Brokerage, Industry News, Story

HUD clarifies flat-fee disclosure

Brokers can combine commission, flat fee on HUD-1

Real estate brokerages may collect both percentage-based commissions and flat fees, disclosing the combined charges on a single line of the HUD-1 settlement statement, as long as the charges are spelled out in the real estate broker’s listing agreement or buyer’s broker agreement.

The U.S. Department of Housing and Urban Development’s top lawyer, Helen Kanovsky, detailed procedures for disclosing real estate broker and agent commission fees in a Jan. 22 letter to Jay Varon, a Washington, D.C.-based attorney who represents real estate brokerages.

HUD, in rolling out new standardized disclosure forms under the Real Estate Settlement Procedures Act (RESPA) last year, "probably wasn’t as explicit as it could have been in saying there’s nothing wrong with charging a flat-fee component as well as a (percentage-based) commission," Varon said. "Now there is no doubt that it can be done."

Varon is one of the lawyers defending JRHBW Realty Inc., a brokerage that does business in Alabama as RealtySouth, in an ongoing class-action lawsuit over a $149 "Administrative Brokerage Commission" the company instituted in 2003.

The lawsuit alleges RealtySouth violated RESPA by collecting a fee for which "no service is rendered," or "a duplicate fee for services already rendered" from more than 30,000 clients (see story). Many agents have also questioned such fees, which have been instituted by numerous brokerages. 

But Varon and other RESPA experts say brokerages can avoid lawsuits by making clear that the fees are part of the brokerages’ overall commission, and not a separate fee for specific activities like record-keeping, operating a Web site, or administrative services.

On listing agreements and buyer’s broker agreements, they say, the commission should be defined as equal to "X" percent of the sales price plus "Y" dollars on buyer agreements and listing agreements.

The total dollar amount of the resulting commission is entered on Line 700 of the HUD-1 settlement statement, Kanovsky said.

HUD had previously provided a space on the HUD-1 to enter the percentage used to compute the sales commission. On the new HUD-1, only a dollar amount is entered. That caused some confusion about reporting commissions based on both a percentage of the sales price and a flat fee.

The issue is addresed only in passing on a "Frequently Asked Questions" (FAQ) guide HUD offers on a dedicated RESPA page at HUD.gov.

"The percentage used to compute the sales commission has been removed from the HUD-1 to better reflect current practices in the real estate industry," the FAQ says.  

HUD supplied a copy of Kanovsky’s letter to Inman News without comment. Copies of the letter were also sent to Joseph Ventrone, the National Association of Realtors’ vice president of regulatory affairs and real estate services, and Susan Johnson, executive director of the Real Estate Services Providers Council Inc. (RESPRO).

Kanovsky warned that her letter "does not constitute a rule, regulation, or interpretation" of law, and that "no person may rely on it to provide protection from liability under RESPA" or regulations HUD has put in place to implement the law.

If the total real estate broker fees on the HUD-1 exceed the amount in the real estate broker’s or agent’s listing agreement — or, if applicable, the buyer’s broker agreement — Kanovsky said HUD might review the excess charge to determine whether additional services were provided.

"Any charge for which no or nominal services are performed or for which duplicative fees are charged would violate RESPA," HUD’s general counsel said.

If a listing broker charges a buyer an administrative fee without having a contractual relationship with the buyer, the broker might be violating RESPA, she said.

HUD’s new procedures won’t help RealtySouth defend itself from the class-action lawsuit filed by its former client, Vicki Busby, on behalf of herself and other clients. RESPA allows injured parties to claim triple damages, and according to the most recent filings in the case, claims could total about $13 million. 

But Varon said Kanovsky’s letter should help other firms avoid such pitfalls by providing "a clear road map for how brokers can charge both percentage and flat fees without runing afoul of RESPA."

"I think the main thing I, and a lot of my clients will take away from this, is that it takes away the uncertainty the Busby case has raised about whether you can do this," Varon said. "I think you can."

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