Settlement reached over alleged home warranty kickbacks to brokers

American Home Shield says new broker compensation policies are RESPA-compliant

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Editor’s note: This is the first in a two-part series on regulations governing the marketing of home warranties by real estate brokers and agents. Part two, "American Home Shield stands behind brokers in legal fights," details a settlement American Home Shield Corp. reached with the Texas Attorney General’s office to bring a seven-year investigation to a close.¬†

American Home Shield Corp. has agreed to pay up to $26 million to settle allegations that the company paid illegal kickbacks to real estate brokers and agents to market the company’s home warranties.

The company denied that the payments it made to real estate brokers who marketed its products violated the Real Estate Settlement Procedures Act (RESPA), and put a positive spin on the settlement, saying it "confirmed the compliancy of the company’s new broker compensation practices," called ProConnect, with RESPA.

About 500,000 homebuyers and sellers who purchased warranties between May 27, 2008, and March 4, 2011, may be eligible to receive an average of $52 each under the terms of the settlement, which also releases real estate brokers and agents from claims that payments they received from American Home Shield violated RESPA’s anti-kickback provisions.

Claim forms mailed out last month to homebuyers and sellers who were believed to have purchased American Home Shield warranties for which real estate brokers were compensated are due by April 30.

Forms and additional information about the settlement of the case, Abney v. American Home Shield, are available at AbneyClassAction.com, a website maintained by the independent claims administrator in the case.

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A proposed settlement in another class-action suit, which alleged that American Home Shield engaged in a pattern of wrongfully denying claims to consumers who purchased home warranties, was recently upheld by the 11th Circuit U.S. Court of Appeals.

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Part 2

The proposed settlement in that case, Faught v. American Home Shield, would apply to an estimated 4.3 million homeowners who held an American Home Shield warranty between July 24, 2001, and Oct. 19, 2009. The settlement will become final on April 26 if it is not appealed to the U.S. Supreme Court.

More information on the proposed settlement — which would create a review desk for homeowners to resubmit rejected claims — is available at FaughtClassAction.com.

In a third case quietly settled in 2010, American Home Shield agreed to pay $5 million and revise its policies regarding both the marketing and fulfillment of home warranty contracts, bringing a seven-year investigation by the Texas Attorney General’s Office to a close. American Home Shield also sought to protect real estate brokers and agents from liability in that settlement.

RESPA case

The RESPA class-action lawsuit, Abney v. American Home Shield Corp., was filed in U.S. District Court for the Northern District of Alabama in May 2009. After ordering the case to mediation, U.S. District Court Judge R. David Proctor — who is also overseeing the Faught case — granted preliminary approval of a settlement in March 2011. The settlement became final on Jan. 10, 2012.

Final approval of the Abney settlement was delayed when a homebuyer in Texas, Michele Schuler, objected that it released real estate brokers and agents from liability.

"The real estate professionals in question are not minor, tag-along players in this drama," attorneys for Schuler said in objecting to the settlement as originally proposed. "Rather, these Realtors who were paid broker compensation each owed a fiduciary duty (to the clients) they were supposed to be representing."

Attorneys for Schuler also said many claims would be denied because it would be difficult or impossible for consumers to prove that their decision to purchase a home warranty had been influenced by a real estate broker or agent.

But Schuler’s objections were withdrawn after the claim form was amended — consumers filing claims will not be asked whether their decision to purchase a home warranty was influenced by a real estate broker or agent — and a formula that will be being used to calculate claims was adjusted to provide for slightly larger payments.

"The settlement is significant on many fronts, including the fact that it contains a release of past liability for real estate professionals who were compensated by us in RESPA-covered transactions," American Home Shield President and Chief Operating Officer Dave Crawford said in a statement. "We felt it was important to eliminate exposure for those who have done business with us."

In cases like Schuler’s, in which the homebuyer allegedly chose American Home Shield at the advice of a broker or agent, but the seller paid for the home warranty, it’s unclear if both will be eligible to receive compensation.

An attorney who represented Schuler did not respond to a request for comment. D. Frank Davis, a lead attorney for plaintiffs in both the Abney and Faught cases, told Inman News that if there are competing claims, "it will be up to the settlement administrator to determine who actually purchased the warranty."

