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Industry News, Legal IssuesHome warranty referral fees restricted under new RESPA rule
Fees paid to brokers/REALTORS® for “marketing” home warranties to sellers or buyers are illegal kickbacks or referrals and are prohibited under the Real Estate Settlement Procedures Act (RESPA), according to an announcement last week from the U.S. Department of Housing and Urban Development (HUD). The ruling took effect immediately.
HUD said that under Section 8 of RESPA, brokers/REALTORS® offering a home warranty are making a referral to a settlement service provider. 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 restriction of compensating real estate professionals for such referrals. HUD noted that REALTORS® are in a unique position to refer business and influence a homebuyer’s or seller’s selection of a home warranty company (HWC).
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. The question arose whether a payment from a HWC is an “earned” fee and permissible or does it fall within the “guise of payments for services rendered when no or nominal services were actually provided,” as was suggested in December by Ivy Jackson, former director of the Office of RESPA and Interstate Land Sales.
Is there ever an occasion when a real estate licensee may be compensated for “selling” a home warranty? Yes.  HUD has offered some guidelines:
First and foremost, HUD requires actual service to be performed. The services must be actual, necessary and distinct from the primary services performed by a broker or agent. HUD has suggested that recording serial numbers of equipment, inspecting equipment to be covered for pre-existing conditions or photographing equipment to be covered might attain the level of investment needed to be considered an “actual, necessary and distinct” service that would be compensable under RESPA. HUD’s guidance in identifying what constitutes “actual, necessary and distinct” services is helpful but not necessarily determinative. One must give careful thought to the service performed before taking a fee.
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 relationships 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.Â
These types of relationships are probably uncommon in today’s market, though some brokers and HWCs have moved in this direction in anticipation of an adverse ruling by HUD.  These progressive brokers have moved from arrangements with HWCs that pay fees only for successful transactions 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 provocative rule that will have a far-reaching impact on residential real estate practices. Interpretive rules are typically exempt from public comment, however, HUD has invited comment from those who are interested.
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.
James L. Goldsmith, Esq. and Brett M. Woodburn, Esq. are attorneys with Caldwell & Kearns and serve as general counsel to PAR. A substantial portion of their practice is 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 voices of the PAR Legal Hotline. They may be reached at realcompliance.com.
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The attorneys of Caldwell & Kearns, P.C. serve as PAR's legal counsel and are the attorneys PAR members speak to on the Legal Hotline. For more information, visit caldwellkearns.com. |
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It’s all about educating the Buyers and Sellers to the pro’s and cons associated by a Home Warranty. Agents take time and sometimes considerable time to explain what and why a HW should be considered. Ultimately it is usually the consumer who makes the final decision unless an agent purchases the product. Maybe the best solution to this issue is for the HWC pass on the savings to the consumer by lowering the premiums thus avoiding the problem entirely. The products have value to the consumer regardless how we agents are compensated or not.
I agree with Harry’s comment on the time it takes to learn about the protection offered by a HWC, explain the home warranties to your clients, and in most cases to order the product either on-line or by phone. This should be explained to your clients in your Business Affliation Agreement that you or your company receive compensation from the HWC just as you do from mortgage, title, and insurance companies. Home warranties provides a degree of protection for all parties in the transaction.
This seems to make sense. Whenever a Broker or Agent refers a settlement service to a client and receives a fee for the referral, there is always the potential for harm to a consumer. In general, informing your client of the benifits of a home warranty is a fairly nominal service.
From my reading of this article, agents cannot be compensated by HWC now according to RESPA except in those cases outlined above; that should not prevent a seller (or buyer) from being presented with the information and making their own decision whether they want to purchase one or not. Or have the agents pay for it themselves (see Kathleen’s comment). As long as the AGENCY/AGENT does not accept any type of fee/compensation back from the HWC. Any thoughts?
Fees received by a Real Estate Company for presenting to a buyer or seller the opportunity to insure items related to a listing or sales agreement is a service provided by the agent. It also insures the buyer and the seller if any items fail before or after closing.
This is a service and takes time to explain the opportunity of a HWC to a buyer or seller if the agent would make the presentation. It is a service over and above and protects the agent, the company and the buyer if a HWC is agreed to; however, I will abide with RESPA’s decision until they come to a better understanding of the need for a buyer or seller to have a HWC. It eleminates a liability in many cases.
What if the agent PAYS for the Home Warranty, or splits the cost with the co-op agent??
Very interesting article–sure to be in my instructor’s notes!