KEEPING IT LEGAL. REALTOR Resource for RESPA Issues: Transaction Fees & Home Warranty Rule Convention Celebrating 100 Years

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1 KEEPING IT LEGAL REALTOR Resource for RESPA Issues: Transaction Fees & Home Warranty Rule 2010 Convention Celebrating 100 Years Copyright 2010 Ohio Association of REALTORS

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3 Fee Charged by Brokerage Violates RESPA A federal appellate court has evaluated whether a transaction fee that a brokerage firm charged violated RESPA. To read an analysis of the opinion from NAR s General Counsel, click here. Vicki Busby ( Buyer ) purchased a home using a federally insured loan. JRHBW Realty, Inc. d/b/a RealtySouth ( Brokerage ) represented the Buyer in the transaction. The Brokerage charged the Buyer a $149 Administrative Brokerage Commission ( Fee ), in addition to receiving a commission paid by the Seller. The Brokerage charges all of its clients the Fee, regardless of whether the client is a purchaser or seller. The Buyer filed a lawsuit against the Brokerage alleging that the Fee violated the Real Estate Settlement Procedures Act ( RESPA ), a federal law designed to prevent consumers from paying unnecessarily high settlement costs in a real estate transaction. The Buyer claimed that the Fee violated RESPA because the Brokerage did not provide any services to support the Fee. The Buyer sought to have the lawsuit certified as a class action involving all other individuals, including both buyers and sellers, who paid the Fee in a transaction involving federally insured loans. The trial court denied the motion for class certification. However, the United States Court of Appeals for the Eleventh Circuit reversed the trial court and sent the case to the lower court for further proceedings. The court stated that an 8(b) lawsuit could occur when no real work is done in exchange for the fee, or the fee exceeds the reasonable value of the services actually provided. On remand, the court certified the lawsuit as a class action and then considered whether the Brokerage had provided settlement services in support of the Fee. The United States District Court for the Northern District of Alabama ruled that the Brokerage had not identified settlement services to support the Fee and therefore the court ruled in favor of the Buyer and the class she represented. Like the appellate court, the trial court looked at 2001 Statement of Policy ( SOP ) issued by the U.S. Department of Housing and Urban Development ( HUD ) on Section 8(b) claims. For Section 8(b) claims, the SOP states that unearned fees are, among other things, when one settlement service provider charges the consumer a fee where no nominal or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed. The Brokerage argued it charged the Fee to all of its clients in order to help the Brokerage to recover its costs for the array of brokerage services that it provides to its customers. Services identified by the Brokerage that the Fee supported were regulatory compliance costs, providing office facilities, website enhancements, and increased access to information for clients. The Brokerage charged a separate fee to its clients in addition to the commission because the Fee is not split with the Brokerage s salespeople and so 2

4 actually reduced the commission costs to consumers. The Fee and the commission represented the costs of doing business with the Brokerage. The court disagreed with the Brokerage s characterization of the Fee and found that it was an unearned real estate settlement fee for which no services were provided. The rejected the array of services argument because most of the services identified by the Brokerage were not settlement-related. The court also stated that these services did not necessarily benefit clients like the Buyer, and so the court ruled that this argument did not counter the no services provided argument made by the Buyer. The court believed that a settlement service for which the Brokerage could collect a fee were those fees related to the closing of a real estate loan, and the services identified by the Brokerage such as an enhanced website did not constitute settlement services. The court also ruled that many of the identified services were covered by the Brokerage s commission paid at the closing, and so the Fee constituted a duplication of the commission. Because the Fee was not a RESPA-compensable settlement service charge, the court entered judgment in favor of the Buyer and the class she represented. Busby v. JRHBW Realty, Inc., No. 2:04-CV-2799-VEH (N.D. Ala. Apr. 20, 2009). [Note: This opinion was not published in an official reporter and therefore should not be cited as authority. Please consult counsel before relying on this opinion.] Copyright NATIONAL ASSOCIATION OF REALTORS Headquarters: 430 North Michigan Avenue, Chicago, IL DC Office: 500 New Jersey Avenue, NW, Washington, DC

