Home warranty referral fees restricted under new RESPA rule

Fees paid to brokers/REALTORS® for “marketing” home warranties to sellers or buyers are illegal kickbacks or referrals and are prohibited under the Real Estate Settlement Procedures Act (RESPA), according to an announcement last week from the U.S. Department of Housing and Urban Development (HUD). The ruling took effect immediately.

HUD said that under Section 8 of RESPA, brokers/REALTORS® offering a home warranty are making a referral to a settlement service provider. Once HUD concluded that the “sales pitch” offered by licensees to consumers about the benefits of a home warranty is a referral, it logically invoked RESPA’s restriction of compensating real estate professionals for such referrals. HUD noted that REALTORS® are in a unique position to refer business and influence a homebuyer’s or seller’s selection of a home warranty company (HWC).

Offering home warranties to buyers is a common practice in residential real estate transactions.  As part of “selling” the home warranty, real estate salespersons and brokers can earn fees.  The question arose whether a payment from a HWC is an “earned” fee and permissible or does it fall within the “guise of payments for services rendered when no or nominal services were actually provided,” as was suggested in December by Ivy Jackson, former director of the Office of RESPA and Interstate Land Sales.

Is there ever an occasion when a real estate licensee may be compensated for “selling” a home warranty?  Yes.  HUD has offered some guidelines:

First and foremost, HUD requires actual service to be performed. The services must be actual, necessary and distinct from the primary services performed by a broker or agent.  HUD has suggested that recording serial numbers of equipment, inspecting equipment to be covered for pre-existing conditions or photographing equipment to be covered might attain the level of investment needed to be considered an “actual, necessary and distinct” service that would be compensable under RESPA.  HUD’s guidance in identifying what constitutes “actual, necessary and distinct” services is helpful but not necessarily determinative.  One must give careful thought to the service performed before taking a fee.

HUD would also consider contractual relationships between licensees and HWCs in which the HWC assumes responsibility for statements made by licensees to be indicative of a relationship through which a licensee may perform compensable services. HUD has suggested it will examine these relationships on a case-by-case basis to determine whether the licensee is truly the agent for the HWC and to ensure that the relationship is disclosed to the consumer as is also required under RESPA. 

These types of relationships are probably uncommon in today’s market, though some brokers and HWCs have moved in this direction in anticipation of an adverse ruling by HUD.   These progressive brokers have moved from arrangements with HWCs that pay fees only for successful transactions and have gone to marketing or administrative service agreements with HWCs where fees are earned for providing services distinct from the normal warranty sales pitch delivered when the agreement is negotiated.

The last factor to consider when evaluating whether your practice (or your office’s practice) of receiving compensation from HWCs complies with RESPA is to ensure that the fee is reasonable. Any fee lawfully paid under RESPA must be reasonably related to the actual service performed.

This is a provocative rule that will have a far-reaching impact on residential real estate practices.  Interpretive rules are typically exempt from public comment, however, HUD has invited comment from those who are interested.

If you have questions about how this rule will affect your office or if you seek to protect yourself from liability that may arise from accepting fees deemed illegal by HUD, please contact your counsel promptly.

James L. Goldsmith, Esq. and Brett M. Woodburn, Esq. are attorneys with Caldwell & Kearns and serve as general counsel to PAR. A substantial portion of their practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. They routinely counsel employers on employee relations issues as voices of the PAR Legal Hotline. They may be reached at realcompliance.com.