Fee Splitting in California

Under California’s Business and Professions Code Section 10137, “it is unlawful for any licensed real estate broker to employ or compensate, directly or indirectly, any person for performing any of the acts within the scope of this chapter who is not licensed under the broker employing…” Further, “no real estate broker shall be employed by or accept compensation from any person other than the broker under whom he or she is at the time licensed.”

Generally, brokers can share compensation only with other brokers or licensed salespersons through their brokers. Brokers may split their fee with an unlicensed individual or entity not in their employ, provided that the fee sharing does not violate the Federal Real Estate Settlement Procedures Act (RESPA) and the individual or entity has not engaged in any activity requiring a real estate license. Improper fee splitting with third parties could subject brokers and agents to substantial fines, loss of license, and even criminal prosecution.

Referral Fees and Finder’s Fees

With respect to referral fees between licensed real estate brokers, California and RESPA allow for it as a common form of commission split. CalBRE and California law go so far as to permit a broker to pay a “finders” fee to any person not licensed by the CalBRE so long as the finder was not actively soliciting on behalf of the broker. The California Attorney General stated in his opinion issued in 1995 that this exemption is solely limited to the introduction of purchasers, and the finder may not be involved in any activities that require a licensee.

However, finder’s fees to unlicensed individuals are almost universally prohibited by federal RESPA law.

RESPA

Commission splits and referral payments otherwise allowed under California law are still subject to federal law. RESPA provides that, “[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” Most residential real estate transactions are subject to RESPA because almost all mortgage loans are federally related. As such, even though finder’s fees are allowed by California, any residential transaction that involves a mortgage loan will not be eligible for payment of a finder’s fee to an unlicensed individual due to RESPA.

Attorney’s Fees

Although licensed attorneys in California can broker real estate transactions under Business & Professions Code Section 10133, brokers cannot pay “referral” fees to attorneys if they are not licensed by the CalBRE. California law and RESPA allows brokers to split fees with attorneys only to compensate attorneys for legal services actually performed, but never for referrals.

Thus, if someone did not render the services to earn a commission split, it is likely illegal. The only common exception being for referrals between licensed real estate brokers.