[Federal Register Volume 75, Number 122 (Friday, June 25, 2010)]
[Rules and Regulations]
[Pages 36271-36273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15355]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-5425-IA-01]


Real Estate Settlement Procedures Act (RESPA): Home Warranty 
Companies' Payments to Real Estate Brokers and Agents

AGENCY: Office of General Counsel, HUD.

ACTION: Interpretive rule.

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SUMMARY: Under section 8 of RESPA and HUD's implementing RESPA 
regulations, services performed by real estate brokers and agents as 
additional settlement services in a real estate transaction are 
compensable if the services are actual, necessary and distinct from the 
primary services provided by the real estate broker or agent, the 
services are not nominal, and the payment is not a duplicative charge. 
A referral is not a compensable service for which a broker or agent may 
receive compensation. This rule interprets section 8 of RESPA and HUD's 
regulations as they apply to the compensation provided by home warranty 
companies to real estate brokers and agents. Although interpretive 
rules are exempt from public comment under the Administrative Procedure 
Act, HUD nevertheless welcomes public comment on this interpretation.

DATES: Effective date: June 25, 2010. Comment Due Date: July 26, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interpretive rule to the Regulations Division, Office of General 
Counsel, 451 7th Street, SW., Room 10276, Department of Housing and 
Urban Development, Washington, DC 20410-0500. Communications must refer 
to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule

    .No Facsimile Comments. Facsimile (FAX) comments are not 
acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number through TTY by calling the toll-free Federal 
Information Relay Service at 800-877-8339. Copies of all comments 
submitted are available for inspection and downloading at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: For legal questions, contact Paul S. 
Ceja, Assistant General Counsel for RESPA/SAFE, telephone number 202-
708-3137; or Peter S. Race, Assistant General Counsel for Compliance, 
telephone number 202-708-2350; Department of Housing and Urban 
Development, 451 7th Street, SW., Room 9262, Washington, DC 20410. For 
other questions, contact Barton Shapiro, Director, or Mary Jo Sullivan, 
Deputy Director, Office of RESPA and Interstate Land Sales, Office of 
Housing, Department of Housing and Urban Development, 451 7th Street, 
SW., Room 9158, Washington, DC 20410; telephone number 202-708-0502. 
These telephone numbers are not toll-free. Persons with hearing or 
speech impairments may access this number via TTY by calling the toll-
free Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    A homeowner's warranty is covered as a ``settlement service'' under 
HUD's RESPA regulations at 24 CFR 3500.2. Accordingly, the framework 
for compensation of real estate brokers and agents for services 
performed on behalf of home warranty companies (HWCs) is established in 
RESPA and HUD's regulations, as discussed in an unofficial staff 
interpretation letter dated February 21, 2008, issued by the Office of 
General Counsel. In brief, services performed by real estate brokers 
and agents 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 real estate broker or agent. (See 24 
CFR 3500.14(g)(3).) The real estate broker or agent may accept a 
portion of the charge for the homeowner warranty only if the broker or 
agent provides services that are not nominal and for which there is not 
a duplicative charge. (See 24 CFR 3500.14(c).)
    HUD has received inquiries regarding the application of this 
framework to the compensation provided by HWCs to real estate brokers 
and agents for the selling of home warranties in connection with the 
sale or purchase of a home. In particular, interested parties have 
inquired about the legality of the HWCs providing compensation to real 
estate brokers and agents on a per transaction basis and about the 
scope of services provided on behalf of the HWC for which real estate 
brokers and agents can be compensated by the HWC.

II. This Interpretive Rule

    This interpretive rule clarifies the legality under section 8 of 
RESPA and HUD's implementing regulations of the compensation provided 
by HWCs to real estate brokers and agents, and it is provided in 
accordance with Secretary of HUD's delegation of authority to the 
General Counsel to interpret the authority of the Secretary. (See 74 FR 
62801, at 62802.)

A. Unlawful Compensation for Referrals

    RESPA does not prohibit a real estate broker or agent from 
referring business to an HWC. Rather, RESPA prohibits a real estate 
broker or agent from receiving a fee for such a referral, as a referral 
is not a compensable service. (See 24 CFR 3500.14(b).) HUD's 
regulations, at 24 CFR 3500.14(f), defines referral, in relevant part, 
as follows:


[[Page 36272]]


    A referral includes 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 a settlement service or 
business incident to or part of a settlement service when such 
person will pay for such settlement service or business incident 
thereto or pay a charge attributable in whole or in part to such 
settlement service or business. (Emphasis added.)

