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HUD Home Warranty RESPA Guidance Answers Questions and Raises Them

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By Ken Trepeta

RISMEDIA, September 11, 2010—On June 25, 2010, HUD issued guidance on the appropriate circumstances under which brokers and agents can be compensated on a per-transaction basis for selling home warranties under the Real Estate Settlement Procedures Act (RESPA). NAR and industry partners have been working for more than two years to get HUD to accept the legitimacy of these arrangements after an earlier interpretive letter (known commonly as the “Ceja Letter”) raised great concerns for real estate professionals and their partners in the home warranty industry and led to class action lawsuits.

While HUD has accepted that agents and brokers can be paid on a per-transaction basis and that review of transactions should be done on a case-by-case basis, serious concerns remain. One of the biggest concerns is that the marketing of these contracts to individuals by real estate agents is not enough in their view to justify compensation.

NAR and our industry partners vehemently disagree with HUD’s position. First, NAR is not entirely convinced that home warranty contracts should even be considered a settlement service. Many home warranties are sold on listing to the seller. Others are sold after closing. Even those that are sold to the buyer in conjunction with closing are not a required part of the transaction, which NAR feels is a reasonable test for whether something should be considered a settlement service under RESPA and subject to Section 8 anti-kickback provisions.

Second, even if home warranty is a settlement service, in some cases, denying compensation for marketing ignores the significant amount of effort real estate agents and brokers put in for quite modest compensation ($45 – $120 is a commonly used range). This effort cannot be fairly equated with a mere referral. Real estate brokers and agents are routinely the only people consumers interact with in a home warranty transaction. Real estate brokers and agents do not simply distribute a brochure or give someone the link to a website. They perform all the sales services, such as explaining the product, answering questions, completing necessary paperwork and, in the vast majority of cases, all initial customer service functions when a potential claim arises.

The real estate broker or agent submits a completed transaction and associated documentation to the home warranty company on behalf of the consumer. In fact, the only contact a consumer has with the home warranty company’s staff is in the event of a post-closing claim. Even then, this contact typically occurs after the real estate broker or agent has explained the appropriate claims procedures to the consumer and provided additional guidance on the home warranty’s coverage. Despite numerous meetings to explain this to HUD, the agency simply ignored these facts.

Another concern is that while HUD ratified the validity of monthly or flat-fee marketing agreements in numerous meetings, the guidance itself barely touches on these arrangements. For these reasons and others, NAR has submitted extensive comments. In those meetings, senior HUD staff made it pretty clear they had no problem with flat-fee agreements as long as they were not regularly adjusted to reflect actual sales. HUD implicitly acknowledges these rather lengthy discussions by saying, “Payments to real estate brokers or agents by the HWC (home warranty company) are based on, or adjusted in future agreements according to, the number of transactions referred” and by using the odd construction regarding marketing “to particular home buyers or sellers.” The odd construction implies that general marketing agreements not done on a per-transaction basis are, in general, acceptable. That is certainly consistent with our discussions.

NAR and the industry appreciate the efforts made by HUD staff to provide meaningful guidance, which is a significant departure from past practices. However, we feel HUD overstepped its statutory authority under RESPA with regard to the marketing and sales of home warranty contracts. NAR will continue to work with brokers, agents, industry partners, HUD and Congress to address our concerns and ensure that consumers are not denied the access to or the benefit from an affordably priced home warranty.

Ken Trepeta is director of Real Estate Services for the National Association of REALTORS®.

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