Wake-Up Call to Brokers

A number of articles have appeared in national and state trade magazines relating to two very important issues. These issues are so important that they deserve local attention as well. Both issues involve HUD interpretations of common broker practices.

The first practice relates to charging, in addition to a commission, a "transaction", "conveyance", "compliance" or other flat-rate fee. Doing so may be a RESPA violation as has been proved in major litigation in a federal court. The problem is that the fee does not relate to an extra service that would otherwise be withheld. Paying a fee in the absence of an identifiable service is a RESPA violation.

The Pennsylvania Association of REALTORS® ("PAR") tackled the issue many years ago by implementing forms changes to listing and buyer agency contracts whereby the parties were charged a "blended fee." The concept behind the blended fee is that the percentage and flat-rate portions of the fee are charged for all of the service to be provided. There is no splitting of the services between the traditional commission and the transaction or other fee.

On January 21, 2010, HUD disseminated a letter in which it confirmed that blended fees do not violate RESPA. The consumer, however, must have a contract with the licensee where the fees are clearly identified.

Since the blended fee is paid for all of the services provided, it makes sense to dispense with the name commonly used to refer to the flat fee. In other words, avoid all reference to "transaction", "conveyance", "compliance" or other flat-rate fee when referring to the flat portion of this blended fee. The fee is your fee and it is charged for all of the services provided. Have the settlement agent calculate your fee and the splits accordingly and assure that they are entered in one location on the settlement sheet.

Those who still charge transaction fees run the risk that a claim will be made that this additional fee is illusory and pays for no additional service. By rolling it into your blended fee and charging the blended fee for all of the services, there is no question but that all fees go for services actually provided.

The second issue deals with the placement of home warranties. A lengthier article recently appeared in PAR's "Just Listed." If you have not seen it, here is an opportunity to at least become acquainted with the issue.

In what seems to be a reversal of a prior position, HUD has issued several "informal" letters suggesting that payments made by home warranty companies to real estate licensees constitutes a violation of RESPA. Lawsuits have been filed against warranty companies for alleged RESPA violations. At least one of the suits has named a real estate broker as a defendant for having participated in the RESPA violation.

The alleged RESPA violation is that the fees paid to licensees by warranty companies are actually "kickbacks" for the referral and that no, or nominal, services were provided. The concept is that enrollment of a buyer in a home warranty program is such a nominal service that it really does not warrant a fee. This is especially so when buyer agents routinely advise clients of the benefit of a home warranty, whether they are being paid or not.

RESPA's "informal" position is not a final say on this matter. The National Association of REALTORS® has weighed in and is urging HUD to withdraw its unofficial staff interpretation while the matter is further considered.

Many brokers are not waiting for a final decision on the matter and have altered their practices by not accepting home warranty "commissions" on a transaction-per-transaction basis. Rather, these brokers are entering into agreements with warranty companies to provide general marketing services, advertising, promotional literature and other activities that will promote the use of a particular company's warranty services. In exchange, the warranty companies are paying an annual or monthly fee that is commensurate with this service, rather than a fee based upon the placement of an individual warranty. Many of these companies have stopped passing on warranty company payments to licensees in an effort to avoid any appearance of a transaction-by-transaction payment.

What you do in your practice is a matter of personal choice. Understand that being charged with RESPA violations can be costly and may lead to civil suits for return of all payments that may have been made. We cannot predict what the outcome will be, but we suggest that you consult your counsel if you have any question as to the acceptance of home warranty company fees or when charging blended fees as discussed above.

Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2009
All Rights Reserved

Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.