Bundle Your Charges

Guidance from HUD reinforces brokers' recent efforts to disclose brokerage fees and commission as a single figure.

May 1, 2010

Last spring, a federal court in Alabama caused quite an uproar when it ruled that a real estate brokerage violated the Real Estate Settlement Procedures Act by charging an $149 "administrative" fee in addition to a commission. The fee was listed separately from the commission on the HUD-1 settlement statement.

Even though the brokerage argued that the flat fee was needed to recover overhead costs related to the services it provides, the U.S. District Court for the Northern District of Alabama labeled the fee as "unearned" under Section 8(b) of RESPA.

That section of the Act prohibits brokerages from charging fees for which no services are performed or for charging fees for services that are already being paid for through the commission.

In the wake of the April 2009 ruling, many real estate brokers rewrote their contracts to make clear that administrative fees are a part of the overall real estate commission and are tied to services performed. They also began disclosing fees and commissions as a single figure on the HUD-1 settlement statement.

The NATIONAL ASSOCIATION OF REALTORS® supported those changes, saying that even though it didn’t agree with the court’s decision that the fee violated RESPA, it believed that combining commission and fees into a single figure on the settlement form would raise fewer questions under RESPA than listing the fees as a separate item.

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

HUD: A Combo is OK

Earlier this year, HUD responded with guidance that gives credence to brokers’ approach of making fees part of the the commission. In a letter, HUD said that although RESPA regulates how a real estate broker discloses its charges, it doesn’t regulate how those charges are determined.

"The commission may be determined using a flat fee, a percentage of the sales price, or a combination of these methods," HUD General Counsel Helen Kanovsky says in the letter.

The key is to make sure that your commission figure on the HUD-1 lines up with the commission structure you spell out in your listing agreement or buyer agreement. In those agreements, it should be crystal clear that your commission is a combination of a flat fee and a percentage of the sales price.

Otherwise, if the combined figure you list in Section 700 of the HUD-1 exceeds the commission that’s spelled out in your client agreement, "the excess amount could be reviewed under section 8 of RESPA to determine whether additional services were provided."

New Settlement Form May Help

From a disclosure standpoint, Kanovsky adds, HUD’s recent revamping of the HUD-1 could help, as the new form requires all charges be listed as a dollar amount rather than as a percentage of the sale price.

Thus, a brokerage can combine the two charges into a single dollar amount on the form and be reasonably confident that it will pass muster under RESPA.

Although the letter provides informal guidance only and doesn’t have the force of law, it contains HUD’s latest thinking on structuring and disclosing any fees you charge on top of your commission. To that extent, you’ll want to familiarize yourself with the guidance to ensure that you stay on the right side of RESPA.

Phillip L. Schulman, a former assistant general counsel of the inspector general at the U.S. Department of Housing and Urban Development, is a partner with K&L Gates in Washington, D.C. He can be reached at phil.schulman@klgates.com.