Davis and other attorneys with Birmingham, Ala.-based Davis & Norris successfully argued that it did not matter who paid claims filed by consumers — American Home Shield or real estate brokers — or whether claims were settled at the federal or state level.

The decision not to sue real estate brokers and agents for breach of fiduciary duty "was based on careful legal analysis," they said. It was "far from clear that the Realtors who disclosed to their principals that they were receiving a financial benefit from the home warranty transaction have, in fact, breached their fiduciary obligations to the principals," lawyers representing consumers in the Abney case said.

Even if Schuler had been able to prove that her agent had breached his fiduciary obligations to her and that she was damaged as a result, a Texas court would have been unlikely to award her more than the alleged $90 "kickback" paid by American Home Shield, attorneys representing consumers in the Abney case said in urging final approval of the settlement.

For American Home Shield, final approval of the settlement "supports our position that our (new) broker compensation program, ProConnect, is in compliance with RESPA guidelines and regulations," Crawford said in a statement.

Crawford was referring to the stipulation of settlement approved by the court, which included a list of business practices and "compensable services" that the parties in the case agreed are permitted by RESPA, and an interpretive rule issued by the U.S. Department of Housing and Urban Development (HUD) in June 2010.

An American Home Shield spokeswoman, Nicole Ritchie, acknowledged that, "As a technical matter, neither the court nor HUD (certifies) programs as compliant" with RESPA.

"We went to great lengths to help ensure our programs met both the letter and spirit of the guidelines outlined in HUD’s ruling, and we pay brokers only for compensable services," Ritchie said.

"We took time to carefully examine the ruling, review our practices, talk with brokers and industry experts to understand their concerns, and conduct an independent valuation on proposed compensable services before bringing our program to market."

In a June 25, 2010, interpretive rule, HUD said real estate brokers and agents could refer clients to home warranty companies, but warned that the marketing of home warranties, in and of itself, was not a "compensable service."

Actively promoting a home warranty company and its products to sellers or prospective homebuyers — by making verbal "sales pitches" about the benefits of a particular product, or by distributing promotional materials at the broker’s or agent’s office or at an open house — "is considered to be a referral," HUD said.

Compensating a real estate broker or agent for marketing services directed at "particular homebuyers or sellers" would violate RESPA "as an illegal kickback for a referral of settlement service business," HUD said.

But HUD said RESPA does provide an avenue for home warranty companies to make payments to real estate brokers and agents who perform "compensable services" on behalf of warranty companies.

HUD defined "compensable services" as "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."

Conducting actual inspections of items to be covered by a warranty to identify pre-existing conditions that could affect home warranty coverage, recording serial numbers of items to be covered, and documenting the condition of covered items by taking pictures "may be compensable services," HUD advised.

Real estate brokers or agents "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," HUD said.

The amount of compensation paid to brokers and agents must be "reasonably related to the value of the services actually performed by the real estate broker or agent," HUD said, rather then payment for "referrals of business, splits of fees or unearned fees."

HUD further clarified the rules in a November 2010 response to the 72 comments it received.

If home warranty companies compensated brokers solely for marketing their products, HUD said, they would be violating RESPA regardless of whether those payments were based on the number of warranties sold, or if they involved monthly or annual flat-fee payments.

In the stipulation of settlement, parties in the lawsuit agreed that American Home Shield’s payments to real estate professionals for compensable services comply with RESPA regardless of whether they are based on the number of warranties sold or made on a flat fee or other basis — "as long as such compensation is not a payment for marketing directed at a particular homebuyer or home seller" or for a referral of business.

HUD also said that because the interpretive rule did not represent a change in HUD’s interpretation of RESPA or regulations, it applied to marketing agreements in place before it was issued. Enforcement of RESPA is now the responsibility of the newly created Consumer Financial Protection Bureau.

Payments will be based on a formula that takes into account the actual amount American Home Shield paid to the real estate broker in each instance, multiplied by the percentage of the purchase price of the warranty that was paid for by the person filing the claim. In some instances, home sellers reimburse buyers for some or all of the cost of a home warranty.

If the actual amount American Home Shield paid to the real estate broker can’t be determined "without an unreasonable expenditure of time and resources," then claimants who can demonstrate that they paid for an entire warranty will each receive $52.50. The maximum possible payment for each claim that’s determined valid is $69.78.

