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 Home Warranty Companies' Payments to Real Estate Brokers and Agents

Buyer Beware

Home Warranty Companies' Payments to Real Estate Brokers and Agents

June 25, 2010 DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-5425-IA-01]

Real Estate Settlement Procedures Act (RESPA): Home Warranty

Companies' Payments to Real Estate Brokers and Agents

AGENCY: Office of General Counsel, HUD.

ACTION: Interpretive rule.

-----------------------------------------------------------------------

SUMMARY: Under section 8 of RESPA and HUD's implementing RESPA regulations, services performed by real estate brokers and agents as additional settlement services in a real estate transaction are compensable if the services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, the services are not nominal, and the payment is not a duplicative charge.

A referral is not a compensable service for which a broker or agent may receive compensation. This rule interprets section 8 of RESPA and HUD's regulations as they apply to the compensation provided by home warranty companies to real estate brokers and agents. Although interpretive rules are exempt from public comment under the Administrative Procedure Act, HUD nevertheless welcomes public comment on this interpretation.



DATES: Effective date: June 25, 2010. Comment Due Date: July 26, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding this interpretive rule to the Regulations Division, Office of General Counsel, 451 7th Street, SW., Room 10276, Department of Housing and Urban Development, Washington, DC 20410-0500. Communications must refer to the above docket number and title. There are two methods for submitting public comments. All submissions must refer to the above docket number and title.

1. Submission of Comments by Mail. Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-0500.

2. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at www.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically.

Note: To receive consideration as public comments, comments must

be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the

rule.  No Facsimile Comments. Facsimile (FAX) comments are not

acceptable.  Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available for public inspection and copying between 8 a.m. and 5 p.m. weekdays at the above address. Due to security measures at the HUD Headquarters building, an advance appointment to review the public comments must be scheduled by calling the Regulations Division at 202-708-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number through TTY by calling the toll-free Federal Information Relay Service at 800-877-8339. Copies of all comments submitted are available for inspection and downloading at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: For legal questions, contact Paul S. Ceja, Assistant General Counsel for RESPA/SAFE, telephone number 202-708-3137; or Peter S. Race, Assistant General Counsel for Compliance, telephone number 202-708-2350; Department of Housing and Urban Development, 451 7th Street, SW., Room 9262, Washington, DC 20410. For other questions, contact Barton Shapiro, Director, or Mary Jo Sullivan, Deputy Director, Office of RESPA and Interstate Land Sales, Office of Housing, Department of Housing and Urban Development, 451 7th Street, SW., Room 9158, Washington, DC 20410; telephone number 202-708-0502. These telephone numbers are not toll-free. Persons with hearing or speech impairments may access this number via TTY by calling the toll-free Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A homeowner's warranty is covered as a ``settlement service'' under

HUD's RESPA regulations at 24 CFR 3500.2. Accordingly, the framework for compensation of real estate brokers and agents for services performed on behalf of home warranty companies (HWCs) is established in RESPA and HUD's regulations, as discussed in an unofficial staff interpretation letter dated February 21, 2008, issued by the Office of General Counsel. In brief, services performed by real estate brokers and agents on behalf of HWCs 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).) 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).)

HUD has received inquiries regarding the application of this

framework to the compensation provided by HWCs to real estate brokers and agents for the selling of home warranties in connection with the sale or purchase of a home. In particular, interested parties have inquired about the legality of the HWCs providing compensation to real estate brokers and agents on a per transaction basis and about the scope of services provided on behalf of the HWC for which real estate brokers and agents can be compensated by the HWC.

II. This Interpretive Rule

This interpretive rule clarifies the legality under section 8 of

RESPA and HUD's implementing regulations of the compensation provided by HWCs to real estate brokers and agents, and it is provided in accordance with Secretary of HUD's delegation of authority to the General Counsel to interpret the authority of the Secretary. (See 74 FR 62801, at 62802.)

A. Unlawful Compensation for Referrals

RESPA does not prohibit a real estate broker or agent from

referring business to an HWC. Rather, RESPA prohibits a real estate

broker or agent from receiving a fee for such a referral, as a referral

is not a compensable service. (See 24 CFR 3500.14(b).) HUD's

regulations, at 24 CFR 3500.14(f), defines referral, in relevant part,

as follows:

[[Page 36272]]

  A referral includes any oral or written action directed to a

person which has the effect of affirmatively influencing the

selection by any person of a provider of a settlement service or

business incident to or part of a settlement service when such

person will pay for such settlement service or business incident

thereto or pay a charge attributable in whole or in part to such

settlement service or business. (Emphasis added.)

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; 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 an arrangements; and

   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,1 the existence of such

arrangements and agreements would not be an indicator of an unlawful referral arrangement, and would be permissible. (See discussion in Sections C and D below.)

