Illinois Real Estate Referral Fees and Compensation Rules

Section 10-5 of the Real Estate License Act says no licensee sponsored by a broker may accept compensation for licensed activity from anyone except that sponsoring broker, and federal law adds a second layer, because Section 8 of the Real Estate Settlement Procedures Act (RESPA) bars fees for referring settlement business on a federally related mortgage loan.

Those two sets of rules decide who may pay whom, and they matter before you sign anywhere. If you are choosing an office, read how to choose your first brokerage alongside this guide, because the answers to "who pays me" and "what may I do with a referral" come from the broker you sponsor with. Gambino Realtors has been in business since 1923 and is based in Rockford. This article explains what the statute and the federal rule say, in plain words, and where the sources are silent.

Who May Pay Whom Under the Illinois Act

Start with the definition, because the whole system hangs on one word. The Act defines "compensation" as the valuable consideration one person or entity gives another in exchange for performing some activity or service. It then lists what counts. The list includes commissions, referral fees, bonuses, prizes, merchandise, finder fees, performance of services, coupons or gift certificates, discounts, rebates, a chance to win a raffle or drawing, a retainer fee, and a salary. So the rules below are not limited to a check labeled "commission." A gift card or a discount can be compensation too.

Now the rule itself. Section 10-5(a) has two sentences that matter. The first says no licensee may pay compensation directly to a licensee who is sponsored by another sponsoring broker for the performance of licensed activities. The second says a licensee sponsored by a broker may not pay compensation to any licensee other than his or her own sponsoring broker, unless the licensee paying the compensation is a principal to the transaction.

Section 10-5(b) is the mirror image. A licensee sponsored by a broker shall not accept compensation for activities under the Act except from the broker who sponsors that licensee, except as the section provides. Read the two together and the money has a fixed path. The client pays the broker or the broker is paid out of the transaction, and the broker pays the agent. Agents do not pay each other directly, and they do not collect directly from another office's agent.

Where does money legitimately move between offices? Section 10-5(d) answers it. One sponsoring broker may pay compensation directly to another sponsoring broker for the performance of licensed activities. This is the path a referral between two brokerages takes. The agent in the first office does not receive a payment from the agent in the second office. The first office receives it, and the first office then pays its own agent under the agreement between them.

The section has two narrower exceptions. A non-sponsoring broker may pay compensation to a licensee sponsored by someone else, or to a person who is not sponsored at all, but only when the payments follow an employment agreement that was already in place between that licensee and the non-sponsoring broker, and only for licensed activity performed while the person was previously sponsored by that broker. Separately, Section 10-5(e) lets a sponsoring broker pay a person licensed under the Auction License Act who is complying with and providing services under Section 5-32 of the Real Estate License Act. Neither exception lets an agent pay a friend in another office. They protect earned money that comes due after a change of sponsor or an auction arrangement.

If you plan to change offices someday, the same logic matters. Our guide to changing sponsoring brokers in Illinois covers the paperwork, and the compensation rule explains why a commission on a deal you started with one broker is a matter between the brokers and your agreement, not a payment you can arrange agent to agent.

Section 10-20 supplies the plumbing. A licensee may perform activities only for his or her sponsoring broker, and a licensee must have only one sponsoring broker at any one time. Every sponsoring broker must have a written employment or independent contractor agreement with each licensee the broker sponsors, and the agreement must address the terms of the relationship, including supervision, duties, compensation and the termination process. The Act does not set a split, a fee or a percentage. Those terms live in that written agreement, which is why it deserves a slow read before you sign it.

One more detail in Section 10-20(e) surprises new agents. A sponsoring broker may pay compensation directly to a business entity that the licensee solely owns and formed to receive the licensee's earnings. That entity does not need its own license. It must be owned only by the licensee, or by the licensee together with a spouse, but only if both spouses are licensed and sponsored by the same sponsoring broker or the spouse is not licensed. Section 10-20(e) says nothing about taxes, so that question goes to a tax professional.

Referral Fees: Who Can Receive One and Who Cannot

The word "referral" causes the most trouble, because in everyday speech it sounds harmless. A friend mentions you to a neighbor. You send a cousin to a lender. Nobody thinks of it as brokerage. The Act thinks of it differently. In the definition of "broker," one of the listed acts is to assist or direct in procuring or referring leads or prospects intended to result in the sale, exchange, lease or rental of real estate. When someone does that for compensation, or with the expectation of compensation, the person falls inside the definition.

That is the background for Section 10-15, titled in part "No compensation to persons in violation of Act." Subsection (a) says no compensation may be paid to any unlicensed person in exchange for the person performing licensed activities in violation of the Act. Subsection (b) says a person cannot sue in an Illinois court to collect compensation for an act the Act reserves to licensees unless the person held the right license when the act was done. So an unlicensed person who does licensed work and is not paid cannot ask a court to fix it.

