Home Warranty Sales OK

If your sales efforts are more than just referrals and your fee is reasonable, compensation should pass RESPA muster.

September 1, 2010

It’s legal for real estate brokers and agents to earn money for services they provide on behalf of home warranty companies, as long as payments aren’t accepted for referrals and other conditions are met, the U.S. Department of Housing and Urban Development said in an interpretive rule issued this summer.

HUD’s new rule seeks to clarify the circumstances under which home warranty companies may compensate real estate professionals without violating the Real Estate Settlement Procedures Act, particularly Section 8 provisions on kickbacks and unearned fees.

There has been much confusion in the real estate industry about this issue for years, sparked by an unofficial staff interpretation letter from HUD’s Office of General Counsel in early 2008. The primary concern has been that brokers and agents could violate RESPA for selling home warranties. The NATIONAL ASSOCIATION OF REALTORS®, among other industry groups, has sought clarification from HUD.

HUD’s interpretive rule covers three important points that help clear up the confusion.

  • Referrals can’t be compensated. RESPA doesn’t prohibit practitioners from referring business to a home warranty company. But it does prohibit them from receiving a fee for merely referring or "marketing" to a buyer or seller who purchases a policy. Compensation for a referral would be a violation of Section 8(a) on illegal kickbacks and Section 8(b) on unearned fees under RESPA.
  • Actual services must be provided in order to get paid. Section 8(c) of RESPA allows "payment of bona fide compensation for services actually performed." HUD says that depending on the facts of a particular case (based on a case-by-case determination), a home warranty company may compensate a real estate broker or sales associate for services when those services are actual, necessary, and distinct from the primary services provided by the real estate broker or sales associate and those additional services must not be nominal or duplicative. HUD’s examples of services that may be compensable include conducting inspections of items to be covered by the warranty to identify preexisting conditions that could affect coverage and recording serial numbers of items to be covered.
  • Compensation must be reasonable. Lastly, HUD clarifies that the value of the payment by the home warranty company must be reasonably related to the value of the services actually performed by the associate or broker.

This rule makes clear that as long as you’re doing more than just referring business and are getting paid a reasonable amount based on the service performed, compensation can be lawful.

Yet, the guidance also leaves open many questions. For example, some dispute HUD’s contention that home warranty contracts are a settlement service, since their only relationship to the settlement is that they are often paid for at that time.

And if HUD does deem home warranty policies as a settlement service, what does that mean for other companies that traditionally have not been considered settlement service providers—for example, home repair companies and privacy protection companies? Must they also must be listed on the HUD-1 and be subject to the interpretive rule?

And what of HUD’s policy of equating marketing services with a simple referral? Critics argue that marketing requires different knowledge and skills from the regular business of real estate. NAR is seeking answers from HUD.

In the meantime, if you have a marketing or services agreement with any settlement service provider or a provider who performs some function in the real estate process (pest inspection or foreclosure debris removal, for example), seek an attorney’s guidance to make sure you’re RESPA compliant.

Marx David Sterbcow, JD, LLM, is a real estate lawyer and managing attorney for Sterbcow Law Group LLC in New Orleans. He can be reached at 877-854-2182.