage lenders are going to try it out without thinking through all the ramifications and the risks.”