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Avoid Co-Brokering

An edited version of this article appeared in the March 2001 issue of the Origination News.

By William P. Vestevich, Esq.

“I don’t need to get a mortgage license, I’ll just co-broker the loan”. I hear this matter-of-fact statement every day from potential clients in my mortgage licensing law practice. When I ask these individuals if they are aware that co-brokering in the residential mortgage loan industry is almost uniformly illegal throughout the country, I consistently receive two reactions from them. The first is a combination of disbelief and defensive posturing: “My lender lets me co-broker all the time, so I’m sure it’s legal. Anyway, the loan closes in my lender’s name so I don’t have to be licensed.” Then, after explaining the law in detail, I receive the second reaction – justification: “Well . . . I only co-broker once in a while”. For purposes of this article, the term “co-brokering” is used generally to describe a situation where a residential mortgage broker or lender, who is unlicensed in any given state to conduct mortgage brokering, teams up with a second, licensed, mortgage broker, or lender, in order to originate a mortgage loan. As part of the co-brokering arrangement, the unlicensed referring mortgage broker usually receives a fee from the licensed mortgage company for the referral of the mortgage loan business. This article will explain the reasons why, as a general rule, co-brokering should never be used as a “license substitute” on any mortgage loan transaction.

Co-Brokering: The Myth

The problem with co-brokering is that many, many mortgage professionals mistakenly believe that, just because co-brokering is conducted in other “brokering” professions (e.g. the real estate brokerage industry), that it is also permissible in the residential mortgage loan industry. Nothing could be further from the truth. As a general rule, to engage in the mortgage business in any given state, a mortgage company must either be licensed, or exempt from licensing, and all loan officers must either be individually licensed, or employed by a licensed mortgage company.

The co-brokering problem has escalated dramatically due to the proliferation of the Internet in the mortgage business. Prior to the Internet, mortgage companies did business in their own back yards, and obtained the proper licensing to conduct mortgage business in their home states. With the Internet, mortgage companies are being presented, and tempted, for the first time with the possibility of doing business with borrowers across the country. Not wanting to be bothered by state and federal mortgage lending and licensing laws, many mortgage professionals erroneously believe that they can avoid regulatory “hassles” of licensure, and compliance with federal laws, simply by closing loans in the name of a mortgage company which is properly licensed in the states in which their borrowers reside.

Downside Risks

The frightening reality is that many mortgage companies either don’t know, or don’t care, that in almost every state they must first be licensed in order to conduct any mortgage brokerage, or mortgage banking, activities. It is important to note that even the solicitation of mortgage business, without anything more, is illegal in a number of states. Unfortunately, co-brokering has caused many, many mortgage professionals, and their companies, to become unwittingly exposed to potential criminal liability (misdemeanors and even felonies – that’s right – felonies!), and for huge civil fines.

Two Types of Laws – Two Types of Penalties

As I explain to my clients, the reason that some lenders will do business with them, even though they are not licensed, is due to the fact that two different types of state licensing laws exist. In the first category of states, it is illegal to conduct mortgage business (solicitation, negotiation, origination, funding, etc.) without first being properly licensed. In these states, only the unlicensed mortgage company places itself at risk in a co-brokered transaction. This is due to the one-sided nature of the penalties, which punish only unlicensed mortgage companies. Since only the unlicensed mortgage company is exposed to risk, licensed mortgage companies are willing to take co-brokered deals.

However, in the second category of states, not only is it illegal to conduct the mortgage business without being properly licensed, but it is also illegal to transact mortgage business with unlicensed mortgage companies. In these states, penalties are dual in nature: both the licensed and the unlicensed mortgage companies are placed at risk. It is highly unlikely that licensed/exempt mort­gage companies will do business with unlicensed companies in these states due to the dual nature of the penalties.

Anti-Kickback Rules

Under the Real Estate Settlement Procedures Act, “RESPA” (12 USCS 2601, et seq.), it is illegal to give anything of value for the referral of settlement services. Referral fees, no matter the name by which they are called, are not permitted between separate, unrelated mortgage companies. Violations of RESPA’s anti-kickback rules subject both the mortgage company paying referral fees, and the mortgage company receiving referral fees, to federal penalties of up to $5,000 per transaction.

In an attempt to circumvent RESPA’s anti-kickback rules, co-brokering mortgage companies usually try to justify their actions under one of two erroneous lines of reasoning. First, some co-brokering/referring mortgage companies perform the entire origination process up to the point of closing, at which time the loan closes in the licensed lender’s name. Under this scenario, the co-brokering mortgage company has actually done the work and has provided settlement services, so the fees they receive are not “referral fees” – they are actually earned as compensation for performing the origination process. RESPA does provide that a settlement service provider may receive compensation for settlement services actually provided (i.e. you must do work on the file to get paid for it). However, even though settlement services are being provided pursuant to RESPA, the fundamental problem of illegal, and unlicensed, state mortgage activity still remains.

The second erroneous methodology utilized in attempting to circumvent RESPA is for an unli­censed mortgage company to simply refer a mortgage loan deal to a licensee without doing any origination work, and re-label referral fees as something seemingly harmless, such as “marketing fees”. However, changing the name of the fees doesn’t change the nature of the fees. It is safe to assume that any regulator reviewing a mortgage loan transaction will look to substance over form, and will easily see through thinly-veiled attempts at disguising referral fees. It is also important to know that the regulators who drafted RESPA, and its supporting Regulation Z, have pretty much thought of every obvious, and not-so-obvious, scheme under which referral fees might be disguised. The best advice in this area is to avoid referral fees and co-brokering altogether.


The best and smartest course of action for any mortgage company is to obtain the proper mortgage licensing in all states in which the company intends to conduct mortgage business. While it may be tempting to make a quick referral fee in an isolated co-brokered mortgage loan deal, the downside risks to the unlicensed co-brokering/referring company, and in some states also to the licensed co-brokering lender or broker, far outweigh the minimal benefit. Finally, and perhaps most importantly, in all cases where there may be any doubt concerning the proper course of action, it is best to consult with your licensing counsel or regulatory compliance counsel to ensure compliance with the law.

© 2001-2018 Vestevich & Associates, P.C

The Finance Industry’s Licensing Authority Since 1996