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Daily Real Estate News | January 14, 2002
HUD Guidelines Make Transaction Fees Risky
Many real estate brokerages structure their compensation on the basis of commission—a percentage of the sales price paid by the buyer for the seller’s property. Some brokers offer their services for a flat fee.
Recently—in reaction to increasing costs and pressure to reduce commission rates—some brokers have begun to combine the two methods of compensation so that they’re paid a percentage of the ultimate sales price plus a flat amount. The flat amount is often described as a transaction fee, processing and handling fee, or regulatory compliance fee.
Although several federal court decisions indicate such fees are legal, the U.S. Department of Housing and Urban Development disagrees and may challenge your company if it adopts a commission-plus-flat-fee form of compensation.
One federal court looked at the legality of a $110 flat fee the buyers paid the broker. The buyers objected to the fee, alleging that the broker performed no services other than those provided in the ordinary course of the transaction.
The buyers claimed that the fee, paid to the broker in addition to a commission, amounted to nothing more than additional compensation to the broker. They charged that the fee violated Section 8(b) of the Real Estate Settlement Procedures Act, which states: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”
The broker asked the court to dismiss the lawsuit, claiming that the fee couldn’t constitute a RESPA violation because there was no third party sharing any portion of the fee. Without some split of the fee—or kickback—to a third party, the broker argued, the fee was lawful.
Acknowledging that few courts had addressed the issue, and looking to what little precedent did exist, the court held that a violation of the cited provision of RESPA requires the involvement of a third party. In this case, the buyers didn’t allege the broker had shared the fee with a third party, so the court concluded the fee was lawful and dismissed the suit.
Similarly, a federal appeals court recently reviewed the practice of a title insurance company that charged buyers more to record a deed than was required by the recorder’s office and retained the difference. The court concluded that the title company didn’t violate RESPA because the additional charge to the consumer wasn’t split with another party.
These judicial interpretations of Section 8(b) led HUD to issue a Statement of Policy on Oct.18, 2001, reiterating its position on unearned fees under RESPA.
HUD maintains that Section 8(b)’s prohibition of the giving or accepting of any portion of any charge other than for goods or facilities provided or services performed is intended to protect consumers from unnecessarily high settlement charges, or what HUD calls an “unearned fee.” HUD maintains that Section 8(b) can be violated by a single entity that charges a consumer a fee for which no, nominal, or duplicative work is done or by a single entity that charges a fee that exceeds the reasonable value of goods, facilities, or services provided.
HUD’s position would render it illegal for a broker to charge a consumer an “additional” fee unless additional bona fide services were provided that justified the increase. HUD’s recent Statement of Policy didn’t provide examples of what would constitute an additional service for which a fee could be charged. The general guidance would indicate, however, that a real estate broker who also sold a home warranty or provided loan origination services could charge a market value fee. Similarly, a listing broker could contract with a seller to be paid one amount if the listing brokerage sold the property and an additional amount if a cooperating brokerage brought about the sale. In that situation, the additional fee would be justified by the distinct services of the second brokerage, which found the buyer.
Although HUD’s interpretation isn’t binding on the courts, HUD is charged with enforcing the law. In addition to HUD’s enforcement powers, aggrieved consumers may still bring a private suit, as in the two cases cited earlier. Private enforcement efforts frequently take the form of class action lawsuits, which if successful result in very large judgments or settlements. RESPA violations can result in the recovery of treble damages or even criminal penalties, including fines or imprisonment or both.
Until the differences between the courts’ and HUD’s interpretations of RESPA are resolved, brokers must carefully examine the justification for any charge to consumers in addition to their traditional commission or flat fee. To play it safe, brokers should be sure they aren’t charging consumers additional fees for services that have traditionally been provided as part of the base compensation. Putting special labels on those fees, such as “transaction fees” or “processing fees,” will certainly call unwanted attention to them.
--Laurie Janik, general counsel, NATIONAL ASSOCIATION OF REALTORS, REALTOR Magazine, January 2002
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