Final answer:
Paying a referral fee to an insurance broker for each real estate closing is typically illegal under the Real Estate Settlement Procedures Act (RESPA), which prohibits kickbacks and unearned fees in the real estate industry.
Step-by-step explanation:
The arrangement described where a real estate broker pays a life insurance broker a fee for each referral that goes to closing is, in general, illegal. The Real Estate Settlement Procedures Act (RESPA) prohibits kickbacks and unearned fees in the real estate industry. This includes referral fees when such referrals are between professionals who provide settlement services, such as real estate brokers and insurance brokers, unless certain exceptions apply. The legality of referral fees in the real estate industry is not based on the amount of the fee, whether it is disclosed in writing, or if the insurance broker holds a specific license.
Specifically, section 8(a) of RESPA prohibits giving and receiving any fee, kickback, or thing of value in exchange for the referral of settlement service business. While there are a few exceptions to this rule (such as affiliated business arrangements that meet specific conditions), generally speaking, payments for referrals are not compliant with RESPA.