[Federal Register Volume 75, Number 230 (Wednesday, December 1, 2010)]
[Rules and Regulations]
[Pages 74620-74622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30243]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-5425-IA-02]


Real Estate Settlement Procedures Act (RESPA): Home Warranty 
Companies' Payments to Real Estate Brokers and Agents Interpretive 
Rule: Response to Public Comments

AGENCY: Office of General Counsel, HUD.

ACTION: Interpretive rule; response to public comments.

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SUMMARY: On June 25, 2010, HUD issued a rule interpreting certain 
provisions of RESPA as applied to the payment of fees to real estate 
brokers and agents by home warranty companies. The public was invited 
to comment on the interpretive rule. After reviewing and considering 
the comments, HUD determined that changes are not needed to the 
interpretive rule. Through this document, HUD responds to certain 
questions raised in the comments. HUD believes that its response to 
these questions serves to provide additional guidance relating to 
matters covered in the interpretive rule and the comments.

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 these numbers via TTY by calling the 
toll-free Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    The requirements and prohibitions under RESPA apply to residential 
real estate transactions that include a federally related mortgage 
loan. Section 8 of RESPA prohibits giving and receiving ``kickbacks'' 
for the referral of real estate settlement services, and unearned fees, 
involving real estate transactions. Since 1992, HUD's RESPA regulations 
have defined ``settlement service'' to include ``homeowner's 
warranties''. 24 CFR 3500.2(11). While a referral of settlement 
services is not compensable under RESPA, a real estate broker or agent 
(or other person in a position to refer settlement service business) 
may be compensated for services that are actual, necessary and distinct 
from the primary services provided by the real estate broker or agent, 
if the services are not nominal, and the payment is not a duplicative 
charge. (See 24 CFR 3500.14(b), (c), (g)(1), and (g)(3)).
    On June 25, 2010 (75 FR 36271), HUD issued an interpretive rule on 
the propriety under Section 8 of RESPA (12 U.S.C. 2607) of payments to 
real estate brokers and agents from home warranty companies (HWCs). The 
interpretive rule concluded:
    (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.

75 FR at 36273.

    HUD received 72 comments in response to publication of the 
interpretive rule. HUD reviewed all of the comments, and appreciates 
the input and information provided by the commenters. Some commenters 
supported the interpretive rule and others did not. HUD found that the 
comments that were not supportive of its interpretation did not present 
concerns or information that warrant any changes to the interpretive 
rule. HUD, however, has identified and is responding to seven specific 
questions to provide additional guidance relating to matters covered in 
the interpretive rule and the comments.

 II. Questions and Responses

    1. Question: Is a home warranty company's flat fee payment (e.g., 
monthly or annual payment) to a real estate broker or agent for 
marketing a home warranty product directly to particular homebuyers or 
sellers a permissible payment under section 8 of RESPA?
    HUD Response: No, as provided in the interpretive rule, payments 
for marketing services directed to particular homebuyers or sellers are 
considered to be payments for affirmatively influencing their choice of 
settlement service providers and would therefore violate section 8 of 
RESPA as an illegal kickback for a referral, regardless of whether the 
payment is made to the broker or agent on a ``per transaction'' or a 
``flat fee'' basis.

[[Page 74621]]

