Being a mortgage loan originator is tough in California, one of the nation’s most competitive real estate markets. One of the hardest elements in this environment? According to the state’s top-producing brokers, it is finding a loyal real estate partner who won’t ask for a kickback for referrals.

It’s dirty; it’s shady; it’s unfair. Although it’s not your everyday phone call, brokers say it’s not uncommon either.

Thuan Nguyen

“My team member told me, ‘I don't know why, but I talked to 10 Realtors. Almost 10 of them told [asked] me that if I refer to you, are you gonna pay me? How much are you gonna pay me?’” said Loan Factory CEO Thuan Nguyen, one of the top-producing originators in the nation.

As any licensed originator and real estate agent should know, requesting or providing a kickback, fee, or anything of value in exchange for a referral is a violation of section 8 of the Real Estate Settlement Procedures Act (RESPA). In criminal cases, a person in violation of Section 8 can be fined up to $10,000 and imprisoned for up to one year, according to California RESPA law and the California Real Estate Settlement Procedures Act

Pablo Martinez

“This is something that's been ongoing in the industry for a long time, and it's a real dilemma for loan officers,” said Pablo Martinez, Equity Smart Home Loans CEO, who has dealt with this since he started in the business almost a quarter-century ago.

Brian Cooke, co-founder and vice president of sales, said this type of activity is more prevalent in hypercompetitive markets, such as Southern California.

“Southern California is known for this … the listing agents forcing buyers to get qualified with their preferred broker who then tries to steal the deal away,” Cooke said. “There’s a lot of cat-and-mouse games here in Southern California."

Brian Cooke

He has gotten a few calls from Realtors and real estate agents himself asking for kickbacks, and said he flatly responds with, “No, I'm not gonna lose my license.” But originators who are desperate for business may be more apt to give in, he said.

However, that’s all anecdotal information since complaints and enforcement actions are not common, even if it is happening. And the agencies that regulate these actions say they don’t know how widespread the problem is for a number of reasons.

Policing Problems

Loan originators, real estate agents, consumers, or essentially anyone with proof, may report the guilty parties to the Department of Real Estate (DRE) or the Department of Financial Protection and Innovation (DFPI) – both of which are responsible for the licensing of originators and real estate agents in California. However, it’s important to note that the DRE does not have the jurisdiction in California to enforce the federal RESPA. Instead, they will forward the complaint to the proper agency that does have enforcement powers, such as the DFPI or the Consumer Financial Protection Bureau (CFPB).

The DFPI can enforce RESPA in California if the real estate agent and/or originator is registered with the agency. However, it is possible that a person is licensed only with DRE and not DFPI. If so, then only the CFPB can enforce a direct violation of RESPA.

A spokesperson for the California DRE, responsible for originator licensing, said the agency does not know how widespread this practice is, but claims there has been no uptick in complaints regarding their licensees and kickbacks for referring clients to a specific mortgage broker.

“Also, when we do receive a complaint, the complainant often times declines to give us the name of the licensee or licensees engaged in the allegedly wrongful practice, which makes it difficult for us to investigate,” the DRE spokesperson said.

Complainants also tend to leave out the company name of the broker and real estate agent committing this wrongful practice, the DRE spokesperson said, making an investigation impossible.

Why would someone attempt to report this activity without releasing names? Perhaps, because they don’t really want this specific person to get in trouble, but they do want this type of activity to stop.

“Some complainants hesitate to name specific people and companies because they are reporting or complaining about competitors and/or members of their community,” the DRE spokesperson said. “Additionally, when someone files a complaint with us, they are often needed as witnesses to testify at administrative hearings, and some complainants are not willing to do that.”

A Tit-For-Tat Game?

Another reason why complainants may not mention names: the well-being of one’s business depends heavily on reputation. So if a mortgage broker reports a real estate agent or another mortgage broker for illegal activity, there could be consequences. A broker or real estate agent does not need to do anything bad to earn a bad name. Everyone has connections. Essentially, it comes down to, “if you snitch on me, then I’ll tell everyone I know to never work with you again.”

A spokesperson for the CFPB said it does not comment on enforcement activity, including how many times enforcement action has been taken on this issue within the past year, because that information is confidential. However, by researching the bureau’s enforcement action page, it seems the last time the CFPB has taken action on this particular issue was in 2017. Prospect Mortgage was fined $3.5 million while Re/Max Gold Coast Realtors, a real estate broker in California, paid a combined $495,000 in consumer relief, repayment of ill-gotten gains, and penalties.

