[Federal Register Volume 75, Number 122 (Friday, June 25, 2010)]
[Rules and Regulations]
[Pages 36271-36273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15355]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-5425-IA-01]
Real Estate Settlement Procedures Act (RESPA): Home Warranty
Companies' Payments to Real Estate Brokers and Agents
AGENCY: Office of General Counsel, HUD.
ACTION: Interpretive rule.
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SUMMARY: Under section 8 of RESPA and HUD's implementing RESPA
regulations, services performed by real estate brokers and agents as
additional settlement services in a real estate transaction are
compensable if the services are actual, necessary and distinct from the
primary services provided by the real estate broker or agent, the
services are not nominal, and the payment is not a duplicative charge.
A referral is not a compensable service for which a broker or agent may
receive compensation. This rule interprets section 8 of RESPA and HUD's
regulations as they apply to the compensation provided by home warranty
companies to real estate brokers and agents. Although interpretive
rules are exempt from public comment under the Administrative Procedure
Act, HUD nevertheless welcomes public comment on this interpretation.
DATES: Effective date: June 25, 2010. Comment Due Date: July 26, 2010.
ADDRESSES: Interested persons are invited to submit comments regarding
this interpretive rule to the Regulations Division, Office of General
Counsel, 451 7th Street, SW., Room 10276, Department of Housing and
Urban Development, Washington, DC 20410-0500. Communications must refer
to the above docket number and title. There are two methods for
submitting public comments. All submissions must refer to the above
docket number and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 7th Street, SW., Room 10276,
Washington, DC 20410-0500.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt by HUD, and enables HUD to make them immediately available to
the public. Comments submitted electronically through the
www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments must
be submitted through one of the two methods specified above. Again,
all submissions must refer to the docket number and title of the
rule
.No Facsimile Comments. Facsimile (FAX) comments are not
acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. Due to security measures at the HUD Headquarters
building, an advance appointment to review the public comments must be
scheduled by calling the Regulations Division at 202-708-3055 (this is
not a toll-free number). Individuals with speech or hearing impairments
may access this number through TTY by calling the toll-free Federal
Information Relay Service at 800-877-8339. Copies of all comments
submitted are available for inspection and downloading at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: For legal questions, contact Paul S.
Ceja, Assistant General Counsel for RESPA/SAFE, telephone number 202-
708-3137; or Peter S. Race, Assistant General Counsel for Compliance,
telephone number 202-708-2350; Department of Housing and Urban
Development, 451 7th Street, SW., Room 9262, Washington, DC 20410. For
other questions, contact Barton Shapiro, Director, or Mary Jo Sullivan,
Deputy Director, Office of RESPA and Interstate Land Sales, Office of
Housing, Department of Housing and Urban Development, 451 7th Street,
SW., Room 9158, Washington, DC 20410; telephone number 202-708-0502.
These telephone numbers are not toll-free. Persons with hearing or
speech impairments may access this number via TTY by calling the toll-
free Federal Information Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A homeowner's warranty is covered as a ``settlement service'' under
HUD's RESPA regulations at 24 CFR 3500.2. Accordingly, the framework
for compensation of real estate brokers and agents for services
performed on behalf of home warranty companies (HWCs) is established in
RESPA and HUD's regulations, as discussed in an unofficial staff
interpretation letter dated February 21, 2008, issued by the Office of
General Counsel. In brief, services performed by real estate brokers
and agents on behalf of HWCs are compensable as additional settlement
services if the services are actual, necessary and distinct from the
primary services provided by the real estate broker or agent. (See 24
CFR 3500.14(g)(3).) The real estate broker or agent may accept a
portion of the charge for the homeowner warranty only if the broker or
agent provides services that are not nominal and for which there is not
a duplicative charge. (See 24 CFR 3500.14(c).)
HUD has received inquiries regarding the application of this
framework to the compensation provided by HWCs to real estate brokers
and agents for the selling of home warranties in connection with the
sale or purchase of a home. In particular, interested parties have
inquired about the legality of the HWCs providing compensation to real
estate brokers and agents on a per transaction basis and about the
scope of services provided on behalf of the HWC for which real estate
brokers and agents can be compensated by the HWC.
II. This Interpretive Rule
This interpretive rule clarifies the legality under section 8 of
RESPA and HUD's implementing regulations of the compensation provided
by HWCs to real estate brokers and agents, and it is provided in
accordance with Secretary of HUD's delegation of authority to the
General Counsel to interpret the authority of the Secretary. (See 74 FR
62801, at 62802.)
