Can a lawyer accept referrals from mortgage brokers and pay the broker for later services, or pay a marketer only for clients who actually retain the lawyer?

Plain-English summary

A real estate lawyer worked with the Washington State Licensed Mortgage Brokers Association and wanted brokers to recommend his services to homeowners seeking to refinance or modify mortgages, with the homeowner (not the broker) paying the lawyer, and the lawyer then paying the broker a fee for services the broker would provide after the referral. Separately, the lawyer wanted to hire third parties to market his services and pay only for clients actually referred and accepted. He asked whether each arrangement was permitted.

The committee concluded that the lawyer may receive referrals from the association or its members, but cannot offer compensation to a referring broker to carry out future services relating to the referred client where that operates as payment for the referral. RPC 7.2(b) bars giving anything of value for recommending the lawyer's services, drawing a distinction (per Comment 5) between permissible general advertising and paying others to channel work directly to the lawyer; a non-exclusive reciprocal understanding can be permissible if the lawyer complies with RPC 1.4(b) by explaining the arrangement, but here the post-referral payment for services functioned as a quid pro quo and would violate RPC 7.2(b). The committee also flagged conflict-of-interest concerns under RPC 1.7, warning the lawyer to ensure no concurrent conflict (including a personal financial interest, per Comment 10) exists in representing borrowers on loans originated by the referring broker, and to obtain informed consent under RPC 1.7(b) for any waivable conflict, plus RPC 5.4 independence concerns and RPC 1.6/1.18 limits on sharing client and prospective-client confidences with the broker. On the second question, the committee concluded a lawyer cannot pay a referral source only for clients actually received, engaged, or accepted, because RPC 7.3 bars solicitation by the lawyer or a third person for the lawyer's pecuniary gain (with limited exceptions), and a lawyer may pay reasonable advertising costs but not value for specific referrals.

In practice

Under the Washington rules as they stood at the time of the opinion, the committee allowed accepting broker referrals while prohibiting payment for them in either form presented. The opinion holds that paying a broker for post-referral services, where the broker is paid only if the client retains the lawyer, is in substance paying for the referral and violates RPC 7.2(b); a genuinely non-exclusive reciprocal arrangement disclosed to the client under RPC 1.4(b) can be permissible, but the proposed structure was not. It holds that paying a marketer per accepted client is barred by RPC 7.3 (no paid solicitation for the lawyer's pecuniary gain outside the rule's exceptions). The committee separately cautioned the lawyer to screen for concurrent and personal-interest conflicts under RPC 1.7, secure informed consent for any waivable conflict, preserve independence under RPC 5.4, and protect confidences under RPC 1.6 and 1.18.

Common questions

Q: Can a lawyer accept client referrals from a mortgage broker?

A: Yes. The committee concluded it is permissible for the lawyer to receive referrals from the Washington State Licensed Mortgage Brokers Association or its members.

Q: Can the lawyer pay the broker a fee for services after the referral?

A: Not where it operates as payment for the referral. The committee concluded paying the broker for post-referral services, payable only if the client retains the lawyer, is a quid pro quo that violates RPC 7.2(b).

Q: Can a lawyer pay a marketing company only for clients who actually hire the lawyer?

A: No. The committee concluded a lawyer cannot pay a referral source only for clients actually received, engaged, or accepted, because RPC 7.3 bars paid solicitation for the lawyer's pecuniary gain outside its exceptions.

Q: What conflict issues did the committee flag?

A: The committee warned the lawyer to ensure no concurrent or personal-interest conflict under RPC 1.7 exists when representing borrowers on loans originated by the referring broker, to obtain informed consent for any waivable conflict under RPC 1.7(b), and to protect confidences under RPC 1.6 and 1.18.

Background and rules framework

The opinion interpreted Washington RPC 7.2(b) (Model Rule 7.2, anything of value for recommending a lawyer's services), RPC 7.3 (Model Rule 7.3, solicitation), RPC 1.7 and 1.9 (Model Rules 1.7 and 1.9, current- and former-client conflicts), RPC 1.18 (Model Rule 1.18, prospective clients), RPC 5.4 (Model Rule 5.4, professional independence), RPC 1.6 (Model Rule 1.6, confidentiality), and RPC 1.4(b) (Model Rule 1.4, explaining the arrangement). It distinguished permissible advertising from paying for individualized referrals.

