12.30.08

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

       

When the real estate economy goes bad, enforcement actions are sure to follow.  Over the last few years we have seen a dramatic increase in enforcement actions at all levels.  Affiliated relationships, marketing agreements and various charges are under attack.  States and HUD have gone after national real estate companies, title companies and builders for various alleged violations.  In the state of Minnesota the enforcement action was not only brought against the entity that set-up and marketed the affiliated companies but individual real estate agents who participated.  The end result is that there is a great uncertainty as to what ultimately will be permitted. 

Why should this concern all real estate professionals?  Because almost everybody in the real estate industry is in an affiliated relationship, has some type of marketing agreement or is charging a fee that is under question.  The fact that a practice has been around for quite some time and is common in the industry does not make it immune from attack.  Many of the attacks are based on HUD's or the states interpretation of RESPA guidelines.  Unfortunately, most real estate professionals know very little about RESPA and it is an extremely confusing, poorly written regulation that leaves much to interpretation.    Many in the industry rely on the fact that something has been done for quite some time with no enforcement action that it must be okay.  Unfortunately, there are many examples that demonstrate that you cannot assume something will not be challenged just because it has not been challenged over the last 10 to 15 years that it has been in existence.

If you have received payments from a home warranty company when a client purchased or renewed their product; if you were paid money by any company for “marketing” there service or product;;  and/or if you charge an “administrative fee” to your clients you have reason to be concerned.  Click here to read about the issues that surround these practices.

Home Warranties

Many real estate brokers and agents have received payments from home warranty companies when their clients purchased a home warranty product.  In the beginning of 2008, HUD issued an “unofficial staff interpretation letter” raising questions about this practice.

The letter addressed two situations.  In the first situation the broker/agent agreed to “perform numerous, varied and sundry marketing-related services to promote the home warranty product”.  The broker/agent would be paid when a consumer purchased a home warranty product.  In the second situation, the broker/agent entered into an “Administrative Services Agreement” with the home warranty company in which the broker/agent agrees to “perform numerous, varied and sundry administrative-related services to promote the home warranty product”.  The broker/agent would be paid when a consumer purchased a home warranty product.

Under both scenarios, HUD determined that it is likely that they violate Section 8 of RESPA.  The letter states in part, “…it would be difficult for real estate agents and brokers to establish that the services they provide in connection with a homeowner warranty merit additional compensation that is in accordance with Section 8 and HUD’s regulations…Because the payments are based on the number of successful transactions, they appear to be payments made pursuant to an agreement or understanding to refer business to the HWC, and not payments for services actually performed.”

As a result of this letter, NAR meet with HUD to discuss home warranty marketing agreements and to request that the letter either be withdrawn or a new letter be issued clarifying the validity of home warranty marketing agreements.  To date, HUD has neither withdrawn nor clarified its position which makes a practice that is common in the industry highly suspect.

Marketing Agreements

Many real estate related companies have marketing agreements with other companies allowing the companies to market their products and services to their customers and/or agents.  The marketing agreements can come in many forms and can be given many different labels.

In early 2008, First American was sued by RE/MAX International for breach of contract by their terminating their marketing agreement based on First American’s concerns that the agreement may violate REPSA.  RE/MAX countered that there was no real fear of a RESPA violation, that the agreement did not require the use of First American products or services, that no money went to any franchisees and that the franchisees were free to enter into relationships with other title insurance companies.

Needless-to-say, First American is probably gun-shy over potential RESPA issues since it has been on the receiving end of a number of highly visible enforcement actions over practices that have been in existence for over a decade before HUD and/or the states determined that they violated RESPA.

Subsequent to the lawsuit, the state of Colorado commenced an investigation and sent subpoenas to First American in California and 11 real estate brokerages in Colorado seeking information on their marketing agreements.  The Colorado Division of Real Estate (DORA) Director Erin Toll has made clear that they are looking not just at the First American marketing agreement but at all marketing agreements.  Toll as quoted in Real Law Central, “It never ceases to amaze me the ingenious ways that real estate settlement providers come up with to hide the [kickback] money.”  When asked specifically about the First American marketing agreement, Toll stated that it was “highly suspect”, “My big question is simple, what do you get for $1.3 million?  What was the title company getting?  What did they pay for?”      

It remains to be seen where the lawsuit or the enforcement action will go; however, it is another example of how uncertainty over RESPA and how RESPA will be interpreted is creating turmoil in the industry.              

Broker/Agent Administrative Fees

It has become a common industry practice for brokers to charge a flat fee charge in addition to the normal commission which at times is labeled “Administrative Fee”.   To my knowledge there has not yet been an enforcement action directed at this practice but a lawsuit against one of HomeServices of America’s real estate companies which alleges that such fees violate RESPA was granted class action certification in 2008.  HomeServices has turned to NAR and HUD to remove the uncertainty that is know hanging over broker/agents heads stating that the “potential staggering exposure that could result from charging a fee that may only be intended to service as a surcharge or a price increase, to permit a company to upgrade the level of service it is providing, or to recover increased business expenses”.

If a court determines that these fees violate RESPA or if HUD or the Department of Commerce decides that these fees violate RESPA, the results would be widespread and devastating.  Enforcement actions, fines, license issues and lawsuits would come raining down on the industry.

To further complicate the issue, the way that you charge this fee may determine whether it is ultimately determined to be in compliance with RESPA.  If you are charging this fee or if you are considering charging this fee, we strongly recommend that you have it reviewed by an attorney familiar with RESPA, weigh the risks of how you go forward and then closely follow how this issue proceeds.