    To evaluate whether a payment from an HWC is an unlawful kickback 
for a referral, HUD may look in the first instance to whether, among 
other things:
     The compensation for the HWC services provided by the real 
estate broker or agent is contingent on an arrangement that prohibits 
the real estate broker or agent from performing services for other HWC 
companies; e.g. if a real estate broker or agent is compensated for 
performing HWC services for only one company, this is evidence that the 
compensation may be contingent on such an arrangements; and
     Payments to real estate brokers or agents by the HWC are 
based on, or adjusted in future agreements according to, the number of 
transactions referred.
    If it is subsequently determined, however, that the payment at 
issue is for only compensable services,\1\ the existence of such 
arrangements and agreements would not be an indicator of an unlawful 
referral arrangement, and would be permissible. (See discussion in 
Sections C and D below.)
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    \1\ Compensable services are services that are actual, necessary 
and distinct from the primary services provided by the real estate 
broker or agent, that are not nominal, and for which duplicative 
fees are not charged.
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B. Marketing by a Real Estate Broker or Agent Directed to Particular 
Homebuyers or Sellers

    In some circumstances, marketing services performed on behalf of an 
HWC are not compensable services. In particular, a real estate broker 
or agent is in a unique position to refer settlement service business 
and through marketing can affirmatively influence a homebuyer's or 
seller's selection of an HWC. As a real estate broker and agent hold 
positions of influence in the real estate transaction, a homebuyer or 
seller is more likely to accept the broker's or agent's promotion or 
recommendation of a settlement service provider. Therefore, marketing 
performed by a real estate broker or agent on behalf of an HWC to sell 
a homeowner warranty to particular homebuyers or sellers is a 
``referral'' to a settlement service provider.
    Accordingly, in a transaction involving a federally related 
mortgage loan, an HWC's compensation of a real estate broker or agent 
for marketing services that are directed to particular homebuyers or 
sellers would be a payment that violates section 8 of RESPA as an 
illegal kickback for a referral of settlement service business. For 
example, a real estate broker or agent actively promoting an HWC and 
its products to sellers or prospective homebuyers by providing HWC 
verbal ``sales pitches'' about the benefits of a particular HWC product 
or by distributing the HWC's promotional material at the broker's or 
agent's office or at an open house is considered to be a referral. 
Thus, compensating the real estate broker or agent for such promotion 
would result in a violation of section 8 of RESPA.
    Nothing precludes a real estate broker or agent from performing 
services to aid the seller or buyer, or to increase the possibility 
that the real estate transaction will occur and thereby benefit the 
broker or agent. However, the broker or agent may not be compensated by 
the HWC for marketing services directed to particular homebuyers or 
sellers.

C. Bona Fide Compensation for Services Performed

    Section 8(c) of RESPA and HUD's regulations allow payment of bona 
fide compensation for services actually performed. (See 24 CFR 
3500.14(g)(1)(iv).) HUD's regulations also allow persons in a position 
to refer settlement service business to receive payments for providing 
additional compensable services as part of a transaction. (See 24 CFR 
3500.14(g)(3).) Services performed by real estate brokers and agents on 
behalf of HWCs would be compensable as additional settlement services 
only if the services are actual, necessary and distinct from the 
primary services provided by the real estate broker or agent. Further, 
the real estate broker or agent may accept, and an HWC may pay to the 
broker or agent, a portion of the charge for the homeowner warranty 
only for services that are not nominal and for which there is not a 
duplicative charge. (See 24 CFR 3500.14(c).) HUD looks at the actual 
services provided to determine in a particular case whether compensable 
services have been performed by the real estate broker or agent.\2\
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    \2\ For example, conducting actual inspections of the items to 
be covered by the warranty to identify pre-existing conditions that 
could affect home warranty coverage, recording serial numbers of the 
items to be covered, documenting the condition of the covered items 
by taking pictures and reporting to the HWC regarding inspections 
may be compensable services.
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    A determination that compensable services have been performed by 
the real estate broker or agent will be based on a review of the 
particular facts of each case. Evidence in support of such a 
determination may include:
     Services--other than referrals--to be performed are 
specified in a contract between the HWC and the real estate broker or 
agent, and the real estate broker or agent has documented the services 
provided to the HWC;
     The services actually performed are not duplicative of 
those typically provided by a real estate broker or agent;
     The real estate broker or agent is by contract the legal 
agent of the HWC, and the HWC assumes responsibility for any 
representations made by the broker or agent about the warranty product; 
and
     The real estate broker or agent has fully disclosed to the 
consumer the compensable services that will be provided and the 
compensation arrangement with the HWC, and has made clear that the 
consumer may purchase a home warranty from other vendors or may choose 
not to purchase any home warranty.
    HUD will review evidence on a case-by-case basis to determine 
whether compensation provided was a kickback for a referral or a legal 
payment for the compensable services. If it is factually determined 
that only actual compensable services have been performed by a real 
estate broker or agent in a transaction, it follows that transaction-
based compensation of that broker or agent that is reasonable would not 
be an indicator of an unlawful referral arrangement and would be 
permissible.

