REAL ESTATE TRANSACTION FEES: To 8(b) or not 8(b), That is the Question
By Phillip L. Schulman
Kirkpatrick & Lockhart LLP
NOTE: NAR is pleased to provide the following guidance on what REALTORS® should know about a recent HUD Policy Statement on the legality of unearned fees. This information is deemed reliable; we suggest you consult with an attorney concerning your specific business plan. Philip Schulman, a partner in the Washington, D.C. office of Kirkpatrick & Lockhart LLP, specializes in a range of issues relating to housing, mortgage finance, general corporate law and mortgage banking. He is a frequent lecturer on RESPA and has authored numerous articles on issues affecting the real estate industry.
Real estate brokers faced with higher costs of doing business have looked for ways to supplement their income. Some have begun charging ancillary fees in addition to the real estate commission. These fees are often referred to as administrative fees, regulatory fees or compliance fees. They are usually in the $100 to $250 range and purport to cover costs for increased overhead and costs incurred for complying with the myriad of federal and state laws affecting the sale of residential real estate.
As you know, the Real Estate Settlement Procedures Act (“RESPA”) governs the conduct of real estate brokers on the federal level. While federal circuit courts and district courts have not found these administrative fees to be in violation of RESPA, the U.S. Department of Housing and Urban Development has consistently maintained that fees charged for nominal or duplicative work violate the Act. Those stakes were raised further on October 18, 2001, when HUD issued a Statement of Policy, adding unearned or excessive fees to the list of RESPA violations.
RESPA is a consumer disclosure and anti-kickback act. On the consumer disclosure side, the act requires lenders to provide buyers and sellers with full disclosure of the costs of the transaction. That means consumers receive Special Information Booklets, Good Faith Estimates and HUD-1 Settlement Statements, all spelling out the charges to be incurred by the buyers and sellers.
RESPA is also an anti-kickback act. The idea here is to prevent the payment of kickbacks and other fees, which drive up the costs of the product to consumers. Section 8(a) of RESPA prohibits any person from giving or receiving a thing of value for the referral of settlement services in connection with federally related mortgage loans. Thus, lenders may not pay, and real estate agents may not receive, fees for the referral of settlement service business.
Section 8(b) provides that no person shall accept “any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service” other than for services actually performed. On its face, this provision would appear to prohibit only the splitting or sharing of charges. It does not prohibit the mere receipt of unearned fees. Rather, the proscribed act concerns the splitting or sharing of such fees by and between the person who performs the legitimate service and the person who provides the referral. Therefore, the statute seems to require that at least two parties share fees. In contrast, HUD’s regulations go further by providing that a charge for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates Section 8(b).
The issue then, is whether a real estate broker’s $250 administrative fee violates RESPA. If it’s not split with the others, it would seem to be in compliance with the Act. However, if HUD determined that the fee were unearned, it would likely conclude that the charged violated HUD’s regulations. The distinction is important: violations of Section 8 may lead to imprisonment, fines or an injunction. Moreover, consumers can sue real estate brokers for three times the amount of the settlement service charge. What’s a real estate broker to do?
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THE ECHEVARRIA CASE – AND HUD’S RESPONSE
The lines were further blurred when earlier this year, consistent with the RESPA statute, the United States Court of Appeals for the Seventh Circuit in Echevarria v. Chicago Title & Trust Co. (7th Cir. 2001), concluded that unearned fees must be shared between two parties in order for those fees to violate Section 8(b). In Echevarria the Court held that RESPA did not cover a situation where Chicago Title charged the consumer more money than it was charged by the county recorder’s office to record a mortgage. Since Chicago Title did not split this excess charge with any other party and the recorder’s office received no more than its regular fee, the transaction did not violate RESPA. The Seventh Circuit’s decision follows a long line of prior circuit court and district court cases holding that there can be no 8(b) violation without a sharing of the unearned fee. In short, no splitting of a fee means no violation.
Under this rationale, a real estate broker’s $250 administrative fee would not violate the Act. After all, the broker is not sharing or splitting this administrative fee with any other party; it retains the full $250.
Before you let out a sigh of relief, beware that HUD did not share the Seventh Circuit’s view on the subject. In response to Echevarria, on October 18, HUD issued a Policy Statement to express its disagreement with the decision and to formalize the Department’s position regarding unearned fees under Section 8(b). According to the Policy Statement, HUD interprets Section 8(b) of RESPA to prohibit all unearned fees, including cases where:
· Two or more persons split fees for settlement services, any portion of which is unearned.
· One settlement service provider marks up the cost of services or goods provided by another without providing additional actual, necessary and distinct services or goods to justify the additional charge.
· One settlement service provider charges the consumer a fee where no, nominal or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed.