    2. Question: Is the list of items in footnote 2 of the interpretive 
rule an exhaustive list of the services that a real estate broker or 
agent can be legally compensated for by a home warranty company under 
section 8 of RESPA?
    HUD Response: No, the footnote itself begins with the introduction, 
``For example''. The list in the footnote is not exhaustive but 
exemplary of services that, in a particular case, may be compensable. 
However, as discussed in the interpretive rule, to be compensable the 
services must be 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'' 
(see fn.1 of the interpretive rule). Referrals of settlement service 
business are not compensable services. Therefore, payments made for 
``services'' that were fabricated to disguise a payment to a real 
estate broker or agent for referrals and are not, in fact, 
``necessary'' would be illegal under section 8 of RESPA.
    3. Question: What is meant by the statement in the interpretive 
rule that evidence in support of a determination that compensable 
services have been performed by a real estate broker or agent may 
include: ``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.''
    HUD Response: While not conclusive, the fact that a home warranty 
company is willing to be legally committed by the work and 
representations of a real estate broker or agent who is compensated by 
the HWC for performing services is one indicator that those services 
provided are ``actual, necessary and distinct'' and not nominal--i.e., 
that actual work is being performed by the real estate broker or agent 
for which the home warranty company is willing to assume liability. 
Specifically, such a legal relationship indicates that the HWC has 
worked with the real estate broker or agent closely enough to 
understand the value of the services performed by the broker or agent, 
and to be confident enough of the broker's or agent's services and 
representations, that the HWC is willing to take responsibility for 
those services and representations. Conversely however, if in a 
contract with a consumer, for example, the HWC disclaims liability for 
acts and representations of the real estate broker or agent in 
connection with the home warranty, this may indicate that no actual 
services of value have been performed by the real estate broker or 
agent.
    4. Question: Why is it a relevant factor in analyzing a potential 
section 8 violation that a home warranty company's payment to a real 
estate broker or agent was made under an exclusive-representation 
arrangement?
    HUD Response: Section 8 of RESPA prohibits payments for referrals 
and unearned fees. Stated another way, referrals are not compensable 
services under section 8. See 24 CFR 3500.14(b). HUD's interpretive 
rule states that, in initially evaluating whether a payment from an HWC 
to a real estate broker or agent is a violation of section 8, HUD may 
look at whether the payment is tied to an arrangement that prohibits 
the broker or agent from receiving from a competitor comparable payment 
for comparable actual services. In other words, such an exclusive-
representation arrangement between the HWC and the real estate broker 
or agent is evidence of an unlawful-payment-for-referral arrangement 
whereby the real estate broker or agent is only being paid for steering 
customers exclusively to the HWC and its products. However, as it is 
further noted in the interpretive rule, if it is determined that the 
HWC's payment is only for compensable services, the existence of an 
exclusive-representation arrangement would be permissible under section 
8.
    5. Question: Does the interpretive rule prohibit payments from an 
HWC to real estate brokers or agents for general advertising services 
performed by the brokers or agents on behalf of the HWC?
    HUD Response: No. The interpretive rule specifically prohibits 
compensation for marketing performed by a real estate broker or agent 
on behalf of an HWC when the marketing is directed to selling the HWC's 
home warranty product to particular homebuyers or sellers. HUD would 
evaluate the permissibility of compensation provided by an HWC to real 
estate brokers or agents for other advertising by applying the 
definition of ``referral'' in Sec.  3500.14(f) of HUD's RESPA 
regulations. For example, a reasonable payment for an advertisement by 
an HWC in a real estate broker's or agent's publication or on the 
broker's or agent's website would not, in and of itself, be a payment 
for a referral under RESPA. If the marketing services for which the HWC 
is paying the real estate broker or agent are services directed to a 
homebuyer or seller that have the effect of ``affirmatively 
influencing'' the selection by the homebuyer or seller of the HWC's 
home warranty product in connection with the real estate settlement, 
then those marketing services would be subject to RESPA's prohibitions 
on referral payments.
    6. Question: Is a home warranty always considered to be a 
``settlement service'' for purposes of RESPA coverage?
    HUD Response: No. RESPA's kickback and referral fee prohibitions 
are applicable in the context of ``settlement services'', a term that 
is defined broadly under RESPA and HUD's RESPA regulations. RESPA 
defines ``settlement services'' to include ``any service provided in 
connection with a real estate settlement'' and provides a nonexclusive 
listing of such services (12 U.S.C. 2602(3)). In its regulations HUD 
has long defined ``settlement service'' to include ``any service 
provided in connection with a prospective or actual settlement * * *'' 
(24 CFR 3500.2). As noted above and in the interpretive rule, 
``homeowner's warranties'' have been specifically included in HUD's 
definition of ``settlement service'' since 1992 (24 CFR 3500.2(11)). 
Therefore, when a home warranty is ``provided in connection with a 
prospective or actual settlement'', it is a ``settlement service'' 
under HUD's regulatory interpretation of RESPA.
    In determining whether services involving a home warranty are 
provided in connection with a prospective or actual settlement, HUD 
would consider, among other things: (i) Whether the charge for the home 
warranty is paid out of the proceeds at the settlement; and (ii) if the 
charge is not paid at settlement, whether the timing of the purchase of 
and payment for the home warranty indicates that the purchase is so 
removed from the settlement that it is not provided ``in connection 
with'' a settlement within the meaning of RESPA and HUD's regulations. 
Items paid in connection with a RESPA-covered transaction, of course, 
may be paid and disclosed on the HUD-1/1A settlement statement as paid 
outside of closing (P.O.C.) or through the accounting at settlement.
    7. Question: Does the interpretive rule apply to situations beyond 
home warranty company payments to real estate brokers and agents, for 
example to payments by other settlement service providers to real 
estate brokers and agents?
    HUD Response: The interpretive rule is specifically directed to 
home warranty company payments to real estate brokers and agents. 
However, the analysis in the interpretive rule is based on an 
interpretation of the RESPA statute and HUD's existing regulations, 
which analysis may be applicable to payments made by other settlement 
service providers to real estate brokers or agents.

[[Page 74622]]

III. Confirmation of June 25, 2010, Interpretive Rule

    Again, HUD appreciates the input and information provided by the 
members of the public and representatives of industry who responded to 
HUD's solicitation of public comment on the June 25, 2010, interpretive 
rule. After consideration of the comments, HUD confirms its June 25, 
2010, interpretation of certain provisions of RESPA as applied to the 
payment of fees to real estate brokers and agents by home warranty 
companies. The interpretive rule therefore stands without change.
    Finally, some commenters asked whether the interpretive rule has 
prospective or retroactive effect. An interpretive rule does not change 
existing law. As noted in the concluding paragraph of the rule, the 
interpretive rule represents HUD's interpretation of its existing 
regulations. This interpretive rule, therefore, does not constitute a 
change in HUD's interpretation of RESPA or the RESPA regulations, but 
is an articulation of HUD's interpretation of RESPA and the 
implementing regulations that specifically applies to home warranty 
company payments to real estate brokers and agents.

    Authority: 12 U.S.C. 2601-2617; 42 U.S.C. 3535(d).

    Dated: November 23, 2010.
Helen R. Kanovsky,
General Counsel.
[FR Doc. 2010-30243 Filed 11-30-10; 8:45 am]
BILLING CODE 4210-67-P