The following questions and answers relate to important Real Estate Settlement Procedures Act (RESPA) issues facing REALTORS® in their daily practice.
Can a broker charge a transaction or administration fee?
A federal district court recently ruled in Busby v. JRHBW Realty, Inc. d/b/a RealtySouth that a buyer’s broker’s $149 administrative brokerage (ABC) fee was not sufficiently related to any specific settlement service performed for the buyer’s benefit, resulting in a violation of Section 8(b) of RESPA. Section 8(b) prohibits charging for “real estate settlement services” unless the fee charged is for “services actually performed.” This case will likely be appealed.
Laurie Janik, General Counsel for the National Association of REALTORS®, made the following comments on April 29, 2009 (www.realtor.org/letterlw.nsf/pages/0409busby?OpenDocument&Login):
“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 11th 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. …
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. … Disclosure of the brokerage firm’s compensation should clearly indicate that both the commission-based 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.”
XYZ Mortgage Company has a 60-percent ownership interest in a real estate company. Is it a RESPA violation if the real estate agents supply coupons for a $200 discount on loan applications to the company’s buyer-clients and customers? The real estate company is not paying the $200.
Providing $200 discount coupons to buyers would tend to have the effect of affirmatively influencing the buyer’s choice of lenders so it would appear to be a referral.
An Affiliated Business Arrangement (ABA) exists when a person in a position to refer settlement business, such as a real estate broker or an “associate” of such person, has an affiliate relationship with, or a direct or beneficial ownership interest of more than 1 percent in, an entity to which the business is referred, such as a title company or lender.
A real estate company that has an affiliate relationship with a title company, lender or other settlement service provider can refer a client or customer to that entity and not violate RESPA, but only if:
- The broker provides the ABA Disclosure Form required under RESPA.
- The party is not required to use the services of the affiliated mortgage company or other settlement service provider.
- Nothing of value, other than a possible return on an ownership interest or franchise relationship, is paid to or received by the broker in return for the referral.
- The ownership interest or franchise relationship does not involve any sham companies.
In other words, an ABA Disclosure Statement must be given to avoid RESPA liability. See the sample statement on Page 16 of the February 2005 Legal Update, “Common Practice Pitfalls,” available online at www.wra.org/LU0502 or on the Department of Housing and Urban Development’s website at www.hud.gov/offices/hsg/sfh/res/resappd.cfm.
A commercial real estate broker rents office space to a mortgage banker and a title insurance company. Is there a RESPA violation if the broker agent charges rent based on a formula that reflects the amount of business referred by either tenant?
Section 8 of RESPA prohibits a person from giving or accepting anything of value in exchange for the referral of settlement service business. Under RESPA, a “thing of value” is any payment, advance, funds, loan, service or other consideration. It can be personal property items, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing money that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another’s expenses, or the reduction in credit against an existing obligation. Other examples of a thing of value include accelerated compensation paid sooner than normal (e.g., paid before instead of at closing) or a donation to another settlement service provider’s favorite charity.
A real estate agent has become affiliated with a mortgage lender that is not in any way related to the real estate brokerage with which the real estate agent is associated. When offering to assist buyers with whom the real estate agent is working in securing financing for their purchase, what, if any, disclosure is required?
The fact that the real estate brokerage is not directly affiliated with the mortgage lender does not affect the real estate agent’s responsibilities under RESPA in this scenario. If the real estate agent is referring a customer to a mortgage lender with whom the real estate agent is affiliated, then the real estate agent should provide an ABA Disclosure Statement to the person being referred in accordance with RESPA. In addition, to be compliant with the requirements of RESPA, the real estate agent cannot require the customer to use a particular mortgage lender, and the only thing of value that can be received by the real estate agent from the ABA with the lender, other than generally permitted compensation, is a return on an ownership interest. (See HUD’s website at www.hud.gov/offices/hsg/ramh/res/settleservices.pdf.)
If a lender and a real estate agent run an ad together and both pay for the ad, does this violate RESPA?
If the bank paid for a joint ad for both the bank and a real estate broker, that would be considered a RESPA violation in the form of an illegal kickback. However, if the broker and the bank shared the cost of the ad proportionately, then it would not be a RESPA violation.
REALTOR® Practice Tip: REALTORS® should avoid referral fees to settlement service providers and provide the ABA Disclosure Statement when referring parties to affiliated service providers.
Resources
Please review the November 2006 Legal Update, “RESPA and the Real Estate Broker,” online at www.wra.org/LU0611, and the May 2007 Legal Update, “Referrals to Service Providers,” online at www.wra.org/LU0705, for an in-depth discussion of RESPA and referrals to service providers.
Debbi Conrad is Director of Legal Affairs for the WRA.