It’s this third category that spells trouble for brokers. Although contrary to the court decisions in the Seventh Circuit and elsewhere, HUD has long held that charging the consumer a fee for no, nominal or duplicative work violates Section 8(b). Now HUD’s Policy Statement goes even farther by declaring that fees in excess of the reasonable value of the good or service is also a violation. Is HUD imposing price controls?
Congress rejected price controls when it enacted RESPA’s referral fee prohibitions over 25 years ago. The act’s legislative history makes clear that RESPA is not a rate-setting statute. Other state and federal laws exist to protect consumers from unfair and deceptive trade practices. Nevertheless, in an attempt to distinguish its views from the Echevarria decision, HUD stakes out new territory by claiming excessive fees (though not split with another party) are prohibited by Section 8(b).
Such a position further clouds the picture for real estate brokers, agents and the entire settlement service industry. Must a broker subject every charge to some type of reasonableness test? What about raising the price of existing services? Can a broker ever mark-up a service provided by another? And if so, how much is an appropriate mark-up? While Congress and HUD have consistently acknowledged that RESPA is not a rate-setting statute, the position articulated in the 2001 Policy Statement is arguably an attempt to do just that by requiring that fees received and retained by providers be reasonable.
In an attempt to make sense out of HUD’s latest pronouncement, here are responses to some of the questions being raised by real estate brokers.
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Q: So, at the end of the day, can I charge an administrative fee to cover some of my rising overhead expenses including compliance with state and federal requirements?
A: It depends. If you do business in Illinois, Indiana or Wisconsin (the states within the jurisdiction of the Seventh Circuit) you can claim that since you are not splitting the administrative fee with another party, you are not in violation of the law. Moreover, many other federal court decisions have followed the reasoning in Echevarria.
My own view is that HUD’s position is contrary to the statute. The clear intent of RESPA’s Section 8(b) prohibition is to prevent mark-ups of settlement services by parties, unless the additional charge is for services actually performed. But if the charge is not split with another, there should be no 8(b) violation.
I say it depends, because HUD does not share my view or that of the federal courts. HUD says that if that $250 administrative fee is: (1) for no, nominal or duplicative work; or (2) is excessive, then the fee violates RESPA. To satisfy the Department, the broker would have to show that the administrative fee was for services that were actual, necessary and distinct from other services or goods already provided by the broker. Additionally, even if the broker could establish that the fee was for actual and necessary services, the broker would also have to demonstrate that the fee was commensurate with the value of those goods or services. Keep in mind, HUD is not saying you can’t charge an administrative fee; rather, if you do, you must be able to defend its purpose and the reasonableness of the amount of the charge.
The bottom line: courts say settlement charges not shared with others do not violate Section 8(b); HUD says otherwise. HUD says any unearned fee, even if its not split with another, violates 8(b). At the end of the day, a real estate broker must decide for him or herself whether to defy HUD.
Q: Are you saying that the courts will allow me to charge anything I want for an administrative fee as long as I don’t split the fee with another?
A: No. I am saying the courts have not found such fees to be violations of RESPA. As I mentioned, however, other federal and state laws prohibit false, unfair and deceptive trade practices. If you charge a borrower $150 for document preparation services, and do not prepare any documents, that would be a false and deceptive trade practice. If you gouge consumers, especially protected classes of individuals, you risk violations of fair housing and other consumer protection statutes. If you add on a fee, it should reflect your actual services and you should be able to defend your pricing schedule. That doesn’t mean you cannot mark-up charges above your cost; but it does mean there should be some relationship between the mark-up and your expenses in producing the good or service.
Q: Instead of charging a $250 administrative fee, couldn’t I just raise the price of my commission from 4 percent to 4.25 percent?
A: Given that RESPA is not a rate-setting statute, it would appear that the Act would not prevent you from charging any amount you wanted for your services. However, according to the Policy Statement, excessive fees violate Section 8(b). In your hypothetical, going from 4 to 4.25 should not disturb even HUD. Charging a commission of 25 percent may draw a very different reaction. Again, it depends on your resolve. At a minimum, you will want to fully disclose all your fees to the consumer as early in the process as is reasonable.
Q: What about my mortgage company. Does this mean every fee charged to the borrower such as application fees, processing fees, document preparation fees and others will need to be individually scrutinized to determine if they are earned?
A: Arguably, in HUD’s view, each of these fees must be independently analyzed to determine whether it, in fact, is commensurate with the value of the goods, facilities or services provided by the lender. It seems like HUD is inviting an avalanche of lawsuits, in which the only question to be decided is whether a lender charged too much for a particular service.
Q: My head hurts. Should I charge an administrative fee or not?
A: I would not shy away from charging the fee. But if I did, I would make sure that: (1) the fee was fully disclosed to the consumer; (2) was for actual services; and (3) was reasonably priced for the value of those services. If HUD or a plaintiff did come after me under RESPA, I would take comfort in the fact that the courts have consistently held that fees not split with others do not violate Section 8(b).
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By Phillip L. Schulman
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036