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Office:  (817) 472-1100 • Fax:  (817) 472-1104

August 24, 2007

Christopher Kinnear, Esquire
HUD General Counsel’s Office
Southwest Region
U.S. Department of housing & Urban Development
801 North Cherry Street, 28th Floor
Fort Worth, Texas 76102

Dear Mr. Kinnear,

	It has been brought to my attention as the recent key note speaker at the Texas Warranty Association’s quarterly meeting held in Austin Texas that there is some level of confusion among home warranty companies (HWC) regarding issues involving the payment of fees to real estate agents based upon the agent’s relationship with the home warranty company.  There are two typical scenarios:

1.	The real estate agent and/or real estate broker enter into a “Marketing Agreement” with the HWC where the agent agrees to perform numerous, varied, and sundry marketing related services for the HWC promoting the HWC’s product. However, the agent is only compensated when the consumer purchases the HWC’s product.  Therefore, in my opinion, the HWC is not paying for marketing related services.  The HWC is only paying for the direct referral of settlement service related business. If the HWC was paying for marketing related services, then the agent would be compensated fair market value for the services provided, not the culmination of a signed agreement between the consumer and HWC.

2.	The real estate agent and/or real estate broker enter into an  “Administrative Services Agreement” with the HWC where the agent agrees to perform numerous, varied, and sundry administrative related services for the HWC administering the HWC’s product. However, the agent is only compensated when the consumer purchases the HWC’s product.  Therefore, in my opinion, the HWC is not paying for administrative related services.  The HWC is only paying for the direct referral of settlement service related business. If the HWC was paying for administrative related services, then the agent would be compensated fair market value for the services provided, not the culmination of a signed agreement between the consumer and HWC.

The federal Real Estate Settlement Procedures Act (RESPA) identifies that real estate agents and real estate brokers as well as home warranty service providers are covered under the Act.   RESPA states in Sec.3500.14 regarding the prohibition against kickbacks and unearned fees that no one shall give and no one shall accept any fee that is simply based upon a referral:
 
(b) No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in Sec. 3500.14(g) (1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.

	A ‘referral’ is defined under RESPA to include “any oral or written action directed to a person who has the effect of affirmatively influencing the selection by any person of a provider of settlement services.” 

RESPA Section 8 and Regulation X prohibit a person from paying or receiving “a thing of value” pursuant to any “agreement or understanding”  that business incident to a “settlement service” shall be referred. With limited exceptions, Regulation X provides that “any referral of a settlement service is not a compensable service.”  

RESPA and Regulation X also prohibit a person from giving or accepting any portion, split or percentage of a charge made or received for rendering of a settlement service other than for services actually performed.  Regulation X further states:

A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable.

Regulation X defines elements of the above prohibitions. A “settlement service” is defined as “any service provided in connection with a prospective or actual settlement.”  A “thing of value” is broadly defined to include any payment including commissions and fees.  An “agreement or understanding” is defined to include verbalized agreements or other agreements “established by a practice, pattern or course of conduct.”  And, a ‘referral” is defined to include “any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of settlement services.” 

In addition, Regulation X provides that a person who is in a position to refer settlement service business and who provides additional settlement services as part of a real estate transaction may only receive payment for services that are “actual, necessary and distinct” from the primary services that he or she provides. 

These definitions make the RESPA Section 8 prohibitions extremely broad. Regulation X makes clear the position of the U.S. Department of Housing and Urban Development (“HUD”) that “high prices standing alone are not proof of a RESPA violation.”  The most specific test of how HUD evaluates fees is reflected in the following Regulation X sentence:

If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. 

HUD has indicated that insofar as RESPA Section 8 is concerned, there is no prohibition against a real estate agent or real estate broker receiving dual compensation for providing both real estate sales services and other settlement services, such as a home warranty service.  However, the compensation must be for service provided.

Therefore, based upon my assumptions, the two scenarios presented in this report would clearly be considered violations of RESPA when the agent’s compensation is only tied to closed settlement service transactions.  I appreciate your consideration and look forward to your response.

Dr. Gary Lacefield
Risk Mitigation Group