In May 2011, notices of the settlement were mailed to 705,081 addresses culled from American Home Shield records. The deadline for submitting requests to be excluded from the settlement was June 27, 2011. American Home Shield received 191 opt-out requests.

Confusion over payments

The uncertainty surrounding the legality of payments by home warranty companies to real estate brokers dates back to February 2008, when HUD issued an unofficial staff interpretation regarding practices allegedly employed by home warranty companies in Texas.

That staff interpretation was prompted by an Aug. 24, 2007, letter from Gary Lacefield, a Texas-based RESPA consultant.

While attending the Texas Warranty Association’s quarterly meeting in Austin that year, Lacefield said he’d found "some level of confusion among home warranty companies" about their payments to real estate agents. Lacefield asked HUD for clarification about two "typical scenarios" he heard discussed at the meeting.

In the first scenario, real estate brokers or agents were entering into marketing agreements with home warranty companies in which they were paid only when a client purchased the company’s home warranty product, Lacefield said.

In the second scenario, brokers and agents were entering into administrative services agreements in which they agreed to perform "numerous, varied and sundry administrative-related services." But again, brokers and agents were paid only when their clients purchased a company’s home warranty product, Lacefield said.

In responding to Lacefield’s inquiry six months later, Paul Ceja, HUD’s assistant general counsel for RESPA issues, said payments to real estate agents or brokers by home warranty companies were "likely" violations of RESPA’s anti-kickback provisions if they were dependent on a particular consumer’s purchase of a home warranty.

"Characterizing such arrangements as ‘marketing’ or ‘administrative’ agreements does not render the underlying conduct legal," Ceja said in a Feb. 28, 2008, analysis, citing a previous 1996 opinion by HUD’s general counsel at the time.

Ceja’s unofficial staff interpretation caused "uncertainty among industry providers and consumers alike," the National Association of Realtors said in a report to members on a meeting NAR representatives held with HUD general counsel Helen Kanovsky.

According to NAR’s account of the Oct. 22, 2009, meeting, "Kanovsky stated that HUD understood (the) industry’s position and the importance of issuing clarifying guidance."

But it was not until the summer of 2010 that HUD published an interpretive rule formally addressing the applicability of RESPA to home warranty marketing agreements.

NAR maintains that home warranties are not required by lenders and should not be considered "settlement services" subject to RESPA requirements.

In July, NAR ally Rep. Judy Biggert, R-Ill., introduced HR 2446, the "RESPA Home Warranty Clarification Act of 2011," which would exclude home warranties from RESPA. The bill would also require that home warranty companies paying real estate brokerages and agents to market their products disclose that fact to consumers.

After the bill was introduced, Teresa Payne, HUD’s associate deputy assistant secretary for regulatory affairs, testified before the House Financial Services Committee that HUD had concerns that the bill could limit consumer protections and lead to higher closing costs for consumers through referral fees.

The House Financial Services Committee referred HR 2446 to the Subcommittee on Insurance, Housing and Community Opportunity, which sent the bill back to the full committee in December, where it awaits further action. The bill has 36 co-sponsors, including Rep. Ruben Hinojosa, a Texas Democrat who, like Biggert, has taken up NAR’s cause on RESPA issues in the past.

"Without a doubt, there’s been a good bit of uncertainty in the market since the HUD ruling — but there’s also been a good bit of healthy debate, too," said Nicole Ritchie, a spokeswoman for American Home Shield.

"Most brokers took a good, hard look at their practices and those of home warranty companies. In our own business, we saw strong performance last year in the real estate channel, and our ProConnect program was an important part of our strategy."

In its most recent annual report to investors, American Home Shield’s parent company, The ServiceMaster Co., said the warranty company’s operating revenue grew by 4.6 percent in 2011, to $687 million.

About 22 percent of that revenue "was tied directly to existing-home resales," the report said, noting that "one of the primary drivers of new home-service contracts is the number of existing homes sold in the United States, since a home-service product is often recommended by a real estate sales professional or offered by the seller of a home in conjunction with a real estate transaction."

American Home Shield’s annual report noted the final approval of the settlement in Abney v. American Home Shield, and said it was "not expected to have a material effect on the company’s reputation, business, financial position, results of operations or cash flows."

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