Can a lawyer take client referrals from a mortgage lender and act like the client's loan broker in exchange for cross-referrals?

Plain-English summary

A lending company marketed itself as a direct lender that uses attorneys in place of mortgage brokers, with the attorney's role described as limited to document review and legal consultation. It offered free training and assigned a staff underwriter to each loan, had attorneys bill their own clients, and apparently expected "registered" attorneys to recommend its lending services in exchange for the loan customers it referred to them. The inquirer asked whether an attorney could enter into such a relationship and assume the responsibilities of a mortgage broker for the client.

The committee said the arrangement might violate RPC 7.2(c) because it contemplates a reciprocal referral arrangement, which would be the lawyer giving something of value in return for referrals. It noted that the Board of Governors had sent the Supreme Court a proposed revision of RPC 7.2 that would expressly permit reciprocal referral arrangements between lawyers, but not between lawyers and nonlawyers. The committee said the arrangement might also run afoul of RPC 1.1 (competence), RPC 1.7 (conflicts, including between the lawyer's financial interest and the client's interests), RPC 1.8(f) (third-person compensation), and RPC 5.4(c) (interference with the lawyer's professional judgment), depending on how it was structured.

The committee added that the expectation of referrals and the fees to be earned from them, including a possible loan-broker commission, could be a conflict under RPC 1.7(b) that materially limits competent representation; if triggered, the lawyer would have to reasonably conclude the conflict would not adversely affect the client and obtain informed written consent. If the lender paid lawyers for referrals beyond cross-referrals, that would have to comply strictly with RPC 1.8(f), and any contingent fee charged only if the client qualified for a loan would have to be discussed in advance and put in a written fee agreement under RPC 1.5.

Currency note

This opinion was issued in 2004, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct, including the revisions to RPC 7.2 the opinion anticipates. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule mentioned here.

In practice

Under the Washington rules as they stood at the time of the opinion, the committee treated the lender arrangement as presumptively problematic under RPC 7.2(c) because it looked like a reciprocal referral deal with a nonlawyer. It layered several rules on top, depending on the facts: RPC 1.1 (competence), RPC 1.7(b) (financial-interest conflict requiring informed written consent), RPC 1.8(f) (any third-person payment must meet the rule's conditions), and RPC 5.4(c) (no interference with professional judgment). The committee said a contingent fee keyed to loan approval would have to satisfy RPC 1.5's advance-disclosure and written-agreement requirements.

Common questions

Q: Can a lawyer accept client referrals from a mortgage lender and recommend that lender in return?

A: The committee said such a reciprocal referral arrangement with a nonlawyer might violate RPC 7.2(c), because it would be the lawyer giving something of value in exchange for referrals.

Q: What conflict does the referral relationship create?

A: The committee said the expectation of referrals and the fees from them could be a conflict under RPC 1.7(b) that materially limits competent representation, requiring a reasonable conclusion that the client is not adversely affected and informed written consent.

Q: What if the lawyer charges a fee only when the client gets the loan?

A: The committee said a contingent fee tied to loan approval would have to be discussed with the client in advance and set out in a written fee agreement under RPC 1.5.

Q: Can the lender pay the lawyer for referrals?

A: The committee said it did not appear the lender was paying for referrals beyond cross-referrals, but if it did, the payment would have to comply strictly with RPC 1.8(f) on third-person compensation.

Background and rules framework

The opinion interprets RPC 7.2(c) (Model Rule 7.2, no giving something of value for a referral) together with RPC 1.1 (competence), RPC 1.7 (conflicts of interest, including the lawyer's financial interest), RPC 1.8(f) (compensation from a third person), RPC 5.4(c) (professional independence), and RPC 1.5 (fees, including contingent fees). The committee analyzed the lender's proposal as a reciprocal referral arrangement between a lawyer and a nonlawyer, which the anticipated RPC 7.2 revision would still not permit. The analysis turns on the value exchanged for referrals and on whether the lawyer's competence and independent judgment are compromised.