The sentence that answers the common question is Section 10-15(e). A licensee shall not pay compensation to an unlicensed person who is not or will not become a party to a real estate transaction in exchange for a referral of real estate services. Read it slowly. It does not ban thank-you notes. It bans paying compensation for a referral to someone who is neither a licensee nor a buyer, seller, landlord or tenant in the deal. That covers the friend, the neighbor, the coworker and the cousin. As an illustration, an agent who hands a gift card to a coworker because the coworker passed along a name is paying compensation under the Act's own definition, since a gift certificate is on the list.

The Act also protects the opposite direction. Section 10-15(c) says a licensee may offer compensation, including prizes, merchandise, services, rebates, discounts or other consideration, to an unlicensed person who is a party to a contract to buy, sell or lease real estate. Both are subject to two limits. The offer must comply with subdivision (35) of Section 20-20(a), and it must not be prohibited by any other law or statute.

There is one small exception that sits outside the license requirement, and it shows how narrow the line is. Section 5-20(10) exempts a resident lessee of a residential dwelling unit who refers prospective lessees for compensation to the owner of the unit or the owner's agent. The exemption has three conditions. The resident may refer no more than three prospective lessees in any 12-month period. The compensation may not exceed 5,000 dollars or the equivalent of two months' rent, whichever is less, in any 12-month period. And the resident's activity must be limited to referring: no showing of a unit, no discussing lease terms, no taking part in the negotiation. It covers tenants referring other tenants in the same building or complex. It does not cover a buyer, a homeowner or anyone else.

Two enforcement provisions give these rules teeth. Section 20-20(a) lets the Illinois Department of Financial and Professional Regulation refuse to issue or renew a license, place a license on probation, suspend or revoke it, reprimand a licensee or take other action, and impose a fine not to exceed 25,000 dollars for each violation. Item (38) on the list of grounds is paying or failing to disclose compensation in violation of Article 10, which is the article these sections sit in. Item (23) is employing a person on a purely temporary or single-deal basis as a means of evading the law on paying commissions to non-licensees.

Disclosure Duties and the Federal RESPA Layer

Illinois pairs its payment rules with disclosure rules. Section 10-10(a) requires a licensee to disclose to a client the sponsoring broker's compensation policy, including the terms of compensation and any amounts offered to cooperating brokers who represent other parties in a transaction. Section 10-10(b) requires a licensee to disclose to a client all sources of compensation related to the transaction that the licensee receives from a third party. If the sponsoring broker receives compensation from both the buyer and the seller, or from both the lessee and the lessor, Section 10-10(d) requires written disclosure to a client that both sides are paying.

Section 10-10(c) deals with referrals to businesses the licensee owns a piece of. If a licensee refers a client to a third party in which the licensee has greater than a 1 percent ownership interest, or from which the licensee receives or may receive dividends or other profit sharing distributions, the licensee must disclose that fact to the client at the time of the referral. The Act excludes a publicly held or publicly traded company from that duty. The disclosure is about the referral for services related to the transaction, so it is the rule behind the question "do you own part of this title company or lender?"

Section 10-10(e) adds a cross-border note. Nothing in the Act prohibits cooperating with, or paying compensation to, an individual domiciled in another state or country who is licensed as a broker there, or a resident of a country that does not require a license to act as a broker, if that person complies with the laws of the place where the person lives and practices. This is the section behind out-of-state referrals between brokers. Another related violation is on the discipline list at Section 20-20(a)(14): acting for more than one party in a transaction without providing written notice to all parties for whom the licensee acts. If you work on a team, our guide to Illinois real estate team rules for agents explains how supervision and sponsorship are set up.

Now the federal layer, because Illinois law does not replace it. Section 10-15(f) says nothing in that section waives or abrogates RESPA. RESPA's Section 8 is codified at 12 U.S.C. 2607, and the Consumer Financial Protection Bureau's rule implementing it is Regulation X, 12 CFR 1024.14. The statute says no person shall give and no person shall accept any fee, kickback or thing of value under any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. It also bars splitting any charge for a settlement service other than for services actually performed.

Two phrases in that sentence carry the weight. The first is "thing of value." Regulation X defines it broadly to include money, discounts, salaries, commissions, fees, stock, dividends, distributions of partnership profits, services at special or free rates, trips and payment of another person's expenses, among many other items. It also says "payment" does not require money to change hands. The second phrase is "agreement or understanding." Under 1024.14(e), the agreement need not be written or even spoken. A practice, pattern or course of conduct can establish it, and when a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, that receipt is evidence of an agreement.

The rule also says what a referral is. Under 1024.14(f), a referral includes any oral or written action directed to a person that has the effect of affirmatively influencing the person's selection of a provider of a settlement service, when that person will pay for the service. A required use of a particular provider is also a referral. Section 1024.14(b) states the consequence in one line: any referral of a settlement service is not a compensable service, except as the rule's list of permitted payments provides.

