RESPA Lawyer Blog

The Department of Housing and Urban Development (HUD) issued an interpretive rule on June 26, 2010 in the Federal Register on the issue of how home warranty companies can pay real estate agents and real estate brokers under the Real Estate Settlement Procedures Act (RESPA) without violating Section 8(a) and 8(b).

The interpretive rule was released in response to a Feb. 21, 2008 unofficial staff interpretation letter that Paul Ceja of HUD's Office of General Counsel issued that caused a great deal of confusion in the real estate industry. Since the letter was issued The National Association of Realtors (NAR), Real Estate Settlement Providers Council (RESPRO), National Home Service Contract Association (NHSC), and others pressed HUD to clarify the rule on the subject of home warranty compensation.

HUD's new clarification breaks down the issue into three distinct categories:

1. Unlawful Compensation for Referrals: RESPA does not prohibit a real estate broker or real estate agent from referring business to a home warranty company. But RESPA does prohibit a real estate broker or agent from receiving a fee for merely referring or "marketing" a buyer or seller to purchase an insurance policy from the home warranty company. A referral by itself is not a compensable service for which compensation can be given and would be a violation of Section 8(a) illegal kickback and Section 8(b) unearned fees under RESPA.

2. Bona Fide Compensation for Service Provided: HUD's RESPA guidance rule says that Section 8(c) allows payment of bona fide compensation for services actually performed. HUD said that depending on the facts of a particular case (based on a case-by-case determination), a home warranty company may compensate a real estate broker or agent for services when those services are actual, necessary, and distinct from the primary services provided by the real estate broker or agent and those additional services must not be nominal or duplicative. An example would be a real estate agent filling out all the information required to issue a home warranty policy and submitting the policy to the home warranty company.

3. Reasonableness of Compensation: Lastly, HUD said they want to assess whether the value of the payment by the home warranty company is reasonably related to the value of the services actually performed by the real estate agent or broker and not just compensation for the mere referral of business. The compensation from the Home Warranty Company to the real estate agent must be based on the fair market value of the services performed in the area where real estate agent operates. For example if the fair market value is $200 dollars in New York but in Missoula the fair market value is $60 to fill out the home warranty application, fill in the registration codes for various appliances, and do some other functions then the real estate agent in Missoula should recieve $60 dollars for that work not $200 if that is the going rate in New York. HUD appears to have taken the position that charging $200 in Des Moine when the fair market value is $60 is unreasonable compensation.

The RESPA interpretive rule raises a large legal question on the issue of whether this rule expands the definition of who a settlement service provider is. Lenders do not typically require a home warranty policy to be purchased by a buyer (or seller) as a condition in securing a federally related residential loan. The result has been that in many jurisdictions across the United States the home warranty policy is paid outside of closing and not listed on the HUD-1.

The question we need clarification on is whether RESPA believes that all home warranty policies issued on the purchase of a home where a federally related mortgage is involved be listed on the HUD-1. If that is not the case does this interpretive rule extend to companies that traditionally were not considered settlement service providers (pest inspection companies, home repair companies, privacy protection companies, etc.) under the original definition?

Continue reading " REAL ESTATE SETTLEMENT PROCEDURES ACT: RESPA ISSUES INTERPRETIVE RULE ON HOME WARRANTY MARKETING AGREEMENTS " »

One question that we are routinely asked about is the timing of the Affiliated Business Arrangement disclosure form under the Real Estate Settlement Procedures Act "RESPA." The RESPA Affiliated Business Arrangement (AfBA) disclosure form is required to be given to a consumer whenever a settlement service provider refers that consumer to a another settlement service provider with whom the referring party has an ownership interest or other beneficial interest in.

The RESPA AfBA ownership threshold is any person or corporate entity who holds more than a one percent (1%) ownership in both companies. HUD says the referring party must give the affiliated business arrangement disclosure form to the consumer at or prior to the time of referral. If the AfBA disclosure form is only signed at the closing then HUD deems the disclosure to be out of compliance with the RESPA regulations. The Affiliated Business Disclosure form must describe the business arrangement that exists between the two settlement service providers and the AfBA disclosure must give the borrower an estimate of the referred settlement service providers fees.

The United States Department of Housing and Urban Development is seeking public comments relating to Section 9: "Required Use" under RESPA. "The Real Estate Settlement Procedures Act (RESPA): Strengthening and Clarifying RESPA's "Required Use" Prohibition Advance Notice of Proposed Rule making" was made public on June, 3, 2010.

HUD appears to be concentrating on home builder owned title and mortgage companies where homebuilders offered construction upgrades or discounts to consumers if the home buyers used their ancillary title or mortgage company. The controversy centered around a few homebuilders who offered consumers free upgrades (i.e. bonus rooms, automobiles, or other extravincentives) if the consumer used the home builders affiliated mortgage or title company. The controversy escalated when some of these free upgrades exceeded tens of thousands of dollars. The cost to use another mortgage or title company did not make sense because the consumer would lose out on the extravagant free upgrade. Some consumers felt like they had to use the home builders affiliated business because the incentive was so excessive they had no choice but to use the homebuilders mortgage company.

The affiliated business model is encouraged by HUD when the consumer saves money but some some felt like the practice that a few homebuilders engaged in did not really save the consumers money on the mortgage side because they claim the interest rates were higher.

HUD appears to be looking at how to clarify the incentive language under "Required Use" so that the incentive offered actually benefits the consumer yet still allows the consumer to shop around.

The comment period ends on September 1, 2010.
All interested parties wishing to submit a comment should direct their comments to:
Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW Room 10276, Washington, D.C. 20410-0500

Sylvia Hsieh with Lawyers USA recently interviewed several attorneys from across the United States on how the new Real Estate Settlement Procedures Act (RESPA) regulations have created confusion for both the real estate industry and for consumers. Hsieh's article "New Real Estate Settlment Procedure Act regs stir confusion, frustration" is a good article on how the rule is creating many challenges. For disclosure purposes she also interviewed Marx Sterbcow with the Sterbcow Law Group LLC for this article.