Home Warranties and RESPA

James L. Goldsmith, Esq.
Brett M. Woodburn, Esq.

Offering home warranties to buyers is a common practice in residential real estate transactions. As part of "selling" the home warranty, real estate salespersons and brokers can earn fees. Because furnishing a home warranty is a "settlement service" the practice of compensating licensees falls within the regulatory purview of RESPA. Is such payment an 'earned' fee and permissible, or does this fee fall within the"guise of payments for services rendered when no or nominal services were actually provided" as was suggested by Ivy Jackson, Director of the Office of RESPA and Interstate land Sales in December 2009?

The question was answered, at least for the short-term, by HUD on June 25, 2010, when it issued an interpretive rule on this very issue. The rule is effective immediately, and though interpretive rules are exempt from public comment, HUD has invited comment from those who are interested.

HUD concluded that fees paid to licensees for 'marketing' home warranties to sellers or buyers are illegal kickbacks or referrals, and are prohibited under Section 8 of RESPA. In reaching this conclusion HUD found that licensees who offer to sell a home warranty are making a "referral" to a settlement service provider. After all, HUD noted, licensees are in such a unique position to refer business that they affirmatively influence a homebuyer's or seller's selection of a warranty company (HWC). Once HUD concluded that the 'sales pitch' offered by licensees to consumers about the benefits of a home warranty is a referral it logically invoked RESPA's prohibition against compensating real estate brokers or agents for such referrals.

Is there ever an occasion when a real estate licensee may be compensated for 'selling' a home warranty? Yes, and HUD has offered some guidelines. First and foremost, however, HUD requires actual service to be performed. The services must be actual, necessary and distinct from the primary services performed by a real estate broker or agent. HUD has suggested that licenses who record serial numbers of equipment; or inspecting equipment to be covered for pre-existing conditions; or photographing equipment to be covered might be services that are compensable under RESPA. HUD would also consider contractual relationships between licensees and HWCs in which the HWC assumes responsibility for statements made by licensees to be indicative of a relationship through which a licensee may perform compensable services. HUD has suggested it will examine these instances on a case by case basis to determine whether the licensee is truly the agent for the HWC, and to ensure that the relationship is disclosed to the consumer as is also required under RESPA. These types of relationships are probably rather uncommon in today's market, though some brokers and HWCs have moved in this direction in the anticipation of an adverse ruling by HUD. These progressive brokers have moved from arrangements with HWCs that pay fees only for successful transactions where warranties are sold and have gone to marketing or administrative service agreements with HWCs where fees are earned for providing services distinct from the normal warranty sales pitch delivered when the agreement is negotiated.

The last factor to consider when evaluating whether your practice (or your office's practice) of receiving compensation from HWCs complies with RESPA is to ensure that the fee is reasonable. Any fee lawfully paid under RESPA must be reasonably related to the actual service performed. This is a rather provocative rule that will have a far reaching impact on residential real estate practices. If you have questions about how this rule will affect your office, or if you seek to protect yourself from liability that may arise from accepting fees deemed illegal by HUD, please contact your counsel promptly.

Mr. Goldsmith and Mr. Woodburn are attorneys with Caldwell & Kearns and serve as general counsel to PAR. A substantial portion of their practices are dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. They routinely counsel employers on employee relations issues as two of the voices of the PAR Legal Hotline. They may be reached at www.cklegal.net.