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OverviewThe National Association of Realtors asked the Department of Housing and Urban Development (HUD) for clarification on an unofficial staff interpretation HUD had issued on February 21, 2008. In that interpretation, HUD's Office of General Counsel opined that services performed by real estate brokers and agents on behalf of a home warranty company (HWC) are compensable as additional settlement services if the services are actual, necessary and distinct from the primary services provided by the real estate broker or agent [See 24 CFR 3500.14(g)(3)], and allowed that the real estate broker or agent may accept a portion of the charge for the homeowner warranty only if the broker or agent provides services that are not nominal and for which there is not a duplicative charge. [See 24 CFR 3500.14(c)]
In today's Federal Register, HUD's Office of General Counsel has published an Interpretive Rule which interprets Section 8 of the Real Estate Settlement Procedures Act (RESPA) and HUD's regulations as they apply to the compensation provided by home warranty companies to real estate brokers and agents. An interpretive rules is exempt from public comment under the Administrative Procedure Act; however, HUD is providing a public comment period, commencing today and continuing to July 26, 2010.
HUD's Interpretive Rule holds that an HWC's compensation of a real estate broker or agent for marketing services that are directed to particular homebuyers or sellers would be a payment that violates Section 8 of RESPA as an illegal kickback for a referral of settlement service business. This obviously upholds HUD's historic view that a referral is not a compensable service for which a broker or agent may receive compensation.
However, on a case-by-case basis, compensation may be permissible when the services provided are actual, necessary, and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and for which there is a duplicative charge.
The amount of the compensation from an HWC that is permitted under Section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business, pursuant to the guidelines offered in HUD's Statement of Policy 1999-1. HUD provides several examples that would not constitute an illegal kickback.
(1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under Section 8 of RESPA.
(2) Depending upon the facts of a particular case, an HWC 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 when those additional services are not nominal and are not services for which there is a duplicative charge.
(3) The amount of compensation from the HWC that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.
Examples of Permissible Compensation
To evaluate whether a payment from an HWC is an unlawful kickback for a referral, HUD may look in the first instance to whether, among other things:
- The compensation for the HWC services provided by the real estate broker or agent is contingent on an arrangement that prohibits the real estate broker or agent from performing services for other HWC companies (i.e., if a real estate broker or agent is compensated for performing HWC services for only one company, this is evidence that the compensation may be contingent on such an arrangements).
- Payments to real estate brokers or agents by the HWC are based on, or adjusted in future agreements according to, the number of transactions referred. If it is subsequently determined, however, that the payment at issue is for only compensable services, the existence of such arrangements and agreements would not be an indicator of an unlawful referral arrangement, and would be permissible.
Pricing the Compensation
In analyzing whether a particular payment or fee bears a "reasonable relationship to the value of the goods or facilities actually furnished or services actually performed," payments must be commensurate with that amount normally charged for similar services, goods or facilities.
If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate may be used as evidence of a compensated referral or an unearned fee in violation of Section 8(a) or (b) of RESPA. [See 24 CFR 3500.14(g)(2)]
The market price used to determine whether a particular payment meets the reasonableness test may not include a referral fee or unearned fee, because such fees are prohibited by RESPA.
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Home Warranty Companies' Payments to Real Estate Brokers and Agents - Interpretive Rule
RESPA: 24 CFR Part 3500 FR: Vol. 75, No. 122, 36271-36273 (06/25/10)
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