A. Unlawful Compensation for Referrals
RESPA does not prohibit a real estate broker or agent from
referring business to an HWC. Rather, RESPA prohibits a real estate
broker or agent from receiving a fee for such a referral, as a referral
is not a compensable service. (See 24 CFR 3500.14(b).) HUD's
regulations, at 24 CFR 3500.14(f), defines referral, in relevant part,
as follows:
[[Page 36272]]
A referral includes any oral or written action directed to a
person which has the effect of affirmatively influencing the
selection by any person of a provider of a settlement service or
business incident to or part of a settlement service when such
person will pay for such settlement service or business incident
thereto or pay a charge attributable in whole or in part to such
settlement service or business. (Emphasis added.)
To evaluate whether a payment from an HWC is an unlawful kickback
for a referral, HUD may look in the first instance to whether, among
other things:
The compensation for the HWC services provided by the real
estate broker or agent is contingent on an arrangement that prohibits
the real estate broker or agent from performing services for other HWC
companies; e.g. if a real estate broker or agent is compensated for
performing HWC services for only one company, this is evidence that the
compensation may be contingent on such an arrangements; and
Payments to real estate brokers or agents by the HWC are
based on, or adjusted in future agreements according to, the number of
transactions referred.
If it is subsequently determined, however, that the payment at
issue is for only compensable services,\1\ the existence of such
arrangements and agreements would not be an indicator of an unlawful
referral arrangement, and would be permissible. (See discussion in
Sections C and D below.)
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\1\ Compensable services are services that are actual, necessary
and distinct from the primary services provided by the real estate
broker or agent, that are not nominal, and for which duplicative
fees are not charged.
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B. Marketing by a Real Estate Broker or Agent Directed to Particular
Homebuyers or Sellers
In some circumstances, marketing services performed on behalf of an
HWC are not compensable services. In particular, a real estate broker
or agent is in a unique position to refer settlement service business
and through marketing can affirmatively influence a homebuyer's or
seller's selection of an HWC. As a real estate broker and agent hold
positions of influence in the real estate transaction, a homebuyer or
seller is more likely to accept the broker's or agent's promotion or
recommendation of a settlement service provider. Therefore, marketing
performed by a real estate broker or agent on behalf of an HWC to sell
a homeowner warranty to particular homebuyers or sellers is a
``referral'' to a settlement service provider.
Accordingly, in a transaction involving a federally related
mortgage loan, an HWC's compensation of a real estate broker or agent
for marketing services that are directed to particular homebuyers or
sellers would be a payment that violates section 8 of RESPA as an
illegal kickback for a referral of settlement service business. For
example, a real estate broker or agent actively promoting an HWC and
its products to sellers or prospective homebuyers by providing HWC
verbal ``sales pitches'' about the benefits of a particular HWC product
or by distributing the HWC's promotional material at the broker's or
agent's office or at an open house is considered to be a referral.
Thus, compensating the real estate broker or agent for such promotion
would result in a violation of section 8 of RESPA.
Nothing precludes a real estate broker or agent from performing
services to aid the seller or buyer, or to increase the possibility
that the real estate transaction will occur and thereby benefit the
broker or agent. However, the broker or agent may not be compensated by
the HWC for marketing services directed to particular homebuyers or
sellers.
C. Bona Fide Compensation for Services Performed
Section 8(c) of RESPA and HUD's regulations allow payment of bona
fide compensation for services actually performed. (See 24 CFR
3500.14(g)(1)(iv).) HUD's regulations also allow persons in a position
to refer settlement service business to receive payments for providing
additional compensable services as part of a transaction. (See 24 CFR
3500.14(g)(3).) Services performed by real estate brokers and agents on
behalf of HWCs would be compensable as additional settlement services
only if the services are actual, necessary and distinct from the
primary services provided by the real estate broker or agent. Further,
the real estate broker or agent may accept, and an HWC may pay to the
broker or agent, a portion of the charge for the homeowner warranty
only for services that are not nominal and for which there is not a
duplicative charge. (See 24 CFR 3500.14(c).) HUD looks at the actual
services provided to determine in a particular case whether compensable
services have been performed by the real estate broker or agent.\2\
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\2\ For example, conducting actual inspections of the items to
be covered by the warranty to identify pre-existing conditions that
could affect home warranty coverage, recording serial numbers of the
items to be covered, documenting the condition of the covered items
by taking pictures and reporting to the HWC regarding inspections
may be compensable services.
