Does Your “Administrative Broker Commission” Violate RESPA?

May 20, 2009

Nash & Lodge, PLLP
By:  Stephen J. Nash, Esq.
nash@nashandlodge.com

The U.S. District Court of the Northern District of Alabama, Southern Division found that a $149.00 administrative commission fee violated RESPA in a class action lawsuit against RealtySouth. The class consists of over 30,000 consumers. To my knowledge, this is the first case to make such a determination. While the decision does not technically apply to real estate brokers in Minnesota it certainly will encourage other lawsuits over “junk fees” whether charged by a real estate broker, lender or title company.

The underlying basis for the lawsuit was that the fee violated section 8(b) of RESPA in that it allegedly was a fee for which no service was performed. The court ultimately found that RealtySouth did, in fact, provide no specific service for this fee. While RealtySouth argued that it covered general increases in overhead costs such as regulatory compliance and technology, the court determined that they were not “settlement-related and/or provide little or no benefit to the borrower, they cannot defeat a Section 8(b) no services claim.” It is interesting to note that if the fee was not “settlement-related” then RESPA should not even apply. None-the-less, the court applied RESPA and found that RealtySouth did not prove that it provided services to justify the fee charged.

Part of the difficulty of applying RESPA to fees is that it is extremely difficult to identify the services provided and prove that the charge is reasonable for those services. What makes this task even more difficult is that quite often the services identified to support the fee are services that, arguably, are already being paid for with another fee, in this case, the commission.

If a separate fee is going to be charged to the consumer, you must carefully identify what services are provided for that fee. If the services that you identify are services that are traditionally covered by another fee, such as the commission, you are going to run into trouble. Once you have clearly identified the services being provided for the separate fee, you must make sure that your contract with the consumer clearly sets out the services being provided for the separate fee.

You must then determine how you will be able to prove the reasonable value of the services covered by the separate fee. This can be extremely difficult because there generally is no separate market for these fees or the value varies from case-to-case.

The other possible avenue to avoid this problem is to not charge a separate fee. Instead, make the additional charge a part of the commission. In other words, you are charging a commission of 6% plus $149. This is a blended commission – part percentage and part flat fee. I believe that since there is no separate fee, all the services provided fall under that fee. The consumer can then determine the reasonableness of the overall fee.

In this upside down world, there is a risk associated with everything we do and the mere fact that something has been around for a while does not prevent the practice from being determined to be a violation. Even if you change your practice today, what you did in the past could come back to haunt you today (the RealtySouth case goes back to a fee charged in 2004). In this particular case, I have always taken the position that there should not be a separate “administrative” fee but, instead it should be made part of the commission because I couldn't see how you could prove the reasonable value of the separate fee. While this case does not state that my position is correct, the rational used by the court does not appear to support an argument that my position is incorrect.

While I do not fully agree with the RealtySouth decision, it would be unwise to ignore it. If you are presently charging a separate fee (especially an “administrative” fee) it would be wise to discontinue the practice. If you charge a separate fee you must clearly spell out what services are being provided for that fee and be prepared to prove that the fee charged is reasonable or increase your base fee so that there is no separate fee.

NOTICE

The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract are, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation.