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By Jeff Arouh, Esq.
RISMEDIA, June 24, 2008-A great deal of attention has recently been given to the increased use by real estate brokers of “administrative fees” in order to reduce the impact of increased costs incurred in complying with rules and regulations applicable to them in connection with the sale of residential real estate. Sometimes the fees are called “administrative fees;” sometimes they are called “regulatory fees;” and sometimes “compliance fees.” But, in each case, they really amount to the same thing-some fee, usually between $100 and $300-that is being charged to the buyer or the seller, or both, in addition to the real estate commission collected in connection with the sale.The use of this administrative fee has been questioned by buyers and sellers and has been the subject of litigation. Typically, the question that is raised in litigation is whether the real estate broker is permitted under the Real Estate Settlement Procedures Act to charge this administrative fee if, as may be argued, the real estate broker is not performing services in exchange for the fee.
The most recent case to address this issue was Busby v. JRHBW Realty, Inc. d/b/a Realty South, Case No. 06-15308, 11th Cir. January 17, 2008, a case in which the plaintiff was seeking class action status for a claim against Realty South alleging that an administrative brokerage commission in the amount of $149 incurred in connection with the purchase of a home was an unearned fee in violation of Section 8(b) of RESPA. In the Busby case, the seller agreed with the real estate broker to pay a commission on the sale of the home and to have the buyer (Busby) pay an additional administrative brokerage commission. Busby paid the administrative brokerage commission and then filed a suit claiming that the administrative brokerage fee violated Section 8(b) of RESPA because it was a fee for which no services were rendered. The court allowed the claim to continue based on plaintiff’s allegation that the administrative brokerage commission fee was a separate and distinct fee charged to the buyer for which no services were rendered. Busby then moved for certification as a class action. The trial court denied that motion. Busby appealed the decision to the 11th Circuit, which reversed and held that the issue of whether services were provided in exchange for the fee was a common question that could be decided across all potential plaintiffs.
This decision is important because it appears to support a position taken by HUD that Section 8(b) applies to situations in which no services are provided; that is, a settlement service provider is proscribed from charging a consumer a fee in situations in which the settlement service provider furnishes no services. The consequence is that a settlement service provider (in this case, the real estate broker), in order to receive any fee, must be in a position to establish that the settlement service provider is, in fact, providing some service and, presumably, that the service is not nominal or duplicative.
This fits squarely in the middle of an issue that remains unresolved in the courts as the Circuit Courts are split on the issue of the permissibility of mark-ups under RESPA. The Second Circuit, Third Circuit and Eleventh Circuit permit claims for a third party mark-up even without a fee split; the 4th Circuit, 7th Circuit and 8th Circuit require a split between two providers for a claim to be asserted.
This being the case, can a real estate broker ever justify charging an administrative brokerage commission over and above the real estate commission earned in connection with the transaction and still be compliant with RESPA? If so, what services are being rendered for the fee? To whom are the services being rendered? What is the relationship of the broker to the person to whom the fees are charged? How can the broker protect itself in these situations?
In my view, a broker can charge an administrative brokerage commission in connection with a real estate transaction-but, the broker must be careful about how it is done and who is impacted.
It is clear that a real estate broker is permitted to charge his/her client a real estate brokerage commission. Typically, this arises in the context of negotiating the listing agreement. The commission may be stated as a percentage amount, as a fixed fee or as a combination of the two. The amount that is charged is, presumably, for a multitude of services. These may run the gamut from listing and selling the home, to advertising, document preparation, maintenance assistance, closing assistance, etc., just to name a few. So long as the real estate broker is providing services in return for the amount charged, it is unlikely that HUD would contest those charges.
In any event, the real estate broker should be in a position to establish from documentary evidence maintained in its files that whatever fees were charged were disclosed to the consumer, were for services actually rendered and were reasonable in relation to the market for those services. To the extent the administrative brokerage commission is stated separately from the real estate broker commission, the broker should ensure that the fee is disclosed, that real services are being provided to the client in exchange for the fee, that the services are documented and, again, that the fees are reasonable in relation to the services being provided.
The issue becomes more complex when the listing broker attempts to collect an administrative brokerage commission from the buyer. Under what theory is that charge being levied? Is the broker charging the buyer for services rendered to the buyer? If so, what services? How have they been disclosed? When did the buyer agree to pay them? What happens if the buyer refuses to pay them but, nevertheless, instructs the buyer side broker to present an offer? These are operating questions that the buyer side broker has to address. In my view, the broker has no basis upon which to seek to charge the buyer an administrative broker commission unless the broker can establish an agreement by the buyer to pay that fee after the fee was disclosed and the broker has indicated to the buyer what services were included in the fee.
Can the listing broker agree with the seller that the buyer should pay an administrative brokerage commission? As a practical matter, that can surely be the case, but is a buyer bound by that agreement? I think not and, ultimately, the issue may be whether the seller has to deal with that increased cost if the buyer refuses to pay. In either event, it is imperative that the broker (listing broker or buyer side broker) explain to the consumer that a charge is being assessed, the amount of the charge and what services are being provided in exchange for the charge.
The views expressed above merely relate to the application of RESPA to these issues. In general, these conclusions are based largely on the fact that the courts that have considered the question have generally concluded that fees charged by settlement service providers and not split with others do not violate Section 8(b) of RESPA. This does not mean that there are not other laws that may be relevant. There are federal and state laws that prohibit unfair and deceptive trade practices, false advertising and other practices, particularly when dealing with consumer situations.
There are state laws that regulate real estate brokers and the relationships between real estate brokers and their clients and customers. All of these have to be considered in determining whether to charge an administrative brokerage fee. It is clear that HUD does not like these allegedly “unearned fees.” Ultimately, it is likely to be the market that determines whether or not any particular broker will continue to try to charge them.
Jeffrey A. Arouh, Esq., is with New York City-based law firm, Holland & Knight, LLP. He can be reached at Jeffrey.firstname.lastname@example.org.
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