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A determination that compensable services have been performed by
the real estate broker or agent will be based on a review of the
particular facts of each case. Evidence in support of such a
determination may include:
Services--other than referrals--to be performed are
specified in a contract between the HWC and the real estate broker or
agent, and the real estate broker or agent has documented the services
provided to the HWC;
The services actually performed are not duplicative of
those typically provided by a real estate broker or agent;
The real estate broker or agent is by contract the legal
agent of the HWC, and the HWC assumes responsibility for any
representations made by the broker or agent about the warranty product;
and
The real estate broker or agent has fully disclosed to the
consumer the compensable services that will be provided and the
compensation arrangement with the HWC, and has made clear that the
consumer may purchase a home warranty from other vendors or may choose
not to purchase any home warranty.
HUD will review evidence on a case-by-case basis to determine
whether compensation provided was a kickback for a referral or a legal
payment for the compensable services. If it is factually determined
that only actual compensable services have been performed by a real
estate broker or agent in a transaction, it follows that transaction-
based compensation of that broker or agent that is reasonable would not
be an indicator of an unlawful referral arrangement and would be
permissible.
Reasonableness of Compensation
As the final step in assessing the legality of the compensation for
these services, HUD will also assess whether the value of the payment
by the HWC is reasonably related to the value of the services actually
performed by the real estate broker or agent. In the context of loan
origination, for example, HUD has stated that the mere taking of an
application is not sufficient work to justify a fee under RESPA. In its
Statement of Policy 1999-1, entitled ``Regarding Lender Payments to
Mortgage Brokers'' (64 FR 10080, March 1, 1999), HUD stated:
Although RESPA is not a rate-making statute, HUD is authorized
to ensure that payments from lenders to mortgage brokers are
reasonably related to the value of the goods or facilities actually
furnished or services actually performed, and are not
[[Page 36273]]
compensation for the referrals of business, splits of fees or
unearned fees.
In analyzing whether a particular payment or fee bears a
reasonable relationship to the value of the goods or facilities
actually furnished or services actually performed, HUD believes that
payments must be commensurate with that amount normally charged for
similar services, goods or facilities * * *. If the payment or a
portion thereof bears no reasonable relationship to the market value
of the goods, facilities or services provided, the excess over the
market rate may be used as evidence of a compensated referral or an
unearned fee in violation of Section 8(a) or (b) of RESPA. (See 24
CFR 3500.14(g)(2).) Moreover, HUD also believes that the market
price used to determine whether a particular payment meets the
reasonableness test may not include a referral fee or unearned fee,
because such fees are prohibited by RESPA. Congress was clear that
for payments to be legal under Section 8, they must bear a
reasonable relationship to the value received by the person or
company making the payment. (S. Rep. 93-866, at 6551.) 64 FR 10086.
D. Conclusion
Accordingly, HUD interprets section 8 of RESPA and HUD's
regulations as these authorities apply to the compensation provided by
home warranty companies to real estate brokers and agents as follows:
(1) A payment by an HWC for marketing services performed by real
estate brokers or agents on behalf of the HWC that are directed to
particular homebuyers or sellers is an illegal kickback for a referral
under section 8;
(2) Depending upon the facts of a particular case, an HWC may
compensate a real estate broker or agent for services when those
services are actual, necessary and distinct from the primary services
provided by the real estate broker or agent, and when those additional
services are not nominal and are not services for which there is a
duplicative charge; and
(3) The amount of compensation from the HWC that is permitted under
section 8 for such additional services must be reasonably related to
the value of those services and not include compensation for referrals
of business.
F. Solicitation of Comment
This interpretive rule represents HUD's interpretation of its
existing regulations and is exempt from the notice and comment
requirements of the Administrative Procedure Act. (See 5 USC
553(b)(3)(A)). Nevertheless, HUD is interested in receiving feedback
from the public on this interpretation, specifically with respect to
clarity and scope.
Dated: June 18, 2010.
Helen R. Kanovsky,
General Counsel.
[FR Doc. 2010-15355 Filed 6-24-10; 8:45 am]
BILLING CODE 4210-67-P