1 Compensable services are 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.

B. Marketing by a Real Estate Broker or Agent Directed to Particular

Homebuyers or Sellers

In some circumstances, marketing services performed on behalf of an

HWC are not compensable services. In particular, a real estate broker or agent is in a unique position to refer settlement service business

and through marketing can affirmatively influence a homebuyer's or

seller's selection of an HWC. As a real estate broker and agent hold

positions of influence in the real estate transaction, a homebuyer or

seller is more likely to accept the broker's or agent's promotion or

recommendation of a settlement service provider. Therefore, marketing performed by a real estate broker or agent on behalf of an HWC to sell a homeowner warranty to particular homebuyers or sellers is a ``referral'' to a settlement service provider.

  Accordingly, in a transaction involving a federally related mortgage loan, 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. For

example, a real estate broker or agent actively promoting an HWC and its products to sellers or prospective homebuyers by providing HWC verbal ``sales pitches'' about the benefits of a particular HWC product or by distributing the HWC's promotional material at the broker's or agent's office or at an open house is considered to be a referral. Thus, compensating the real estate broker or agent for such promotion would result in a violation of section 8 of RESPA.

  Nothing precludes a real estate broker or agent from performing

services to aid the seller or buyer, or to increase the possibility

that the real estate transaction will occur and thereby benefit the

broker or agent. However, the broker or agent may not be compensated by the HWC for marketing services directed to particular homebuyers or sellers.

C. Bona Fide Compensation for Services PerformedSection 8(c) of RESPA and HUD's regulations allow payment of bona

fide compensation for services actually performed. (See 24 CFR

3500.14(g)(1)(iv).) HUD's regulations also allow persons in a position

to refer settlement service business to receive payments for providing additional compensable services as part of a transaction. (See 24 CFR 3500.14(g)(3).) Services performed by real estate brokers and agents on behalf of HWCs would be compensable as additional settlement services only if the services are actual, necessary and distinct from the primary services provided by the real estate broker or agent. Further, the real estate broker or agent may accept, and an HWC may pay to the broker or agent, a portion of the charge for the homeowner warranty only for services that are not nominal and for which there is not a duplicative charge. (See 24 CFR 3500.14(c).) HUD looks at the actual services provided to determine in a particular case whether compensable services have been performed by the real estate broker or agent

2 For example, conducting actual inspections of the items to

be covered by the warranty to identify pre-existing conditions that

could affect home warranty coverage, recording serial numbers of the

items to be covered, documenting the condition of the covered items

by taking pictures and reporting to the HWC regarding inspections

may be compensable services.

A determination that compensable services have been performed by the real estate broker or agent will be based on a review of the

particular facts of each case. Evidence in support of such a

determination may include:

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.

HUD will review evidence on a case-by-case basis to determine

whether compensation provided was a kickback for a referral or a legal payment for the compensable services. If it is factually determined that only actual compensable services have been performed by a real estate broker or agent in a transaction, it follows that transaction-based compensation of that broker or agent that is reasonable would not be an indicator of an unlawful referral arrangement and would be permissible.

Reasonableness of Compensation

As the final step in assessing the legality of the compensation for

these services, HUD will also assess whether the value of the payment by the HWC is reasonably related to the value of the services actually performed by the real estate broker or agent. In the context of loan origination, for example, HUD has stated that the mere taking of an application is not sufficient work to justify a fee under RESPA. In its Statement of Policy 1999-1, entitled ``Regarding Lender Payments to Mortgage Brokers'' (64 FR 10080, March 1, 1999), HUD stated:

Although RESPA is not a rate-making statute, HUD is authorized

to ensure that payments from lenders to mortgage brokers are

reasonably related to the value of the goods or facilities actually

furnished or services actually performed, and are not[[Page 36273]]

compensation for the referrals of business, splits of fees or unearned fees.

  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, HUD believes that 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).) Moreover, HUD also believes that 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. Congress was clear that for payments to be legal under Section 8, they must bear a reasonable relationship to the value received by the person or company making the payment. (S. Rep. 93-866, at 6551.) 64 FR 10086.

D. Conclusion

Accordingly, HUD interprets section 8 of RESPA and HUD's

regulations as these authorities apply to the compensation provided by home warranty companies to real estate brokers and agents as follows:

  (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;

  (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; and

  (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.

F. Solicitation of Comment

This interpretive rule represents HUD's interpretation of its existing regulations and is exempt from the notice and comment requirements of the Administrative Procedure Act. (See 5 USC 553(b)(3)(A)). Nevertheless, HUD is interested in receiving feedback from the public on this interpretation, specifically with respect to clarity and scope.

Dated: June 18, 2010.

Helen R. Kanovsky,

General Counsel.

[FR Doc. 2010-15355 Filed 6-24-10; 8:45 am]




 
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