MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2007-10
Referral Fee to Attorney Paid by Mortgage Broker
You ask whether you are permitted to receive referral fees from a mortgage broker. You have indicated that such fees are common in the refinance field, and that your bankruptcy practice often refers clients to brokers for refinancing. According to your inquiry, there are a limited number of brokers who are willing to work with customers in bankruptcy, and you have a continuing relationship with one such broker.
Recently, that broker has expressed a desire to pay your office a referral fee for each client you refer to her office, for whom she successfully obtains a refinance.
The broker would not receive any portion of the legal fees paid by you to the client, and you would not receive any portion of the fee paid by the client to the broker. Moreover, you have indicated that the paying of the referral fee would not increase the costs of the refinance. The fee would be paid directly by the broker to your firm. There would be no exclusivity agreement, and you would be free to refer clients to other brokers and clients would be free to work with other brokers.
You have reviewed our previous decisions on referral fees, (2000-34, 1999-18, and 1984-77), and believe your situation can be differentiated. However, you have failed to specifically describe in your inquiry how the arrangements you describe would address the concerns the Committee has previously expressed in those opinions.
The issue of the propriety of lawyers engaging in business with, or receiving referrals from non-lawyers has been addressed in several Opinions of the Committee. See, 1994-22, 1996-17, 1999-18, 2000-34, 2000-35, and 2000-40.
In each of these opinions we expressed concern that such a business venture would be impermissible under Rules 1.5, 1.7, 1.8, 5.4 and 7.1.
First, we have expressed concern that Rules 1.7, 1.8 and 5.4 might be implicated if the nature of the relationship between you and the broker was not disclosed. Since you are receiving a fee from a particular broker, and would therefore have a financial incentive to refer to that broker, we believe that this is a relationship which should be disclosed to the client.
Moreover, our concern in those earlier opinions was not limited to the lack of disclosure; we noted that even if disclosure were made, the Committee would most likely not approve of the proposed referral fee.
We also noted that the transaction amounted to an indirect economic transaction with an attorney that did not comply with Rule 1.8 (“Conflict of Interest: Prohibited Transactions”), that it amounted to the sharing with a non-attorney of a fee received ancillary to the provision of legal services, and thus violated Rule 5.4 (“Professional Independence of a Lawyer”).
For example, in Ethics Opinion 99-18, the Committee was asked to opine on a proposed referral fee to be paid to attorneys by an investment advisory firm. Under the proposed arrangement, the nature of the relationship was to be disclosed in detail, but we found that the arrangement was nonetheless impermissible under Rule 5.4 and 1.8. See also Ethics Opinion 94-22. Rule 5.4 prohibits attorneys from sharing fees with non-lawyers except under narrow circumstances to ensure that financial incentives do not infringe upon an attorney’s duty of loyalty to his or her client, compromising the attorney’s legal judgment.
Thus, the Committee concludes that the arrangement that you propose, like that proposed in 99-18, would violate Rule 5.4. Disclosure alone does not equate to compliance with Rule 1.7(b). Further we note that disclosure does not prevent this arrangement from violating Rule 1.7(b). Rule 1.7(b) provides that regardless of disclosure, the lawyer must reasonably believe that his representation of a client will not conflict with his or her own interests. Entering into the proposed arrangement would give an attorney a financial incentive to refer a client to that particular broker regardless of the individual client’s needs.
In addition, while we decline to opine about legal issues, we also warn that the arrangement you pose might implicate the provisions of the Real Estate Settlement Procedures Act (RESPA). RESPA is a consumer protection statute, designed to help consumers become better shoppers for settlement services and to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. 12 U.S.C. § 2607. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. See also Maryland Annotated Code, Real Property Art., § 14-127(c). To the extent that your arrangement might run afoul of the provisions of RESPA or Maryland law, it may also violate Rule 8.4.
The Committee believes that your proposed business arrangement presents a situation which would prevent you from complying with all of the provisions of the Maryland Rules of Professional Conduct, and therefore concludes that the relationship you propose violates the Rules.