Citations and references

Rules of Professional Conduct:

• Model Rule 7.2 / Washington RPC 7.2(b) (value for recommendations; reciprocal referral limits)
• Model Rule 7.3 / Washington RPC 7.3 (solicitation; paying for specific referrals)
• Model Rule 1.7 / Washington RPC 1.7 (concurrent and personal-interest conflicts)
• Model Rule 1.9 / Washington RPC 1.9 (former-client conflicts)
• Model Rule 1.18 / Washington RPC 1.18 (prospective clients)
• Model Rule 5.4 / Washington RPC 5.4 (professional independence)
• Model Rule 1.6 / Washington RPC 1.6 (confidentiality)
• Model Rule 1.4 / Washington RPC 1.4(b) (explaining the matter)

See also

• WA Ethics Op. 2189: pure referral fees between lawyers
• WA Ethics Op. 2193: distributing legal-services flyers door-to-door
• WA Ethics Op. 2171: legal disclaimer for a lawyer referral database

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1653

Original opinion text

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

Advisory Opinion: 2203
Year Issued: 2010
RPC(s): 1.6, 1.7, 1.9, 1.18, 5.4, 7.2, 7.3, 1.4
Subject: Accepting referrals from mortgage brokers; paying fees to brokers for subsequent services

I. QUESTIONS PRESENTED:

1) Whether: a) It is permissible for an attorney to receive referrals from a member of (or directly from) the Washington State Licensed Mortgage Brokers Association; b) Whether, in addition to the referral, the attorney later pays the referring Broker a fee for the Broker’s services relating to the referred client?

2) Whether it is permissible for the attorney to hire a third party to market the attorney where the attorney only pays for clients actually received and engaged/accepted by the attorney?

II. BRIEF ANSWER:

1) (a) Yes, it is permissible for attorneys to receive referrals from a member of, or directly from, the Washington State Licensed Mortgage Broker’s Association (b) No (under the facts described below), an attorney cannot offer compensation to a referring Broker to subsequently carry out future services relating to the referred client.

It was also the Committee’s position that this practice raises concerns regarding conflicts of interest.

2) No, an attorney cannot pay a referral source only for clients actually received, engaged, or accepted by the attorney.

III. RULES OF PROFESSIONAL CONDUCT

1.6, 1.7, 1.9, 1.18, 5.4, 7.2, and 7.3

IV. STATEMENT OF FACTS:

An Attorney engaged in real estate law has developed a relationship with the Washington State Licensed Mortgage Brokers Association (and members thereof), through which the Attorney wishes to engage one or more brokers to advertise the lawyer’s services, or more particularly, to recommend the Lawyer’s services to homeowners/borrowers attempting to refinance or modify their mortgages. It appears that the Lawyer would be paid directly by the homeowner/borrower and not the Broker. After the referral has been made, the Lawyer would like to pay the Broker a fee for providing certain services for the Lawyer (and homeowner/borrower) relating to the refinance or modification.

As a separate and unrelated matter, the inquiring Lawyer would like to hire third parties to market the Lawyer’s services, and in return, the Lawyer would like to pay for only those clients actually referred and accepted by the Lawyer.

V. DISCUSSION:

Question 1:

The first inquiry raises concerns with respect to several RPCs relating to both advertising and conflicts of interest.

Advertising Constraints

RPC 7.2(b) (Advertising) provides, in relevant part:

A lawyer shall not give anything of value to a person for recommending the lawyer’s services, except that a lawyer may

(1) pay the reasonable costs of advertisements or communications permitted by this Rule; (2) pay the usual charges of a legal service plan or a not-for-profit referral service; ….

As Comment 5 to Rule 7.2 makes clear, while a lawyer’s advertising to the public is permissible, lawyers are not permitted to pay others to channel professional work directly to them.

Thus (when the exchange of something of value for marketing and referrals is involved) a distinction is drawn between person-to-person referrals and general advertisements. This is due, in at least part, because general advertisements do not contain an individualized (one-to-one) component nor do they add in a relationship of trust (both of which may interfere with the client’s independent choice of professionals).

An exception under the rule is made for direct referrals between lawyers, but in that case, two requirements must be met for the referral to permissible, namely: that the referral agreement is not exclusive; and the client is informed of the arrangement between the lawyers. And, the lawyer cannot offer compensation for the referral.

