REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA): HUD ISSUES RESPONSE TO PUBLIC COMMENTS ON HOME WARRANTY COMPANY PAYMENTS TO REAL ESTATE AGENTS AND BROKERS

On November 23, 2010, the Office of General Counsel’s Helen Kanovsky with the Department of Housing and Urban Development “HUD” responded to public comments HUD received on the “Home Warranty Companies’ Payments to Real Estate Brokers and Agents” Interpretive Rule it published on June 25, 2010. HUD’s response was very clear that the interpretive RESPA rule they issued in June did not need to be changed. However, HUD did provide some clarification to the public by providing additional guidance relating to matters covered in the interpretive rule and from the public’s comments. HUD’s answered seven questions as listed below:

1. Question: Is a home warranty company’s flat fee payment (i.e. monthly or annual payment) to a real estate broker or agent for marketing a home warranty product directly to particular homebuyers or sellers a permissible payment under Section 8 of RESPA?

HUD Response: No, as provided in the interpretive rule, payments for marketing services directed to particular homebuyers or sellers are considered to be payments for affirmatively influencing their choice of settlement service providers and would therefore violate Section 8 of RESPA as an illegal kickback for a referral, regardless of whether the payment is made to the broker or agent on a “per transaction” or a “flat fee” basis.

2. Question: Is the list of items in footnote 2 of the interpretive rule an exhaustive list of the services that a real estate broker or agent can be legally compensated for by a home warranty company under Section 8 of RESPA?

HUD Response: No, the footnote itself begins with the introduction, “For example”. The list in the footnote is not exhaustive but exemplary of services that, in a particular case, may be compensable. However, as discussed in the interpretive rule, to be compensable the services must be services that are “actual, necessary and distinct from the primary services provided by the real estate broker or agent that are not nominal, and for which duplicative fees are not charged” (see fn.1 of the interpretive rule issued on June 25, 2010). Referrals of settlement service business are not compensable services. Therefore, payments made for “services” that were fabricated to disguise a payment to a real estate broker or agent for referrals and are not, in fact, “necessary” would be illegal under Section 8 of RESPA.

3. Question: What is meant by the statement in the interpretive rule that evidence in support of a determination that compensable services have been performed by a real estate broker or agent may include: “The real estate broker or agent is by contract the legal agent of the HWC, and the HWC assumes responsibility for any representations made by the broker or agent about the warranty product.”

HUD Response: While not conclusive, the fact that a home warranty company is willing to be legally committed by the work and representations of a real estate broker or agent who is compensated by the HWC for performing services is one indicator that those services provided are “actual, necessary, and distinct” and not nominal–i.e. that actual work is being performed by the real estate broker or agent for which the home warranty company is willing to assume liability. Specifically, such a legal relationship indicates the HWC has worked with the real estate broker or agent closely enough to understand the value of the services performed by the broker or agent, and to be confident enough of the broker’s or agent’s services and representations, that the HWC is willing to take responsibility for those services and representations. Conversely however, if in a contract with a consumer, for example, the HWC disclaims liability for acts and representations of the real estate broker or agent in connection with the home warranty, this may indicate that no actual services of value have been performed by the real estate broker or agent.

4. Question: Why is it a relevant factor in analyzing a potential Section 8 violation that a home warranty company’s payment to a real estate broker or agent was made under and exclusive representation arrangement?

HUD Response: Section 8 of RESPA prohibits payments for referrals and unearned fees. Stated another way, referrals are not compensable services under Section 8. See 24 CFR 3500.14(b). HUD’s interpretive rule states that, in initially evaluating whether a payment from an HWC to a real estate broker or agent is a violation of Section 8, HUD may look at whether the payment is tied to an arrangement that prohibits the broker or agent from receiving from a competitor comparable payment for comparable actual services. In other words, such an exclusive-representation agreement between the HWC and the real estate broker or agent is evidence of an unlawful-payment-for-referral arrangement whereby the real estate broker or agent is only being paid for steering customers exclusively to the HWC and its products. However, as it is further noted in the interpretive rule, if it is determined that the HWC’s payment is only for compensable services, the existence of an exclusive-representation arrangement would be permissible under Section 8.

5. Question: Does the interpretive rule prohibit payments from an HWC to real estate brokers or agents for general advertising services performed by the brokers or agents on behalf of the HWC?

HUD Response: No. The interpretive rule specifically prohibits compensation for marketing performed by a real estate broker or agent on behalf of an HWC when the marketing is directed to selling the HWC’s home warranty product to particular homebuyers or seller. HUD would evaluate the permissibility of compensation provided by an HWC to real estate brokers or agents for other advertising by applying the definition of “referral” in § 3500.14(f) of HUD’s RESPA regulations. For example, a reasonable payment for an advertisement by an HWC in a real estate broker’s or agent’s publication or on the broker’s or agent’s website would not, in and of itself, be a payment for a referral under RESPA. If the marketing services for which the HWC is paying the real estate broker or agent are services directed to a homebuyer or seller that have the effect of “affirmatively influencing” the selection by the homebuyer or seller of the HWC’s home warranty product in connection with the real estate settlement, then those marketing services would be subject to RESPA’s prohibitions on referral payments.

6. Question: Is a home warranty always considered to be a “settlement service” for purposes of RESPA coverage?

HUD Response: No. RESPA’s kickback and referral fee prohibitions are applicable in the context of “settlement services”, a term that is defined broadly under RESPA and HUD’s RESPA regulations. RESPA defines “settlement services” to include “any service provided in connection with a real estate settlement” and provides a nonexclusive listing of such services (12 USC §2602(3)). In its regulations HUD has long defined “settlement service” to include “any service provided in connection with a prospective or actual settlement…” (24 CFR 3500.2). As noted above and in the interpretive rule, “homeowner’s warranties” have been specifically included in HUD’s definition of “settlement service” since 1992 (24 CFR 3500.2(11)). Therefore, when a home warranty is “provided in connection with a prospective or actual settlement”, it is a “settlement service” under HUD’s regulatory interpretation of RESPA. In determining whether services involving a home warranty are provided in connection with a prospective or actual settlement, HUD would consider, among other things: (i) whether the charge for the home warranty is paid out of the proceeds at the settlement; and (ii) if the charge is not paid at settlement, whether the timing of the purchase of and payment for the home warranty indicates that the purchase is so removed from the settlement that it is not provided “in connection with” a settlement within the meaning of RESPA and HUD’s regulations. Items paid in connection with a RESPA-covered transaction, of course, may be paid and disclosed on the HUD-1/1A settlement statement as paid outside of closing (P.O.C) or through the accounting at settlement.

7. Question: Does the interpretive rule apply to situations beyond home warranty company payments to real estate brokers and agents, for example to payments by other settlement service providers to real estate brokers and agents?

HUD Response: The interpretive rule is specifically directed to home warranty company payments to real estate brokers and agents. However, the analysis in the interpretive rule is based on an interpretation of the RESPA statute and HUD’s existing regulations, which analysis may be applicable to payments made by other settlement service providers to real estate brokers or agents.

If you have any questions about the Home Warranty Interpretive Rule please contact the Sterbcow Law Group at www.respaattorneys.com