HUD Issues Rule on Home Warranty Fees

by Peg Ritenour
Vice President
Legal Services

(eConnections: June 2010)

On June 25, HUD published an interpretative rule indicating its position on the payment of a fee to brokers or agents for the sale of home warranties under RESPA. HUD will be accepting comments for 30 days on this rule.

In the rule, HUD clarifies that while nothing in RESPA prohibits brokers or agents from referring business to a home warranty company, it does prohibit the agent or broker receiving a fee for such a referral. To evaluate when a payment from a home warranty company (HWC) is an illegal referral, HUD indicates it will look at whether:

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 arrangement; 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.

Under Section 8(c) of RESPA and other HUD regulations, payment is permitted for bona fide services that are actually performed. These services must be actual and distinct from the primary services the Realtor is providing. HUD has indicated that in determining whether payment to a broker or agent by an HWC is bona fide compensation for actual services, it must review the facts of each case. Factors it indicates would support such a finding are:

  • 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.

In making its analysis of whether payment to a broker or agent violates RESPA, HUD will also look at whether the amount paid is reasonably related to the value of the services actually performed by the broker or agent. HUD pointed out that, in the context of loan origination, it has previously determined that the mere taking of an application is not sufficient work to justify any fee under RESPA. Thus, it appears HUD’s analysis of a fee for merely taking a home warranty application would be the same.

HUD concluded its interpretative rule with the following summary:

(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.

It is anticipated that NAR’s Legal Department will be analyzing this rule and most likely will submit comments to HUD. OAR will provide an update on this issue when NAR’s position has been issued.