5 Price Increase or Unearned Fee? How to Protect Your Bottom Line Laurie Janik, NAR General Counsel April 29, 2009 A federal district court recently ruled in Busby v. JRHBW Realty, Inc. d/b/a RealtySouth that an administrative brokerage fee ( ABC Fee ) of $ paid by a home buyer to the brokerage firm that represented her was not sufficiently related to any specific settlement service performed for her benefit, resulting in a violation of Section 8(b) of the Real Estate Settlement Procedures Act ( RESPA ). Section 8(b) prohibits charging for real estate settlement services unless the fee charged is for services actually performed. Click here to read a summary of the court's decision. The court found that the ABC Fee represented an additional charge to the buyer to defray the overall costs of the brokerage services she received, including the broker s overhead and administrative costs. However, because the ABC Fee was separately itemized on the settlement statement from the percentage brokerage commission, and not specifically justified as compensation for other discrete real estate settlement services provided, the court viewed it as a duplication of the percentage commission charges, thereby rendering it an unearned fee in violation of RESPA. In my view, this unfortunate holding is incorrect because the court s analysis of RESPA is flawed and because the court misapplied the mandate previously handed down in this case by the 11 th Circuit Court of Appeals. It is undisputed that RESPA is not a fee-setting statute. Since a brokerage may charge a percentage based commission or a flat rate for its services, there is no principled basis to construe RESPA to prohibit charging a percentage plus a flat rate. The court s confusion likely stemmed from the fact that the total compensation was shown in two places on the settlement form, with each bearing a separate label (percentage commission and ABC Fee). These two factors caused the court to reject the brokerage firm s explanation that the ABC Fee represented nothing more than a price increase being charged for the firm s brokerage services. Believing the firm had already been paid for the brokerage services by the percentage commission, the court was looking for a different, specific service or set of services of benefit to the buyer in return for the ABC Fee. Finding none, it concluded that no settlement services were provided for the ABC Fee. This case had previously been certified as a class action. In light of this decision, brokers should review how they characterize their compensation. Placing separate labels on what is all compensation to the brokerage firm exposes the firm to the same claims asserted against the defendant here. It allows the conclusion that each separately labeled charge represents a fee for a separate service. Likewise, disclosing 4

6 separate components of the broker s compensation in different parts of the contract with the consumer or on different lines of the settlement statements creates risk. Disclosure of the brokerage firm s compensation should clearly indicate that both the commissionbased component and the flat fee component represent payment for services provided by the brokerage. These combined amounts should be disclosed in the 700 section of the HUD-1 as the broker s compensation. Finally, do not create the impression that any particular fee is for a separate service if that is not the case. The final chapter in this case has not yet been written. An appeal is likely after other proceedings in the case are completed, and certainly warranted in order to reverse this most unfortunate decision. A clarification from HUD on this issue was requested by NAR months ago and is long overdue. In the meantime, be cautious and protect your hardearned compensation. Copyright NATIONAL ASSOCIATION OF REALTORS Headquarters: 430 North Michigan Avenue, Chicago, IL DC Office: 500 New Jersey Avenue, NW, Washington, DC

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9 Third Lawsuit Filed in Ohio Challenging Transaction Fees Ohio REALTOR April 2010 by Peg Ritenour Vice President OAR Legal Services Last month, another lawsuit was filed against an Ohio brokerage challenging the administrative fee it charges its customers. This case, involving a central Ohio brokerage, was filed in federal court and alleges that such fees violate RESPA. Like the two other cases filed against a Cleveland brokerage late last year, this new case is a class action suit, seeking treble (or triple) damages for all parties who were charged the fee, injunctive relief, court costs and attorney fees. This Ohio litigation follows a 2009 decision by an Alabama federal court that held that such fees violate Section 8(b) of RESPA. In that case, Busby v. Realty South, the court found the brokerage performed no separate and distinct services to justify the fee. In the opinion of many RESPA experts and the National Association of REALTORS (NAR), the Busby decision misinterpreted RESPA and could be possibly overturned on appeal. However in the meantime, NAR has provided advice for brokers who charge such fees to avoid defending a costly class action challenge. It is believed the basis for the court s decision in Busby partially stemmed from the fact that the administrative fee charged by the brokerage was listed separately from the commission on the HUD-1 Settlement Statement. Additionally the court found that the administrative fee represented an additional charge to defray the overall costs of the services the brokerages provided, and was not for any additional services. As a result, NAR and other RESPA experts have recommended that brokerages restructure how they handle such administrative fees to avoid a similar challenge. Rather than charge a separate fee for specific services, such as record retention, operating a Web site or regulatory compliance, NAR recommends that a brokerage include the fee as part of its over-all compensation for its service. For example, the brokerage would indicate in its listing that the fee for its service would be the percentage of the sales price plus the flat fee, (i.e., X % of the sales price plus $Y). To also avoid the outcome that occurred in Busby, brokerages need to make sure that the combined amount of the percentage plus the flat fee is indicated as one dollar amount on line 700 of the HUD-1 Settlement Statement. This approach has been reviewed by HUD for compliance with RESPA. In a letter it recently issued to legal counsel in the Busby case, HUD makes it clear that RESPA does not regulate how a broker determines what it charges for its service. HUD indicated that a broker s commission may be determined using a flat fee, a percentage of the sales price or a combination of these methods. Thus, it is strongly advised that brokers follow the approach recommended by NAR to avoid having to justify their administrative fee. On the other hand, if brokers continue to break out their administrative fee as being separate from their commission, HUD s letter makes it clear that the broker may be required to demonstrate that it performs separate and distinct services for that fee. If brokers are unable to demonstrate what additional services are provided for the fee, they could be exposing themselves to a RESPA challenge. (To see the HUD letter click here.) OAR will closely monitor the class action litigation that has been filed in Ohio and will report developments in future issues of the Ohio REALTOR. 8

