Brokerage Admin Fee Shot Down in Alabama Jurisdiction

Court says no to brokerage fee in ruling that NAR says misconstrues settlement provision.

July 1, 2009

In a development for real estate brokerages in Alabama, the U.S. District Court for the Northern District of Alabama in April ruled on a class action lawsuit against a brokerage that charged a flat $149 administrative fee in addition to its commission. The court said the fee violated section 8(b) of the federal Real Estate Settlement Procedures Act, which prohibits charging for real estate settlement services unless the fee is for "services actually performed." Other courts have looked at the same section of RESPA that the Busby court applied and found no violation of RESPA unless there is a sharing of the fees among two or more settlement service providers.

The brokerage argued that the fee is necessary to help it recover overhead costs. What’s more, because the fee isn’t split with the sales associate, it enables the brokerage to keep commission rates lower than they otherwise would be—saving consumers money.

However, the court disagreed, calling the fee "unearned" because no services were specifically tied to it. The court said most of the overhead costs that the fee helped offset weren’t settlement-related and didn’t necessarily benefit clients.

Following the ruling, NATIONAL ASSOCIATION OF REALTORS® General Counsel Laurie Janik issued a memo that said the court misconstrued RESPA and that the ruling is likely to be appealed. Yet she said brokerages should review how they characterize compensation and should clearly indicate that both the commission-based component and the flat-fee component represent payment for services. These combined amounts should be disclosed in the 700 section of the HUD-1 form as the broker’s compensation.

To help resolve confusion over this brokerage compensation issue, NAR has asked the U.S. Department of Housing and Urban Development, which enforces RESPA, for a clarification on the intent of Section 8(b).

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.