Citations and references

Rules of Professional Conduct:

• Model Rule 7.2 / Washington RPC 7.2(c) (giving something of value for a referral)
• Model Rule 1.1 / Washington RPC 1.1 (competence)
• Model Rule 1.7 / Washington RPC 1.7(b) (conflicts; lawyer's financial interest; informed written consent)
• Model Rule 1.8 / Washington RPC 1.8(f) (compensation from a third person)
• Model Rule 5.4 / Washington RPC 5.4(c) (professional independence of the lawyer)
• Model Rule 1.5 / Washington RPC 1.5 (fees; contingent fee written agreement)

See also

• WSBA Ethics Op. 1295: Lawyer Who Is Also a Mortgage Broker
• WSBA Ethics Op. 1071: Paid Lawyer Referral Service
• WSBA Ethics Op. 1944: Referral to a Lawyer With a Common Business Interest

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1328

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion: 2085
Year Issued: 2004
RPC(s): RPC 1.1, 1.5, 1.7, 1.8(f), 5.4(c), 7.2(c)
Subject: Lawyer accepting referrals from a direct lender

An inquirer asks about the propriety of accepting referrals from a specific lending company [name and identifying details have been redacted].

The lending company markets itself as a direct lender doing business across the United States, and claims to be affiliated with a major west coast mortgage bank. The lending company’s marketing materials indicate it routinely sells loans on the secondary market to other mortgage companies – the marketing materials mention prominent mortgage companies.

The lending company uses attorneys in place of mortgage brokers, presumably as a competitive advantage. Its web site states the attorney’s role is limited to the simple practice of law such as document review and legal consultation.

The lending company’s promotional materials state they provide free training and assign a staff underwriter to each and every loan. The web site for the lending company indicates the training lasts 30 minutes by conference call. The content of the training is not specified. This memorandum assumes that the training focuses on how to properly complete the forms and other procedural requirements of the company’s loan process.

The lending company’s promotional materials state the attorney is to bill their client for their time. It is unclear whether the lending company provides financial incentives to the attorney or expects a fee of some sort for referring clients to the attorney.

QUESTION:

Is it permissible for an attorney to enter into a relationship with the lending company wherein the attorney assumes the responsibility of a mortgage broker on behalf of the client?

ANSWER:

Based upon available information found or provided to date, it appears to us that the lending company’s arrangement might present a violation of Rule 7.2(c) in Washington because it contemplates a reciprocal referral arrangement which would constitute the lawyer giving something of value to another in return for referrals. The arrangement might also run afoul of Rule 1.1, 1.7, 1.8(f) and 5.4(c), depending on how it was structured and its affect on the lawyer’s delivery of competent legal services.

An attorney must protect the interests of his or her client by providing competent and impartial legal advice to the client (RPC 1.1). An attorney must also avoid conflicts of interest, including conflicts between the lawyer’s financial interest and the interests of clients (RPC 1.7). Neither may an attorney give anything of value to a person in return for client referrals (RPC 7.2); nor accept compensation from a third person for providing legal services to a client unless the client gives informed consent, there is no interference with the lawyer’s independence and confidential information is protected. RPC 1.8(f), nor may an attorney accept referrals from another if the other interferes with the lawyer’s professional judgment. RPC 5.4(c).

While the lending company’s materials are somewhat unclear as to the precise nature of the referrals and/or cross-referrals involved, it appears that the lending company is offering to refer loan customers to “registered” attorneys and, in return, expects such attorneys to recommend the lending services of the lending company. Such a reciprocal referral arrangement may constitute an impermissible giving something of value to the lending company in return for referrals in violation of RPC 7.2(c). The Committee notes that the Board of Governors has sent to the Supreme Court a proposed revision of RPC 7.2 which would expressly permit reciprocal referral arrangements between lawyers, but not between lawyers and nonlawyers.

In addition, the expectation of such referrals and the fees to be earned from them (the lending company’s materials suggest that lawyers might earn a commission as a loan broker) could constitute a conflict of interest under RPC 1.7(b) since it might materially limit the attorney’s ability to competently represent the client. If Rule 1.7(b) were to be triggered, any attorney would need to conclude reasonably that the conflict would not adversely affect the client and would also need to obtain the client’s informed consent in writing. Finally, it is possible that such an arrangement could interfere with the lawyer’s professional judgment in violation of RPC 5.4(c).

It does not appear that the lending company is offering to pay registered lawyers for referrals (apart from cross referrals) but if this were done, it would need to be done in strict compliance with RPC 1.8(f), which imposes restrictions on lawyers being paid by a third person to represent a client.

The arrangement might also lend itself to a contingent fee agreement under which the attorney would charge a fee only if the client qualified for a loan with the lending company. If there were such a contingent fee arrangement, the attorney would need to discuss in advance with the client the fee arrangement and provide a written fee agreement in compliance with Rule 1.5.