10 HUD Issues Rule Limiting Payment for Home Warranties Ohio REALTOR August 2010 by Peg Ritenour Vice President Legal Services On June 25, HUD published an interpretative rule regarding its position on the payment of a fee to brokers or agents for the sale of home warranties. This rule follows discussions held with HUD by NAR over the last two years after HUD issued a letter indicating that payments related to the sale of home warranties may violate RESPA. RESPA is a federal law that prohibits the payment or receipt of anything of value for the referral of a settlement service in connection with a federally related transaction. In this new rule, HUD indicates its position that a home warranty constitutes a settlement service. As such, a real estate agent or broker cannot receive anything of value for merely referring a seller or buyer to a home warranty company. The purpose of the rule issued by HUD is to clarify what constitutes a referral. Under Section 8(c) of RESPA and other HUD regulations, however, payment is permitted for bona fide services that are actually performed. These services must be actual and distinct from the primary services the Realtor is providing. HUD has indicated that in determining whether payment to a broker or agent by a home warranty company (HWC) is bona fide compensation for actual services, it must review the facts of each case. It does, however, provide several examples of those factors. Additionally, in making its analysis of whether payment to a broker or agent violates RESPA, HUD will also look at whether the amount paid is reasonably related to the value of the services actually performed by the broker or agent. HUD pointed out that, in the context of loan origination, it has previously determined that the mere taking of an application is not sufficient work to justify any fee under RESPA. Thus, it appears HUD s analysis of a fee for merely taking a home warranty application would be the same. The rule became effective on the date it was issued (June 25 th ). Although not required to, HUD did accept comments on this interpretative rule for 30 days. NAR filed lengthy comments objecting to many provisions of the rule and seeking clarification of others. However, because the rule is currently in effect, Realtors should comply with it until notified of any revisions by HUD as a result of the comments received from NAR and others. Below is an extensive Q & A regarding how the rule applies to Realtors and what steps they should take to avoid violation of RESPA. Q1. Can I give my client information about a home warranty company as long as I don t receive any compensation? A1. Yes. Nothing in RESPA prohibits REALTORS from making a referral; it only prohibits you from receiving something of value in exchange for that referral. 9

