May, 2008
Ethics
Inspection News and Views from the American Society of Home Inspectors



Ethics and Preferred Vendor Programs

KEITH OBERG

Part 2 of 4: Background on Payment for Referrals and Preferred Vendor Programs

ASHI’s position on the issue of paid referrals and, by extension, “preferred vendor” programs is not new and, while controversial for some, it is well supported by nationally accepted ethical principles. Let’s look at some background regarding the issue, and related ethics principles and regulations.

While ASHI’s original Code of Ethics did not specifically address or prohibit payment for referrals, a large body of interpretation at the time supported the principle. As real estate brokers’ joint marketing programs developed, ASHI’s Code of Ethics Committee outlined the ethical principles that were being violated and clearly affirmed the critical differences between programs that involved paying for referrals and those that were merely advertising.

The following is excerpted from a 2001 Request for Interpretation (RFI):

“Paying a real estate company for referrals generally deceives or misleads clients who would assume a referral is based on competence, not on hidden payment. Paying for endorsements or paying to be on an “approved” or “preferred” listing is generally similar to paying for referrals and inconsistent with the Code of Ethics. The separation and independence of the home inspector from the real estate company handling the transaction is a cornerstone principle intended to protect consumers.” 

And, the following is from a 2002 RFI:

 “The Code of Ethics allows advertising. However, any advertisement, regardless of who owns or controls the advertising media, would be a violation if it is deceptive or if it involves referrals or endorsements by an entity that has conflicting interests with home inspector clients, such as a real estate agent.”

The impetus for developing a new Code of Ethics arose largely as a result of the lack of specific text in the original code regarding payment for referrals in response to the rise of joint marketing schemes.

The new Code of Ethics, voted on and approved by ASHI members in 2004, unequivocally states the following in 1.C:

 “Inspectors shall not directly or indirectly compensate realty agents or other parties having a financial
interest in closing or settlement of real estate transactions for the referral of inspections or for inclusion on a list of recommended inspectors, preferred providers or similar
arrangements.” 


The California Real Estate Inspectors Association (CREIA) and other state home inspector organizations have supported this position. Most state regulations prohibit payment for referrals and some, such as Louisiana, have adopted the wording found in 1.C of ASHI’s Code, which specifically references “preferred vendor” programs.

Incidentally, the National Association of Home Inspector’s (NAHI) Code of Ethics supports the prohibition against payment for referrals, stating: “The inspector will not provide any compensation, inducement, or reward directly or indirectly, to any person or entity other than a client for the referral of business to the Inspector.” However, NAHI does not clarify that “preferred vendor” programs constitute payment for referrals.

The National Association of Realtors® (NAR) Code of Ethics addresses payment for referrals only by requiring
disclosure, excerpted as follows:

 “When recommending real estate products or services, … REALTORS shall disclose to the client or customer to whom the recommendation is made, any financial benefits or fees ... the REALTOR or REALTOR’s firm may receive as a direct result of such recommendation.” 

This provision recognizes that a conflict of interest potentially exists when brokers receive fees for referrals. It would, if honored, require agents to disclose to clients that inspectors being referred by agents, or appearing on referral lists, are paying a fee to the agency for the recommendation of those services.

The other factor that comes into play when we examine payment for referral programs is The Real Estate Settlement Procedures Act (RESPA), administered by HUD. This law was enacted in 1974 to eliminate kickbacks and referral fees that unnecessarily raise the cost of settlement services. Section 8 prohibits giving or accepting a fee or kickback or anything of value in exchange for referrals. While RESPA clearly prohibits paying for referrals in any form, the relevance of this provision is in dispute with regard to “preferred vendor” programs. When confronted with RESPA’s provisions against paying for referrals, some argue that “preferred vendor” programs are advertising, rather than referral programs, choosing to ignore the meaning of a list of “preferred vendors.”

In this review, it is quite clear that most ethics codes dealing with the home inspection profession support the ethical principles prohibiting payment for referrals. Nevertheless, ASHI has taken the lead in identifying “preferred vendor” programs as a form of payment for referrals. While this position has been adopted by increasing numbers of fellow home inspector organizations and state regulators, it has not yet been as widely accepted.