Reasonableness of Compensation

    As the final step in assessing the legality of the compensation for 
these services, HUD will also assess whether the value of the payment 
by the HWC is reasonably related to the value of the services actually 
performed by the real estate broker or agent. In the context of loan 
origination, for example, HUD has stated that the mere taking of an 
application is not sufficient work to justify a fee under RESPA. In its 
Statement of Policy 1999-1, entitled ``Regarding Lender Payments to 
Mortgage Brokers'' (64 FR 10080, March 1, 1999), HUD stated:

    Although RESPA is not a rate-making statute, HUD is authorized 
to ensure that payments from lenders to mortgage brokers are 
reasonably related to the value of the goods or facilities actually 
furnished or services actually performed, and are not

[[Page 36273]]

compensation for the referrals of business, splits of fees or 
unearned fees.
    In analyzing whether a particular payment or fee bears a 
reasonable relationship to the value of the goods or facilities 
actually furnished or services actually performed, HUD believes that 
payments must be commensurate with that amount normally charged for 
similar services, goods or facilities * * *. If the payment or a 
portion thereof bears no reasonable relationship to the market value 
of the goods, facilities or services provided, the excess over the 
market rate may be used as evidence of a compensated referral or an 
unearned fee in violation of Section 8(a) or (b) of RESPA. (See 24 
CFR 3500.14(g)(2).) Moreover, HUD also believes that the market 
price used to determine whether a particular payment meets the 
reasonableness test may not include a referral fee or unearned fee, 
because such fees are prohibited by RESPA. Congress was clear that 
for payments to be legal under Section 8, they must bear a 
reasonable relationship to the value received by the person or 
company making the payment. (S. Rep. 93-866, at 6551.) 64 FR 10086.

D. Conclusion

    Accordingly, HUD interprets section 8 of RESPA and HUD's 
regulations as these authorities apply to the compensation provided by 
home warranty companies to real estate brokers and agents as follows:
    (1) A payment by an HWC for marketing services performed by real 
estate brokers or agents on behalf of the HWC that are directed to 
particular homebuyers or sellers is an illegal kickback for a referral 
under section 8;
    (2) Depending upon the facts of a particular case, an HWC may 
compensate a real estate broker or agent for services when those 
services are actual, necessary and distinct from the primary services 
provided by the real estate broker or agent, and when those additional 
services are not nominal and are not services for which there is a 
duplicative charge; and
    (3) The amount of compensation from the HWC that is permitted under 
section 8 for such additional services must be reasonably related to 
the value of those services and not include compensation for referrals 
of business.

F. Solicitation of Comment

    This interpretive rule represents HUD's interpretation of its 
existing regulations and is exempt from the notice and comment 
requirements of the Administrative Procedure Act. (See 5 USC 
553(b)(3)(A)). Nevertheless, HUD is interested in receiving feedback 
from the public on this interpretation, specifically with respect to 
clarity and scope.

    Dated: June 18, 2010.
Helen R. Kanovsky,
General Counsel.
[FR Doc. 2010-15355 Filed 6-24-10; 8:45 am]
BILLING CODE 4210-67-P