The CFPB did reveal that it’s more common to receive complaints from industry participants than consumers. But Nguyen theorizes that might be because consumers aren’t aware it’s happening, and industry participants might be disincentivized to report one another.

“I know my competitors. They're doing this,” Nguyen said. In his opinion, regulators only look at complaints from consumers. “If we are competitors and we report each other, they don't really care,” he added.

Nuygen said it’s not guaranteed the DRE, DFPI, or any agency will take the complaint seriously if the broker is reporting a competitor. And it’s not likely the consumer will realize their agent is up to some shady behavior. Or, at least, not until it’s too late.

“They think that a Realtor is a professional, and will refer them to someone good,” Nguyen said. “When the homeowner realizes that the rate they are receiving is too high, it's too late. That is the reason why so many Realtors are struggling, because they look at the bottom line. They look at the kickback money without knowing that they might lose a bigger asset; they lose their client forever.”

It’s dirty;
it’s shady;
it’s unfair …
and it happens WAY
too much.

The CFPB encourages consumers to comparison shop and “not just accept their real estate agent’s recommendations. A recent bureau study found consumers could save $100 a month on their mortgages by comparison shopping.”

But, realistically, is a broker going to suggest a client to shop around? Likely not. A real estate agent is more likely to make that suggestion, unless they're receiving a kickback from a particular lender or broker, of course.

The National Association of Realtors did not respond to requests for comment and the California Association of Realtors declined a request for comment.

What Proof?

Still, the main problem among those who encounter this is the struggle to obtain proof. Martinez said that’s likely why policing this activity is difficult.

“You have to get the kickback to commit the crime,” Martinez said. “And I can't really snitch on them, because I don't know if they're really getting a kickback or if they're just testing me out … It's like talking about a theft, but the theft wasn't done.”

Typically, if this happens, the real estate agent and loan officer verbally agree on a kickback either over the phone or during an in-person meeting, and recorded conversations are not the norm. In California, for example, both parties need to give permission before a call is recorded.

“A lot of people are uncomfortable and some conversations you don't want to record,” Martinez said. “Maybe that's something that maybe down the road people may be more comfortable with, but I'm not comfortable (with it). I don't give you permission to record the call cause I don't know what's gonna come outta my mouth, you know? And it's not because I'm doing something shady. Maybe I just said something that can be taken out of context.”

It’s also not a viable solution for the broker to tell the client that their real estate agent is attempting to do something illegal. The homebuying process is stressful enough for the borrower, Martinez explained, and the worst thing to do is get them involved with internal drama. It only spooks them away from working with either person.

Tough to Resist

In a tough market, originators can have a hard time resisting these offers and allowing agents to go with their competitors instead. It’s also hard for agents not to ask for this referral fee when their field is suffering the same fate as the rest of the mortgage industry. And, ultimately, who’s going to know, right? The deal between an originator and agent is mutually destructive. After the payment is made, neither would snitch on the other. Everyone would leave the table happy, except for the borrower, of course.

It’s the broker’s and agent’s responsibility to get the best deal possible for their client. However, if the broker is providing a kickback, they need to get that money somewhere, which is most likely their client. The broker raises compensation, increasing the borrower’s interest rates, in order to pay the agent.

Unexpected Challenges

Nguyen, a Vietnamese immigrant who began his own broker shop with no experience working in the mortgage industry, quickly climbed to the top thanks to his revolutionary mortgage technology MOSO. The platform, built by Nguyen and his friends in Silicon Valley, automates much of the loan process and provides borrowers the most up-to-date information on their loans and the current mortgage rate. This allowed his company to excel during the refinance boom, and Nguyen was famed as Rocket Mortgage’s number one broker partner. But when the refinance market dried up, things took a drastic turn.

Nguyen said his business was direct-to-consumer, so he never had a reason to work with real estate agents. About 95% of his business were refinances, but when rates suddenly ratcheted up, that business disappeared. In 2022, Nguyen was forced to cut his staff in half in order to survive, and he redirected his focus to expanding his referral network.

“I went out there, met a lot of Realtors … learned about their problems. I want to know their problems so that I can help them,” Nguyen said.