That list matters, because it is where agents and brokers find their lawful routes. Under 12 CFR 1024.14(g)(1), RESPA's Section 8 permits seven kinds of payment, among them a payment to an attorney for services actually rendered, a payment to any person of a bona fide salary or compensation for goods or facilities actually furnished or services actually performed, and an employer's payment to its own employees for any referral activities. It also permits normal promotional and educational activities that are not conditioned on the referral of business and that do not defray expenses someone in a position to refer would otherwise incur. And it permits payments under cooperative brokerage and referral arrangements between real estate agents and real estate brokers.

Read the cooperative brokerage item with care, because the rule itself limits it. The rule says that exemption refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity. It has no application to fee arrangements between real estate brokers and mortgage brokers, or between mortgage brokers. So the Illinois route in Section 10-5(d), one sponsoring broker paying another, lines up with the federal exemption. A payment between a real estate broker and a mortgage broker for sending business does not.

The CFPB publishes illustrations in Appendix B to the regulation. The Bureau says that payment violates Section 8, that it makes no difference whether it comes from the title company or the purchaser, and that the amount must bear a reasonable relationship to the services rendered., and that copying machines, computer terminals, printers and similar items given in exchange for referrals also violate the law. Illustrations 7 and 8 treat an affiliated business arrangement: a broker who owns more than 1 percent of a title agency may receive dividends in proportion to stock held, but not dividends that vary with the business the broker refers, and only if the disclosure and no-required-use conditions are met.

The penalties are in the statute. Under 12 U.S.C. 2607(d), a person who violates the section can be fined not more than 10,000 dollars or imprisoned for not more than one year, or both. A violator is also jointly and severally liable to the person charged for the settlement service in an amount equal to three times the charge paid. The CFPB, the Secretary named in the statute, and a state attorney general or insurance commissioner may bring actions to enjoin violations, and a prevailing party in a private action may recover court costs and reasonable attorney's fees. Regulation X section 1024.14(h) also says documents provided under the section must be kept for five years from the date of execution.

Notice what the sources do not say. RESPA's wording is tied to settlement services involving a federally related mortgage loan, and the statute and rule do not address a sale with no mortgage. The sections cited here set no dollar limit for a lawful referral fee between brokers and no standard split for an agent. The Act does not publish a safe list of gifts a licensee may give a client, and Section 10-15(c) and (d) simply point back to the "free" advertising rule and to every other law that applies. Anyone building a thank-you program, a referral program or a lender partnership should have the plan reviewed by an attorney and by the managing broker before it starts.

What This Means for a New Agent Choosing an Office

The practical effect is that you should ask about compensation in writing and ask early. Because Section 10-20(c) requires a written agreement covering supervision, duties, compensation and termination, and because Section 10-5(b) means the sponsoring broker is the only lawful source of your pay for licensed activity, the agreement is the document that tells you how you will actually be paid. Ask to see a sample before you decide, and ask how the office handles referrals that come in or go out. Gambino Realtors, based in Rockford and in business since 1923, gives new agents a personal business coach, weekly classes, sales meetings twice a month, a mentor who goes with them on first appointments, and leads brought to agents. Whatever office you choose, the compensation terms still belong in the written agreement, not in a verbal promise.

Questions worth asking any broker follow directly from the rules above. How is a referral from an agent in another office handled, and does the money go broker to broker? What does the office's compensation policy say, and where is it disclosed to clients under Section 10-10(a)? If the office or the agent has a financial interest in a lender, title company or other vendor, where does the 1 percent disclosure appear, and how is it presented to the client? What does the office do when someone outside the industry asks to be thanked for a name? The answer under Section 10-15(e) is that the thank-you cannot be compensation to a person who is not a party to the transaction.

Unlicensed help raises the same questions, and our guide on what unlicensed assistants may do in Illinois covers how the Act treats pay for people who are not licensed. For the full set of guides, see the Illinois Real Estate Guide.

The Bottom Line

An Illinois agent is paid by the sponsoring broker, brokers may pay other sponsoring brokers directly, and licensees may not pay compensation to an unlicensed person who is not a party to the transaction in exchange for a referral. Federal law adds a ban on fees and kickbacks for referring settlement business on a federally related mortgage loan, with penalties set in the statute. Disclosure under Section 10-10 sits on top of both. The Act does not hand you a lawful dollar figure for a referral, so do not assume one exists.

Before you take a position, get the compensation terms in the written agreement and have your managing broker or an attorney confirm the plan for any referral program. Then pick the office that explains these rules plainly, which is a good test of how it will treat you later. Our guide on how to choose your first brokerage lists the other questions to ask. This article describes what the statute and rule say and is not legal, tax or financial advice.

Before you move on, here are the questions people ask most about who may be paid in an Illinois transaction.

Frequently Asked Questions