Finally a break in the real estate industry

30 May

Last week the United States Supreme Court decided a case which refines a commonly debated interpretation of the Real Estate Settlement Procedures Act (“RESPA”) by lower courts.  RESPA is a Federal law that plays a significant role in how real estate brokerage companies (among others) conduct day-to-day business.  It has myriad prohibitions, restrictions and disclosure requirements that are applicable to such “settlement service providers” as title companies, mortgage lenders, real estate brokers and more.  Generally, it prohibits referral fees and unearned fees by settlement service providers in connection with a federally-related mortgage, imposes restrictions and requirements on “affiliated business providers”, mandates certain disclosures to increase transparency of transactions for consumers, and more.

Until this month, the issue of how RESPA impacts “administrative fees” charged by real estate brokers and agents was a controversial and often debated real estate brokerage issue, nationwide.  There was a split in how the decisions in various cases across the country interpreted Section 2607(b) of RESPA.  That section provides:

“[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service […] other than for services actually performed.” 12 U. S. C. §2607(b)

The various split in decisions and HUD interpretations addressing this issue left some unanswered questions as to whether a real estate brokerage would find itself in hot water when charging an “administrative fee” or similar charge in addition to a commission, if the real estate broker could not readily identify what service was being rendered pursuant to that admin fee.

The United States Supreme Court decided a case last week (May 24, 2012) which clarifies this issue significantly, and simplifies this issue for real estate brokers.  In the case of Freeman v. Quicken Loans, the Supreme Court found that there is no violation of §2607(b) of RESPA without showing that a charge for a settlement service was divided with a third party.

The full decision of the Freeman case can be found here: http://www.supremecourt.gov/opinions/11pdf/10-1042.pdf.  An interpretation of how this decision impacts real estate brokerage companies and brokers/agents was offered by the National Association of Realtors(R) (“NAR”), and their article can be found here: http://speakingofrealestate.blogs.realtor.org/2012/05/24/supreme-court-rules-fee-split-required-for-respa-violation/.

In short, this author suspects that some of the national controversy and confusion surrounding real estate brokerage admin fees will now become an easier topic to  address consistently, and with less controversy. Prior cases, including the controversial 2009 decision in Busby v. JRHBW Realty, Inc. d/b/a Realty South, had suggested that merely charging an “admin fee” in addition to a commission, even if it is disclosed to the consumer paying such fee, is in and of itself a violation of RESPA.  In January 2010, a HUD letter from Helen Kanovsky (Office of the General Counsel at HUD) clarified that there may be some room from brokerages to have commissions composed of a flat fee or commission or both.

Now that the Supreme Court has weighed in, it would seem likely that admin fees charged by real estate brokers should draw less scrutiny.  Additionally, the prior caselaw and unfavorable decisions interpreting RESPA in such a way as to further restrict the real estate industry than was explicitly stated in RESPA are probably of dramatically less impact, or their impact is narrowed significantly by this decision.

Stay tuned to the Thomsen Nybeck Legal Update blog for further discussion of this issue as more information, interpretations, and decisions bring this issue into even sharper focus.  For now, real estate brokerage companies, agents, and brokers who charge (or have ceased charging) administrative fees may wish to discuss these issues once again with their legal counsel to identify how they want their business practices to fit within the fluid and evolutionary laws surrounding these practices.

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This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck.  Brad’s practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals, and is a frequent speaker for real estate continuing education throughout the state of Minnesota.

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