Selling a Home Warranty? Know the Rules
Industry confusion persists with regard to pitching financial protection for home systems and appliances.
May 9, 2013
Some real estate professionals consider home warranties a security blanket for everyone involved in a real estate transaction—the buyer, seller, and agent. Warranties offer a measure of financial protection if certain home appliances need to be repaired or replaced. They can help buyers feel more confident about their purchase and may reduce sellers’ liability if something goes wrong after the keys have been handed over. Real estate agents often find they play an intermediary role in answering questions about warranties and can even assist in filing claims.
But the long-standing relationship between real estate brokerages and home warranty providers—with regard to how compensation can be offered to practitioners—was called into question in 2008 in an informal letter from the U.S. Department of Housing and Urban Development. The letter suggested that brokers and agents could be violating the Real Estate Settlement Procedures Act if they accepted a fee for selling home warranties. That’s because referral fees for “settlement services” are banned under the federal law, and confusion has reigned ever since over the acceptable conditions for receiving compensation. Even a clarification letter from HUD two years later, which said warranty sales were permissible as long as sales efforts constituted more than simply referrals and fees were reasonable, did not stem the confusion, since the follow-up guidance continued to suggest that warranties were a “settlement service.” The conflicting interpretations led to lawsuits, including a class-action case against American Home Shield. The company denied any wrongdoing but settled its suit in 2011 to avoid further litigation costs.
Pursuit of Clarity
Last year, it looked like the real estate industry and home warranty companies were getting closer to clarity on the issue. In August 2012, the House of Representatives passed a bill that said home warranty purchases were not a settlement service under RESPA—legislation that the National Association of REALTORS® strongly supported. But the legislation died in the Senate last year, and Congress has yet to take it up again.
Still, NAR continues to advocate on the issue, and has asked the Consumer Financial Protection Bureau—which now enforces RESPA—to weigh in on the issue. The agency has yet to respond.
In the meantime, the industry is following the lead of HUD’s 2010 interpretive rule addressing the conditions for agents and brokers to receive compensation for selling the warranties, says Ken Trepeta, director of NAR’s Real Estate Services. Consumer lawsuits have decreased, as real estate brokerages and home warranty companies have tweaked their relationships. Here are recommendations to avoid potential RESPA violations in the marketing and sale of home warranties to consumers.
- DO make sure your services are “actual, necessary, and distinct.” You can receive compensation from a home warranty company, but your warranty-related services must be necessary and distinct from required other real estate duties. Many home warranty companies now require agents to document pre-existing conditions in the home that could affect coverage and obtain serial numbers from appliances and systems that would be covered by the warranty. In exchange for this work, agents can be compensated if the client decides to purchase a warranty.
- DON’T accept compensation for referrals. Just promoting a home warranty company via a sales pitch about the benefits of a particular product or distributing a promotional brochure to clients is considered a “referral,” which isn’t eligible for compensation. You can still do such marketing; just don’t accept payment for it.
- DO make sure any fees collected are “reasonable.” Merely taking an application from a client who wants to purchase a home warranty does not justify a fee under RESPA, according to HUD. Payment must be in line with the services performed.
- DO disclose to clients any fees collected. Disclose to consumers that you are receiving -compensation from a home warranty company. Make clear to them that they can purchase a home warranty from other vendors and that they aren’t required to purchase one at all, according to HUD. Scott Geller, abr, crs, associate broker with RE/MAX Centre, REALTORS®, in Jamison, Pa., has been promoting and selling home warranties to his clients for the past two decades. His brokerage includes a clause in the sales contract about the availability of warranties from third-party vendors and notes, among other points, that “buyer and seller understand that a broker who recommends a home warranty may have a business relationship with the home warranty company that provides a financial benefit to the -broker.”
- DON’T be exclusive. Don’t enter into an exclusive service agreement between a home warranty company that prohibits you from performing services for other home warranty companies. Have information about more than one home warranty company available for your clients to choose from.
- DO consult an attorney. As a precaution, have an attorney carefully review your relationship with the warranty provider to make sure you are in compliance with RESPA.