Nguyen updated his MOSO system with features to cater to real estate agents, such as sending them updates on mortgage rates and their clients’ applications. Still, countless Realtors and real estate agents in California are asking for compensation on their referrals. When the kickback isn’t provided, they simply move onto the next broker shop.

Some of Nguyen’s loan officers even asked him to give in to the agents’ demands for referral compensation. An agent only is asking for $500 to $1,000 — not a lot, they said, and then the lender, agent, and client will be happy. But Nguyen declined. First of all, because it’s illegal, and second, they actually couldn’t afford it.

“We want to give the client the best rate,” Nguyen said. “And, in order to do so, we already cut our profit down to the minimal level. So we don't have money to pay them. In order to pay the Realtor, we have to raise our compensation and the borrower rate will go up.”

Nguyen claims he was able to turn this around by building his company’s reputation. “The interesting thing is many who demanded illegal kickbacks are now impressed by our work ethic,” Nguyen said. “They know that we are clean, and we have good service. So they come back to us and ask us to help them with their personal loan on their family's loans.”

During the boom,
commissions shot
through the roof.
Nationwide, total
commissions were
$76.2 billion in 2019

There Is A Solution

This down market doesn’t just affect loan originators and mortgage companies. It also affects real estate agents — an industry that has also grown in capacity throughout the pandemic as well. Their story is not all that different from originators. From May 2020 to May 2021, the state Department of Real Estate reports the number of licensed real estate agents grew from 422,496 to 454,615. (Some contraction has taken place with 435,770 licensed as of May 2023.)

Not only did the housing market boom during the pandemic, providing real estate agents lots of business, but many were also given tens of thousands of dollars in COVID-19 relief loans that have been mostly forgiven.

The federal government authorized more than 300,000 loans to real estate entities claiming just one employee, adding up to $3.9 billion through the Paycheck Protection Program (PPP) with nearly 80% of that amount already forgiven, according to a report from NBC News. The government’s Pandemic Response Accountability Committee reported that the typical loan was $13,000 on average; 146 real estate companies across the nation received at least $90,000 each.

During the boom, commissions shot through the roof. Nationwide, total commissions were $76.2 billion in 2019, $85.9 billion in 2020 and $98.8 billion in 2021, according to Steve Murray, a partner at Real Trends Consulting. But as interest rates rose up and inventory dwindled even further, the good times faded.

It’s no wonder these agents are looking to get some extra cash where they can get it. In California, this strategy could be particularly effective considering how competitive the state is. Nowadays, Nguyen says a real estate agent who closes one deal a month in California is a superstar.

The pressure is on for both originators and agents in this market environment. Many originators — especially those that are new to the purchase side of the business — are scrambling to make these connections and can’t afford to keep turning agents away.

There are strategies to salvage this relationship without giving into their demands or kicking them to the curb. Martinez, from Equity Home Loans, suggests that brokers recommend that these agents take on dual roles — originators and real estate agents.

“It's more about educating and having them understand,” Martinez said. “It's only a 20-hour course. And you can do it online. You pay the fees, you get the endorsement, then you can start originating loans and get a commission from it. Whether you do partial work or you do all the work, it doesn't matter. Now you can legitimately earn a commission on the transaction.”

Note that not all lenders will permit agents to do work on the loan. So if a broker were to offer this opportunity to a real estate agent, it may actually convince them.

Cooke, a San Francisco mortgage broker, said there are many lenders that solicit Realtors who are licensed as originators. He also recommends that brokers offer to split marketing expenses.

“There's plenty of ways to achieve this, such as co-marketing opportunities for lead generation and making referrals through each other's networks,” Cooke said. “That's the right thing to do. Co-market on Zillow or wherever. However you get business, you can co-market and share the expenses.”

That being said, some people are stubborn. They might threaten to drag a broker’s name through the mud or send all their business to a competitor if the broker doesn’t comply or says they’ll report the agent. If that happens, it’s better to drop them like a hot potato and allow karma to strike back.

“The consumer is the one that gets hurt,” Nguyen said. “The loan officer, in order to have the money to pay the Realtor, will raise the rate a little bit. Nobody is gonna catch it. I feel bad because both of them (loan officer and agent) have a fiduciary [duty] to help the consumer get the best deal possible.”