Real estate brokers continue to charge additional fees to cover the cost of their services. These fees, often mistakenly referred to as administrative/professional fees, are more appropriately identified as additional flat fee commission charges. It has been two years since a federal district court in Busby v. RealtySouth called into question whether real estate brokers/agents must perform separate and distinct services under Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) in return for charges assessed by real estate brokerage companies. Since then, many real estate brokers have restructured their compensation structures to make flat brokerage fees a part of overall real estate commissions, which is an approach the U.S. Department of Housing and Urban Development (HUD) gave credence to in a January 2010 letter. However, federal courts continue to consider fee arrangements under Section 8(b), and the Consumer Financial Protection Bureau (CFPB) now has the reins on RESPA.
First, the good. When the Busby court considered Section 8(b) of RESPA, they determined that RESPA prohibits a single-settlement service provider from charging fees for which no services are performed. As HUD first expressed this position in a 2001 Policy Statement, the court gave deference to HUD’s interpretation of Section 8(b) and held that a real estate broker must perform services separate and apart from the services performed to earn a real estate commission in order to justify a flat real estate brokerage fee. However, since then, the Fifth Circuit Court of Appeals has expressly considered whether Section 8(b) of RESPA applies to undivided, unearned fees and held that Section 8(b) is not applicable unless the fee is divided with two or more parties. . Although the Fifth Circuit considered a lender’s loan discount fee, and not a real estate brokerage’s flat fee, the court joins the ranks of the Fourth, Seventh and Eighth Circuits in concluding that a single person or entity cannot violate Section 8(b). As the Fifth Circuit strongly stated that “the language of RESPA 8(b) is unambiguous and does not cover undivided, unearned fees,” a real estate broker in Texas, Louisiana, or Mississippi should take comfort that its flat fee charges, in and of themselves, should not raise concerns under Section 8(b) of RESPA.
Now, the bad. Federal district courts continue to find the Busby decision to be persuasive in determining Section 8(b) to be applicable to real estate brokerage charges. Notably, on August 30, 2011, the U.S. District Court for the Southern District of Ohio granted a plaintiff’s Motion for Summary Judgment against a real estate brokerage company and held that the broker did not perform separate services for a $199 real estate brokerage fee in violation of RESPA. . In this case, the real estate broker specifically structured its total commission package to include a $199 fee plus a cooperative commission, but the title insurance company closing the transaction disclosed the $199 fee as an administrative charge. The court stated that the label on the charge was irrelevant and held that the broker charged the plaintiffs an undivided, unearned fee in violation of RESPA by not providing a separate and distinct service directly in exchange for the $199 charge. Although the court noted that the real estate broker “can certainly change its fee structure in order to increase its profit,” the court stated that “it must do so in a manner that is consistent with RESPA.” While this case likely will be appealed to the Sixth Circuit Court of Appeals, which has yet to weigh in on Section 8(b) of RESPA, the case renews concerns that a broker’s flat fee could still run afoul of Section 8(b) of RESPA.
Finally, the ugly. While the Federal Circuit Courts continue to take sides on the Section 8(b) debate, HUD no longer has a say in enforcing RESPA. Effective July 21, 2011, CFPB became the federal agency responsible for regulating and enforcing RESPA. Since many officials from HUD’s Office of RESPA transferred to CFPB, it remains to be seen whether CFPB will interpret RESPA in the same way as HUD. While it is possible CFPB could break with the past and reconsider the types of charges that create RESPA concerns, we expect that CFPB will continue to take HUD’s position that an undivided, unearned fee violates Section 8(b) of RESPA. With an arsenal of enforcement weapons more dangerous than HUD, once RESPA enforcement becomes a priority, the new CFPB could prove to be a force to reckon with on Section 8(b) issues.
Real estate brokers should continue to carefully structure their fees to avoid RESPA scrutiny. Notably, a real estate broker should make clear as part of the listing or buyer’s agreement that its real estate commission consists of both a certain percentage of the sales price plus a flat fee. This total amount should then be disclosed as a single dollar amount on Line 700 of the HUD-1 Settlement Statement. In other words, the broker would be increasing its price for the services it performs to earn a real estate commission, which should avoid the need to justify a separate flat fee under Section 8(b) of RESPA. However, if a broker continues to charge a separate flat fee in addition to its real estate commission, the broker must be prepared to demonstrate that it performs separate and distinct services in exchange for the fee under Section 8(b).
If you have any questions about whether your real estate fees comply with RESPA, we encourage you to seek additional resources and legal advice.
Phillip L. Schulman, Esq. & Holly Spencer Bunting, Esq. are with K&L Gates.
For more information, please visit www.klgates.com.
