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Transaction Fee Scrutiny Creates Uncertainty

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By Laurie Janik

Many real estate brokerages are compensated on a commission basis, charging a percentage of the sales price paid by the buyer for the seller’s property. Some brokers offer their services for a flat fee. In reaction to increasing costs and pressure to reduce commission rates, some brokers combine the two methods of compensation so that they’re paid a percentage of the ultimate sales price plus a flat amount. The flat amount is often described as a transaction fee, or a processing and handling fee.

Several federal court decisions indicate such fees are legal. Other federal courts, plus the U.S. Department of Housing and Urban Development, have expressed a contrary view. As a result of the unsettled state of the law, your company may be challenged if it adopts a commission-plus-flat-fee form of compensation.

One federal court looked at the legality of a $110 flat fee the buyers paid the broker. The buyers objected to the fee, claiming the broker performed no additional services other than what would have been performed in the ordinary course of the transaction. The buyers claimed that the fee amounted to nothing more than additional compensation to the broker. They charged that the fee violated Section 8(b) of the Real Estate Settlement Procedures Act, which states: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

The broker asked the court to dismiss the lawsuit, claiming that the fee couldn’t constitute a RESPA violation because there was no third party who shared any portion of the fee. Without some split of the fee-or kickback-to a third party, the broker argued, the fee was lawful.

The court held that a violation of the cited provision of RESPA requires the involvement of a third party. In this case, the buyers didn’t allege the broker had shared the fee with a third party, so the court concluded the fee was lawful and dismissed the buyer’s suit.

A different federal appeals court reviewed the practice of a title insurance company that charged buyers more to record a deed than was required by the recorder’s office and retained the difference. The court concluded that the title company didn’t violate Section 8(b) of RESPA because the additional charge to the consumer wasn’t split with another party. The court found that two or more parties must split or share a fee for a violation to occur.

Other federal appeals courts have found violations of RESPA under similar fact patterns. These courts have adopted the view articulated by HUD in a Statement of Policy issued in 2001. According to this Statement, Section 8(b)’s prohibition of the giving or accepting of any portion, split, or percentage of any charge other than for goods or facilities provided or services performed is intended to protect consumers from unnecessarily high settlement charges or what HUD would consider an “unearned fee.” HUD further maintains that Section 8(b) can be violated by a single entity that charges a consumer a fee where no, nominal, or duplicative work is done or the fee exceeds the reasonable value of goods or facilities provided or services actually performed.

HUD’s position would render it illegal for a broker to charge a consumer an additional fee unless additional bona fide services were provided that justified the increase. HUD’s Statement of Policy does not provide examples of what would constitute an additional service for which a fee could be charged. The general guidance would indicate, however, that a real estate broker who also sold a home warranty or provided loan origination services could charge a fee for those services that is reasonably related to the market value of the service provided. Similarly, a listing broker could contract with a seller to be paid one amount if the listing brokerage sold the property and an additional amount if the sale of the seller’s property was brought about through the efforts of another cooperating brokerage. In that situation, the additional fee would be justified by the distinct services of the second brokerage, which found the buyer for the property.

Although HUD’s interpretation isn’t binding on the courts, its interpretation of the law is important given that HUD is charged with enforcing the law. In addition to HUD’s enforcement powers, aggrieved consumers may also bring a private suit. Private enforcement efforts frequently take the form of class actions, which, if successful, result in very large judgments or settlements. The penalties for RESPA violations allow for the recovery of treble damages. There is also the possibility of criminal penalties, which include fines or imprisonment or both.

As noted above, the courts are not in agreement on the scope of Section 8(b). Federal appellate courts covering the states of AR, IA, IN, IL, MD, MN, MO, NC, ND, NE, SC, SD VA, WI, and WV have disagreed with HUD’s position. Courts covering the states of AL, CT, DE, FL, GA, NJ, NY, PA and VT have agreed with HUD’s Policy Statement. The lawfulness of a brokerage’s $149.00 administrative fee is currently being litigated. Until the law is settled, brokers who want to be safe should carefully examine the justification for any charge to consumers in addition to their traditional commission-based or flat fee compensation. Brokers wanting to avoid challenges to their compensation structures should avoid charging consumers additional fees for services that have traditionally been provided as part of the base compensation. Putting special labels on those fees, such as “transaction fees” or “processing fees,” will certainly call attention to them and could result in the broker’s need to explain what additional, distinct service is being provided and to demonstrate that the charge is justified.

Laurie Janik is General Counsel of the National Association of Realtors.®

For more information, please visit www.realtor.org.

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