Wisconsin REALTORS® Association - Legal Hotline Hottips
Legal Hottips - March 31,
2008 RESPA ALERT Two issues regarding RESPA have recently surfaced, one
in a lawsuit and one in an interpretative letter from HUD.
REALTORS® would be well-served to closely examine their practice
with regard to home warranty fees and any administrative or transaction
fees charged in their transactions. RESPA Class Action Regarding Broker Administrative Fee In Busby v. JRHBW Realty, Inc., 513 F.3d 1314 (11th Cir. 2008), a buyer was charged a $149 "Administrative Brokerage Commission" (Fee) in a transaction where the brokerage also received commission. The brokerage charged all of its clients the Fee, both buyers and sellers. The buyer filed a lawsuit against the Brokerage alleging that the Fee violated the Real Estate Settlement Procedures Act (RESPA). The buyer claimed that the Fee violated RESPA because the brokerage did not provide any services to support the Fee. Section 8(b) prohibits receiving payment for a real estate settlement service where no services were actually performed. 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 loan. The trial court denied the motion for class certification, and the buyer appealed. 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 looked at 2001 Statement of Policy (SOP) (http://www.hud.gov/content/releases/respafinal.pdf) issued by the U.S. Department of Housing and Urban Development (HUD). 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." Therefore, 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. Next, the court considered whether this matter was appropriate for class certification. The trial court had ruled that the lawsuit was not appropriate for a class action because the trial court would need to analyze each specific transaction to determine if services were provided by the brokerage in exchange for the Fee. The Court of Appeals reversed the trial court. Since the buyer argued that no services were provided by the brokerage, the court ruled that the trial court did not need to make a factual analysis of each transaction. If the brokerage could show that it provided any services for the Fee, then the buyer's class action would fail. Accordingly, the case was sent back to the lower court for further review. For additional information about this case, visit NAR's Letter of the Law at http://www.realtor.org/letterlw.nsf/pages/0308busby. Although no substantive ruling has yet been made in this case, this represents one more federal court that may adopt HUD's interpretation of Section 8(b) of RESPA. The Seventh Circuit, which has jurisdiction over Wisconsin, has ruled that section 8(b) of RESPA applies only when the fee charged is split with a third provider or party. However, the decision in Echevarria v. Chicago Title & Trust Co., 256 F.3d 623 (7th Cir. 2001), was made before HUD issued the 2001 SOP. In fact, the 2001 SOP was issued, in part, due to the Seventh Circuit's decision in Echevarria that was made, "absent a formal commitment by HUD to an opposing position.."Id. at 630. The Echevarria case offers some measure of protection to Wisconsin REALTORS®, but it does not eliminate the possibility of HUD scrutiny under its 2001 SOP along with penalties and fines. Tips for Broker Transaction or Administrative
Fees READ MORE ABOUT IT: Home Warranty Processing Fees HUD's Assistant General Counsel for RESPA issued an unofficial interpretation letter on February 21, 2008 regarding marketing agreements and administrative service agreements between home warranty companies and real estate brokers or agents. Under these agreements, the real estate licensees promised to perform numerous services to promote the home warranty, but were compensated only when a consumer bought a home warranty. The interpretative letter concludes that these practices were violations of section 8 of RESPA. The experience of HUD's enforcement staff indicates that it would be hard for real estate brokers and agents to show that the services they provide in connection with a home warranty program merit any additional compensation in accordance with RESPA and HUD regulations. Under RESPA, home warranties are considered to be settlement services. Section 8(a) of RESPA prohibits giving or accepting a fee or a kickback for the referral of settlement services in connection with a federally related mortgage loan. Section 8(b) prohibits giving or accepting any part of the charge for rendering a settlement service other than for services actually performed. The referral of a settlement service (with limited exceptions) is not compensable under RESPA and nominal services also are not compensable under RESPA. A referral is any oral or written communication or action directed to a person that has the effect of affirmatively influencing the person's selection of a settlement service provider. A settlement service provider who is in a position to refer settlement service business, like a real estate broker or agent, may receive additional compensation for providing additional settlement services only if those additional services are actual, necessary and distinct from the primary services provided by that person in the real estate transaction. The described payments relative to the home warranties do not appear to be bona fide compensation because the payments are based upon the number of successful transactions. They do not appear to relate to any services actually performed. In these types of situations, HUD looks at whether the payments are made for referrals - in violation of RESPA - rather than for compensable services, how the persons are paid, whether it is an exclusive arrangement, and whether the activity involved amounts to an endorsement of the particular settlement service provider. This interpretative letter appears to apply some similar
criteria to test the legitimacy of payments to real estate brokers for
home warranty services that is used to test the legitimacy of lender
payments to mortgage brokers. See the discussion of RESPA Statement of
Policy 1999-1, The bottom line is that brokers who have arrangements with home warranty companies may wish to examine whether they are really earning any fees paid to the broker. It may also be necessary to review the provisions for home warranty programs in the various addenda used throughout the state and consider whether any language referencing payment of fees to the broker should be modified or eliminated. READ MORE ABOUT IT: This Wisconsin REALTORS® Association Best of the Legal Hotline service is provided for you by the WRA's Legal Affairs Department. The service should be considered a general statement of applicable legal principles. Given this format, it is impossible to fully address all potential legal issues which might apply in any particular situation. A determination of any individual's legal rights in a transaction can only be obtained after complete analysis of the law and its applicability to the particular fact situation. Please contact the WRA Legal Hotline if additional information is needed, or private counsel, if legal advice is needed. Thank you for using the Wisconsin REALTORS® Association Best of the Legal Hotline service. Debbi Conrad |