Offering home warranties to buyers is a common practice in residential real estate transactions, and real estate salespersons and brokers can earn fees for selling the warranties. Furnishing a home warranty is a “settlement service” under RESPA, so the practice of compensating licensees falls within that law’s regulatory purview. The federal Department of Housing and Urban Development (HUD) has recently provided guidance on the practice of providing access to home warranty companies (HWCs). Under RESPA, if a real estate company simply refers buyers to the HWC and does no work, the fee it receives may be considered an illegal kickback. If the relationship is structured properly, however, the real estate company may market the home warranty product and receive compensation.
HUD concluded that under certain circumstances, fees paid to licensees for marketing home warranties to sellers or buyers are illegal kickbacks or referrals, and are prohibited under Section 8 of RESPA. In reaching this conclusion, HUD found that licensees who offer only to sell a home warranty are making a "referral" to a settlement service provider. HUD noted that licensees are in such a unique position to refer business that they affirmatively influence a homebuyer's or seller's selection of a home warranty company. Therefore, HUD concluded, the sales pitch offered by licensees to consumers about the benefits of a home warranty is a referral, triggering RESPA’s prohibition against compensating real estate brokers or agents for such referrals.
More recently, however, on June 25, 2010, HUD's Office of General Counsel published an Interpretive Rule clarifying circumstances under which HWCs may compensate real estate licensees in compliance with Section 8 of RESPA. Services provided by real estate licensees on behalf of HWCs are compensable as additional settlement services if the services are actual, necessary, and distinct from the primary services provided by the licensee. As with all such fees, the amount of compensation from the HWC permitted under Section 8 for such additional services must be reasonably related to the value of those services, and cannot include compensation for referrals of business.
To evaluate whether a payment from an HWC is an unlawful kickback for a referral, HUD may look to whether, among other things:
• the compensation for the HWC services provided by the real estate licensee is contingent on an arrangement that prohibits the licensee from performing services for other HWC companies; and
• payments to licensees by the HWC are based on, or adjusted in future agreements according to, the number of transactions referred.
Is there ever an occasion when a real estate licensee may be compensated for ‘selling’ a home warranty? Yes, and HUD has offered some guidelines. Keep in mind, however, that HUD requires actual service to be performed. As indicated above, such services must be actual, necessary and distinct from the primary services performed by a real estate broker or agent. HUD suggests that services such as recording serial numbers of equipment; inspecting equipment to be covered for pre-existing conditions; or photographing equipment to be covered might be compensable under RESPA.
HUD would also consider contractual relationships between licensees and HWCs in which the HWC assumes responsibility for statements made by licensees to be indicative of a relationship through which a licensee may perform compensable services.
For the Interpretive Rule, please see: http://www.hud.gov/offices/hsg/ramh/res/homewar625.pdf
For more information on RESPA, please see: http://www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm