HUD Clarifies Rules For Brokers And Agents Selling
December 14, 2010
Nash Law Firm
By: Stephen J. Nash
nash@nash-law.com
For many years real estate brokers and agents have been paid by home warranty companies when home warranties were purchased. The question addressed by HUD was whether such payments violate section 8 of RESPA. If so, the payments would be considered "kickbacks" which would subject real estate brokers and agents who received such payments to enforcement actions by HUD and/or the Minnesota Department of Commerce even if they no longer receive such payments.
In Minnesota we have already faced a similar situation with respect to real estate broker and agent ownership of affiliated title companies which HUD and the Minnesota Department of Commerce determined to violate RESPA. Over the last three years the Minnesota Department of Commerce has brought enforcement actions against hundreds, if not thousands, of real estate brokers and agents alleging that the payments that they received constituted "kickbacks" even though most of the brokers and agents had already gotten out of these relationships or did so as soon as the Minnesota Department of Commerce made it's position clear.
Those who have ever received such payments should take special interest in the positions ultimately taken by HUD since they cannot undue what has been done and and adverse ruling could exposed them to an enforcement action.
HUD does not prohibit a real estate broker or agent from referring business to a home warranty company; however, payment for such a referral is considered a "kickback". On the other hand, services that are "actual, necessary and distinct from the primary services provided for by the real estate broker or agent, that are not nominal, and for which duplicative fees are not charged." are compensable.
So we know that a referral by itself is not considered a compensable service but how do we determine if the services provided meet the above standard?
I. When Can a Home Warranty Company Pay a Broker or Agent?
In 2008 Paul Ceja, assistant general counsel for issues related to the Real Estate Settlement Procedure Act (RESPA), said that payments to real estate agents or brokers by home warranty companies that are contingent on a particular consumer's purchases of a home warranty were "likely" violations of RESPA's anti-kickback provisions. Since this was an "unofficial staff interpretation" it did not constitute a rule, regulation or interpretation. Kind of like being "slightly pregnant".
The National Association of Realtors (NAR) then requested a clarification to alleviate this "slightly pregnant" condition..
On June 24, 2010, HUD published an interpretive rule stating that home warranty companies may only compensate real estate agents and brokers for services not related to marketing, such as conducting inspections of items to be covered by a warranty, and recording serial numbers of items to be covered.
The following are factors that HUD stated would be considered in determining whether a payment from a HWC is an illegal kickback for a referral:
- 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 HWCcompanies; e.g., 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 arrangements; and
- Payments to real estate brokers and agents by the HMC are based on, or are adjusted in future agreements according to, the number of transactions referred.
Services to be compensable must be "actual, necessary and distinct from primary services provided by the real estate broker or agent". Said service cannot be "nominal" and the broker or agent cannot be paid "duplicative" charges.
While each case must be individually reviewed, the following are factors cited by HUD:
- Services - other than referrals - to be performed are specified in a contract between the HWC and the real estate broker or agent, and the real estate broker or agent has documented the services provided to the HWC;
- The services actually performed are not duplicative of those typically provided by a real estate broker or agent;
- 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; and
- The real estate broker or agent has fully disclosed to the consumer the compensable services that will be provided and the compensation arrangement with the HWC, and has made clear that the consumer may purchase a home warranty from other vendors or may choose not to purchase any home warranty.
II. What Can the HWC Pay?
The HWC can only pay what is determined to be "reasonably related to the value of the services actually performed by the real estate broker or agent." Even if you can navigate through the hurdles of when you can be paid, it will be difficult to overcome this last requirement. How does a real estate broker or agent prove the reasonable value for the services they have provided? What you may consider reasonable may not be considered reasonable by HUD or the Minnesota Department of Commerce. Who do you think will win that argument?
III. Conclusion
This interpretation of RESPA is not surprising to me and is in many ways much easier to apply than the rules regarding affiliated title companies. If you are currently receiving payments from a HWC you must thoroughly review RESPA and the latest HUD interpretation. Real Estate brokers should adopt rules with respect whether an agent can accept such payments and, if so, the rules that must be followed to comply with RESPA. Files must be documented to establish that RESPA has been complied with and retained in case of a future enforcement action.
If you are contemplating entering into a contract with a HWC to receive payments based upon a structure that the HWC complies with RESPA, what protection is the HWC giving you in case of future enforcement actions or lawsuits? Lawsuits and enforcement actions are expensive even if you prevail.
Cost is not the only concern: Are you willing to risk your real estate license? You hold your license at the discretion of the state. This gives the Minnesota Department of Commerce tremendous power over you, including the ability to take your license.
For those of you who are not currently receiving payments from an HWC and have no plans on receiving such payments in the future, there is one more question you must ask before you are home free: have you ever received such payments? If the answer is yes, you are not yet out of the woods. If an act is deemed to violate RESPA today, the same act violated RESPA back in 2006. Ignorance of the violation is not a defense. The fact that HUD did not publish and official interpretation until 2010 is not a defense to acts committed before the interpretation.
While we don't know what HUD or the Minnesota Department of Commerce will do in this situation, if recent history has any bearing, there is cause for concern.
In 1995 Universal Title (later acquired by First American Title) began marketing interest in affiliated title companies to brokers and agents. Law firms gave legal opinions that the affiliated title companies were a legal way for brokers and agents to be compensated for title related services. Thousands of brokers and agents became owners of affiliated title company over the next decade without a problem. In 2006 the Minnesota (with HUD behind them) commenced an enforcement action against First American and subsequently against hundreds of real estate brokers and agents for their involvement with affiliated title companies (many were not associated with First American).
Most real estate brokers and agents did not believe and still do not believe that they violated RESPA yet they still got entangled in a massive enforcement action.
If this happened to real estate brokers and agents who got involved with affiliated title companies, would anyone be surprised if the Department of Commerce commenced another massive enforcement action against all of the real estate brokers and agents that received payments from HWC's? Sounds like a good source of revenue for a state that is looking at massive cuts and great PR for the Department of Commerce.