Editor’s note: This story has been edited to clarify that RESPA does not prohibit a real estate broker or agent from referring business to a home warranty company, but that HUD considers compensation paid by a home warranty company to real estate brokers or agents for marketing services directed at particular homebuyers or sellers to be an illegal kickback for a referall of settlement service business.
Federal regulators will publish an interpretive rule Friday formalizing their position that real estate brokers and agents are prohibited under existing law from receiving fees for referring business to home warranty companies.
The new rule follows a request by the National Association of Realtors for clarification on an unofficial staff interpretation issued by the Department of Housing and Urban Development in February 2008.
In the 2008 letter, Paul Ceja, assistant general counsel for issues related to the Real Estate Settlement Procedure Act (RESPA), said that payments to real estate agents or brokers by home warranty companies that are contingent on a particular consumer’s purchases of a home warranty were "likely" violations of RESPA’s anti-kickback provisions.
"Characterizing such arrangements as ‘marketing’ or ‘administrative’ agreements does not render the underlying conduct legal," Ceja said, citing a previous 1996 opinion by HUD’s general counsel at the time, Nelson Diaz.
But Ceja warned that his response, to an August 2007 inquiry by a Texas-based consultant on RESPA issues, was an "unofficial staff interpretation," did not constitute "a rule, regulation or interpretation," and that "no person may rely on this response to provide protection from liability under RESPA" or related regulations.
NAR says it met with HUD general counsel Helen Kanovsky on Oct. 22, 2009 and requested clarifying guidance.
In an interpretive rule to be published in the Federal Register, HUD said home warranty companies may only compensate real estate agents and brokers for services not related to marketing, such as conducting inspections of items to be covered by a warranty, and recording serial numbers of items to be covered.
Marketing performed by a real estate broker or agent on behalf of a home warranty company to sell a warranty to a particular homebuyer or seller constitutes a "referral" to a settlement service provider, HUD said. Although RESPA does not prohibit referrals to home warranty companies, fees paid for such referrals violate RESPA’s anti-kickback provisions, HUD said.
Real estate brokers and agents are "in a unique position to refer settlement service business and through marketing can affirmatively influence a homebuyer’s or seller’s selection" of a home warranty company, HUD said.
"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."
As an interpretive rule, HUD said its decision is exempt from public notice and comment requirements of the Administrative Procedure Act, but that HUD "is interested in receiving feedback from the public … specifically with respect to clarity and scope."
An attorney who advises real estate firms on RESPA issues, Phillip Schulman of the Washington, D.C.-based law firm, K&L Gates, sent out an advisory to clients offering to answer questions regarding the announcement or provide assistance in preparing written comments to HUD.