11 Q2. Can I be paid a nominal fee for selling a home warranty? A2. The answer depends on what services you perform in the course of selling the warranty. Under section 8(c) of RESPA you may receive compensation for bona fide services that are actually performed. Moreover, those services must be actual, necessary and distinct from any other services you are providing. If all you are doing to sell the warranty is referring the home warranty company (HWC) to a buyer or seller, this would not be considered bonafide services for which you could be paid. Q3. Does the new rule allow a broker or agent to be paid for marketing or promoting a home warranty to a buyer or seller? A3. In the new rule HUD clearly states that it considers marketing efforts that are directed to particular buyers or sellers to sell a home warranty to be a referral. As such, HUD takes the position that any payment for that direct marketing would be an illegal kickback. HUD gives the following examples of what it considers to be marketing or promotion that is directed at particular buyers and sellers and is therefore activity for which a REALTOR cannot be paid: Providing a verbal sales pitch about the benefits of a particular warranty Distributing the HWC s promotional materials at your office Providing promotional materials at an open house Q4. Does HUD indicate whether filling out an application for the home warranty is a bona fide service for which I can be paid? A4. Not specifically. However, in its new interpretative rule HUD restates its previous position that the mere taking of an application for a loan is not considered sufficient work to justify any fee. Therefore, because the work involved in taking a home warranty application is comparable to taking a loan application, it should be assumed that HUD would likewise find that completing a home warranty application would not be sufficient to justify any fee, regardless of how nominal it is. Q5. Are there any additional services I can perform for which I can be compensated under the new rule, such as reviewing the policy(s), providing counseling about the various options and answering questions? A5. Although HUD indicates that it will make determinations on a case by case basis, it did provide some examples that may qualify as compensable services. These examles did not include the type of counseling you describe, so it is uncertain whether HUD considers that to be a compensable service. The following are the examples HUD gave of services that MAY qualify for compensation: Conducting actual inspections of the items to be covered by the home warranty to identify any pre-existing condition that could affect coverage Recording serial numbers on the items to be covered under the policy Documenting the condition of the covered items by taking pictures Reporting any inspections to the home warranty company Q6. Does the rule provide any guidance or limitation on how much you can be compensated for this type of service? A6. The rule itself does not indicate what amount of compensation would be acceptable to HUD. However under existing RESPA provisions, if the service is deemed by HUD to be 10

12 compensable, the amount of compensation you can receive from the home warranty company must be reasonably related to the value of the services you provided. If HUD believes the fee is excessive compared to the amount of work you performed, it will consider it to be an illegal referral. Q7. What factors will HUD look at to determine if a payment is a prohibited referral? A7. HUD indicates that it will consider, among other things: Whether the agreement with the HWC is exclusive (i.e. you cannot promote any other warranty) If payment is made per transaction Whether future payments are adjusted based on the number of policies sold If there is a written agreement appointing the broker or salesperson the legal agent of the HWC Whether the HWC is responsible for the representations of the agent or broker Whether disclosure is made to the consumer of: o The fee that is paid to the broker or agent o The services provided in exchange for that fee o The fact that the consumer is not obligated to buy a policy or may buy one from another HWC. Q8. Does it make any difference if the fee is paid to the brokerage rather than the agent? A8. No. HUD makes no distinction in its rule between payments to agents or brokers; the analysis is the same. Q9. My brokerage has a marketing agreement with an HWC to provide marketing services for a flat fee. Under this agreement the HWC s banner is displayed on our website along with a link to information about the HWC. We also include an ad from the HWC in our brokerage newsletter, post their signage in our lobby and open houses and include the HWC s material in our listing/ buyer packets. Payment is not based on the number of warranties sold. Is this ok under the new HUD rule? A9. While the rule discusses marketing that is targeted directly at buyers and sellers, (i.e. the direct sales pitch ) it does not address such generalized marketing service agreements in any way. Prior to this rule, however, most RESPA experts advised brokers that as long as the compensation was not based on the number of policies sold and the fee paid was reasonably related to the value of the services, that they could be compensated for such generalized marketing services without violating RESPA. Q10. Currently we offer information about a home warranty company to our clients and that company pays our agents a modest fee ($50-60) for each policy they sell. It appears that HUD considers this to be a referral fee that violates RESPA. If so, what steps should we take to be in compliance with RESPA and the new rule? A10. Unfortunately, the new rule is vague in many areas and is subject to interpretation by even the top RESPA experts. Therefore it is difficult to provide a hard and fast list of steps you can take to assure compliance with HUD s new rule. However, based on the rule, the following are suggested steps you can take to avoid a RESPA violation: 1. Provide additional services. For example: 11

13 Conduct actual inspections of the items to be covered by the home warranty to identify any pre-existing condition that could affect coverage Record serial numbers on the items to be covered under the policy Document the condition of the covered items by taking pictures Report any inspections to the home warranty company 2. Only accept compensation that is reasonably related to the amount of work actually being performed 3. Make written disclosure to your client of the following: The fee you are receiving from the HWC The services you are providing in exchange for that fee The fact that the consumer is not obligated to buy a policy or may buy one from another HWC. 4. Have an agreement with the HWC which: Is not exclusive Appoints you to be the agent of the HWC Imposes responsibility on the HWC for the representations of your agents Q11. When does this rule go into effect? A11. Because it is an interpretative rule, it became effective on the date it was issued - June 25 th. HUD did accept comments for a 30 day period after issuance. NAR filed lenghty comments to the rule; however it is not known whether HUD will make any changes or clarifications to the rule as a result of those comments. Any modifications will be reported by OAR immediately. 12