We are frequently asked about the propriety of paying a referral fee. That is, from time to time, a finance company may offer to pay its customer or even a non-customer a “bounty” for introducing the company to a new customer. Certainly, this is one way to grow your business. Anything wrong with doing this? Well, it depends…
If residential real estate secures the loan to the referred customer, then paying a referral fee is probably a violation of Section 8 of the Real Estate Settlement Procedures Act. This is the federal law that governs much of home mortgage lending. So, it seems pretty clear that a finance company should stay away from offering a pure referral fee in connection with residential mortgage lending, certainly in the absence of the referrer performing mortgage related services to the finance company.
Second, check state law. Make absolutely certain that the state in which you operate permits payment of a referral fee in a traditional installment loan—that is, in a non-real estate consumer transaction. Alabama does.
Third, the fee cannot be passed along to the new customer. That would turn the fee into a Finance Charge. And even if the finance company is willing to pass along this fee to the new borrower, and treat such a charge as a Finance Charge, state law may still prohibit doing so. Alabama would.
Finally, be certain that your referral fee offer is clearly stated and limited. For example, if you will only pay the fee (i) if the loan is to a new customer for the finance company and (ii) if the loan actually closes, be certain to say that. Otherwise, your referral fee program may get pretty costly, pretty fast.
Practice Pointer: Do not leave the decision about adopting a referral fee program completely up to the marketing department. Make certain that legal and compliance are brought into the discussion!