Brokers charging buyers or sellers administrative fees (sometimes called transaction fees or administrative brokerage commissions) to augment a percentage-based commission received good news from all nine justices of the United States Supreme Court. A rare, unanimous decision by the Court on May 24, 2012, in a case challenging loan fees (Freeman vs. Quicken Loans), eliminated the threat of RESPA challenges to administrative fees that are part of the broker’s commission. Brokers who ceased charging these fees in light of HUD’s policy statement or prior adverse court rulings may safely reinstate them. Furthermore, brokers may split these administrative fees with their licensed sales agents if they choose. Brokers should not split these fees with any third party who performed no services to earn them.
A Little Bit of History
In recent years, suits alleging a violation of Section 8(b) of RESPA were brought against real estate brokerages that charged consumers a flat fee in addition to a percentage-based commission. The first such suit, decided in 2009 in the case of Busby v. JRHBW Realty, Inc. d/b/a Realty South, sent shock waves through the brokerage community. In that case, the court found that a fully disclosed administrative brokerage commission paid by a buyer violated Section 8(b) of RESPA because it was not sufficiently related to any specific service performed for the buyer’s benefit and could not be justified by the entire array of services provided to the buyer. In essence, the court found that a price increase violated RESPA merely because it was imposed as a flat fee added to a percentage-based commission as opposed to the brokerage simply charging a higher percentage-based commission. In spite of the fact that the ruling defied logic and was contrary to the language of the statute, other cases alleging the same violation soon followed, with equally troubling results. This flawed reasoning has now been firmly repudiated by the Supreme Court. As a result, such fees do not violate Section 8(b) of RESPA unless the broker who is paid the settlement fee splits it and pays a portion of it to a third party who is not a real estate licensee and who provides no services in exchange for the fee.
Special Fees Require Special Attention
While most of the fees charged by brokers to buyers and sellers are intended as compensation for the brokerage services rendered in the buying or selling of a property, occasionally brokers may provide buyers or sellers a separate, distinct service that is not covered by the brokerage commission and that is subject to a separate charge. When a distinct service is subject to a separate charge, the service and its attendant fee should be described in writing. This written document could be the listing agreement or buyer representation agreement, but it could also be a separate agreement that only addresses the service being provided. The broker should not split the fee with any person or entity that did not perform services to earn their share of the fee, including a licensee of the broker.
An example of a service that could be subject to an additional, separate charge is home staging to prepare the home being marketed. If the broker is charging a fee for the staging services in addition to the commission for marketing the property, the staging service should be identified separately in the listing agreement or other contract and the fee for the service should be spelled out separately. To avoid legal challenges under various state consumer protection statutes, the amount of the fee should be reasonable. This fee should only be split with a licensee if that licensee performed the staging services in order to earn her share of the fee. The staging service fee should not be split with the listing agent unless that agent was the person who staged the property.
In sum, transaction fees that are part of the total brokerage commission may be charged to consumers without violating Section 8(b) of RESPA. These fees should be identified as part of the brokerage compensation in the listing agreement or buyer representation agreement and shown on the HUD-1 as part of the brokerage commission. They may be shared by the broker with other real estate licensees.
Other fees charged to consumers for separate and distinct services should be spelled out clearly in writing. The fees should not be shared by the broker with any other party, including the broker’s licensees, unless that party performed services to earn the fee.
Finally, remember that the Supreme Court’s decision has no impact on any state laws that prohibit charging an administrative fee. Likewise, the decision in no way alters RESPA’s prohibition against the payment by a broker of anything of value in return for the referral of business to the brokerage.
This column is brought to you by the NAR Real Estate Services group.
Laurie Janik is the senior vice president, general counsel, Law & Policy for the National Association of REALTORS®.