If this arrangement with the broker constitutes a quid pro quo it would likely violate RPC 7.2(b). A non-exclusive reciprocal understanding would not violate RPC 7.2(b), provided the lawyer complied with the duty mandated under RPC 1.4(b) to explain the arrangement “to the extent reasonably necessary to permit the client to make informed decisions.” In this case, the referral fee may be deemed to have been exchanged in the form of the payment by the Lawyer to the broker for services rendered after the Lawyer receives the referral (we assume for the analysis that the broker is aware that he/she would not be paid unless and until the client hires the Lawyer).

The reciprocal referral arrangement proposed by the inquirer results in the Lawyer giving something of value to a non-lawyer broker in exchange for recommending the Lawyer’s services in violation of RPC 7.2(b).

Conflicts of Interest

There was also concern expressed by the Committee that the scenario described by the inquiring Lawyer raised conflicts of interest. The inquiring Lawyer should ensure that no concurrent conflict of interest exists in his representation of homeowners/borrowers pursuing modifications or refinance of loans that may have been originated by the referring broker. If a conflict of interest exists, the inquiring Lawyer is cautioned to ensure that it is a waivable conflict, and if so, he must adhere to RPC 1.7, which requires both the disclosure of the nature of the conflict and informed consent.

RPC 1.7 provides in relevant part:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: …. (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer`s responsibilities to . . . a third person or by a personal interest of the lawyer.

There are several Comments that are instructive to the inquiry, including Comment 1, which provides:

“Loyalty and independent judgment are essential elements in the lawyer’s relationship to a client. Concurrent conflicts of interest can arise from the lawyer’s responsibilities to . . . a third person or from the lawyer’s own interests.”

Comment 10 to RPC 1.7 specifically addresses personal interest conflicts that could arise in this scenario:

“The lawyer’s own interests should not be permitted to have an adverse effect on representation of a client . . . . In addition, a lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed financial interest.”

If the inquiring attorney is interested in pursuing representation in such matters where a concurrent conflict has arisen, he must disclose his own personal business interests and obtain the informed consent of the client as set forth in RPC 1.7(b) before proceeding with representation.

Additional Concerns

In addition, there was a concern expressed by the Committee that part (b) (of Question 1) may run afoul of either RPC 5.4’s prohibition on sharing legal fees with a non-lawyer, or the requirement of independence of judgment.

Finally, the lawyer should be careful to ensure compliance with RPCs 1.6 and 1.18, to ensure that confidential information of clients and prospective clients is not shared with the broker unless the client has consented.

Question 2:

An attorney cannot pay a referral source only for clients actually received, engaged, or accepted by the attorney. RPC 7.3 provides the relevant guidance with respect to this portion of the inquiry:

(a) A lawyer shall not, directly or through a third person, by in-person, live telephone or real-time electronic contact solicit professional employment from a prospective client when a significant motive for the lawyer’s doing so is the lawyer’s pecuniary gain, unless the person contacted: (1) is a lawyer; (2) has a family, close personal or prior professional relationship with the lawyer; or (3) has consented to the contact by requesting a referral from a not-for profit lawyer referral service.

An exception is made under 7.3(d), permitting in-person or telephone solicitations when the lawyer has engaged a prepaid or legal services plan and the organization makes the solicitations, so long as lawyers ensure that the prepaid legal or legal services organization is otherwise in compliance with the Rules.

A lawyer may pay the reasonable costs of advertising (RPC 7.2), but may not give anything of value to a person for recommending the lawyer’s services, except as set forth in 7.2(b) (and as expressed above). Just as the lawyer is prevented from in-person solicitations, so too is a third party prohibited from making these solicitations in return for compensation on behalf of lawyer.

Under the facts set forth in the inquiring Lawyer’s second question, it would appear that the conduct expressed would not be permissible under the Rules: i.e., the payment for particular client referrals from third parties when actually accepted by the Lawyer.

VI. CONCLUSION:

Lawyers may pay for the reasonable cost of advertising and may accept professional referrals, but may not pay persons or organizations (or otherwise exchange value) for specific referrals unless the organization is pre-paid legal, a legal services plan or a not-for-profit referral service. The scenario posed in questions 1(b) and 2 above, as presented by the inquirer, appears to run afoul of the Rules of Professional Conduct because the inquiring Lawyer proposes an exchange of value for the referral, either by direct payment or by way of a referral for work. There was also concern expressed by the Committee that a conflict of interest arises in the first scenario, and therefore, to the extent that scenario is permissible under other RPCs, the inquiring Lawyer must ensure compliance with RPC 1.7 et. seq.