Laurie Janik, NAR General Counsel (and amazing attorney) has released a memo regarding the recent court opinion against “Admin Fees”.
Price Increase or Unearned Fee? How to Protect Your Bottom Line
Laurie Janik, NAR General Counsel
April 29, 2009
A federal district court recently ruled in Busby v. JRHBW Realty, Inc. d/b/a RealtySouth that an administrative brokerage fee (“ABC Fee”) of $149.00 paid by a home buyer to the brokerage firm that represented her was not sufficiently related to any specific settlement service performed for her benefit, resulting in a violation of Section 8(b) of the Real Estate Settlement Procedures Act (“RESPA”). Section 8(b) prohibits charging for “real estate settlement services” unless the fee charged is for “services actually performed.” Click here to read a summary of the court’s decision.
The court found that the ABC Fee represented an additional charge to the buyer to defray the overall costs of the brokerage services she received, including the broker’s overhead and administrative costs. However, because the ABC Fee was separately itemized on the settlement statement from the percentage brokerage commission, and not specifically justified as compensation for other discrete “real estate settlement services” provided, the court viewed it as a duplication of the percentage commission charges, thereby rendering it an unearned fee in violation of RESPA.
In my view, this unfortunate holding is incorrect because the court’s analysis of RESPA is flawed and because the court misapplied the mandate previously handed down in this case by the 11th Circuit Court of Appeals. It is undisputed that RESPA is not a fee-setting statute. Since a brokerage may charge a percentage based commission or a flat rate for its services, there is no principled basis to construe RESPA to prohibit charging a percentage plus a flat rate.
The court’s confusion likely stemmed from the fact that the total compensation was shown in two places on the settlement form, with each bearing a separate label (percentage commission and ABC Fee). These two factors caused the court to reject the brokerage firm’s explanation that the ABC Fee represented nothing more than a price increase being charged for the firm’s brokerage services. Believing the firm had already been paid for the brokerage services by the percentage commission, the court was looking for a different, specific service or set of services of benefit to the buyer in return for the ABC Fee. Finding none, it concluded that no settlement services were provided for the ABC Fee.
This case had previously been certified as a class action.
In light of this decision, brokers should review how they characterize their compensation. Placing separate labels on what is all compensation to the brokerage firm exposes the firm to the same claims asserted against the defendant here. It allows the conclusion that each separately labeled charge represents a fee for a separate service. Likewise, disclosing separate components of the broker’s compensation in different parts of the contract with the consumer or on different lines of the settlement statements creates risk. Disclosure of the brokerage firm’s compensation should clearly indicate that both the commission- based component and the flat fee component represent payment for services provided by the brokerage. These combined amounts should be disclosed in the 700 section of the HUD-1 as the broker’s compensation. Finally, do not create the impression that any particular fee is for a separate service if that is not the case.
The final chapter in this case has not yet been written. An appeal is likely after other proceedings in the case are completed, and certainly warranted in order to reverse this most unfortunate decision. A clarification from HUD on this issue was requested by NAR months ago and is long overdue. In the meantime, be cautious and protect your hard-earned compensation.