When directors of the California Association of Realtors® (CAR) met in Sacramento recently, their association attorneys had an important message for them: Real estate firms and agents who, in addition to commission, impose additional charges such as an "administrative fee", "transaction fee", "regulatory compliance fee" etc. need to tread very carefully. They could easily become targets for a serious lawsuit.
Nor is this a concern only for California Realtors®. Similar advice has come from the National Association of Realtors® (NAR) to its members throughout the country.
What brought this all about is a ruling from a United States District Court for the Northern District of Alabama. The case involved a transaction in which a real estate firm (JRHBW Realty, Inc. doing business as Realty South) had charged its client an Administrative Brokerage Commission fee (the "ABC Fee") of $149. The client, Vicki Busby purchased a home in Jefferson, Alabama in May of 2004. Ms. Busby had obtained a federally-related home loan, bringing the transaction within the scope of the Real Estate Settlement and Procedures Act (RESPA).
In September of 2004, Ms. Busby filed a suit on behalf of herself and all others similarly situated against Realty South alleging violations of RESPA. She contended that the ABC violated RESPA because it was a fee for which no service was performed. Section 8 of RESPA provides, among other things, "No 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." [my emphasis]
Originally, the District Court denied giving this suit class action status, but such status was granted on appeal. When the case went back to District Court, it ruled against the real estate firm, finding that no specific settlement service had been performed in order to earn the fee.
Laurie Janik, NAR general counsel, put it this way: "The court found that the ABC Fee represented an additional charge to the buyer to defray the overall costs of the brokerage services she received, including the broker’s overhead and administrative costs. However, because the ABC Fee was separately itemized on the settlement statement from the percentage brokerage commission, and not specifically justified as compensation for other discrete ‘real estate settlement services’ provided, the court viewed it as a duplication of the percentage commission charges, thereby rendering it an unearned fee in violation of RESPA."
As profit margins have continued to shrink, it has become fairly common (though far from universal) practice for brokerages to add one or more flat-rate fees to the commission charged for brokerage services. Commonly, the broker’s reason for making this a separate fee is so that it will not be subject to the commission "split" due the agent. But, as the court found in the Busby case, often these fees do not represent compensation for a specific service rendered to the principal; they just go to general overhead.
In discussions of these issues at CAR it was pointed out that specific add-on fees needed to be demonstrably for the benefit of the principal. Arguably, for example, the use of a transaction coordinator provides primary benefit to the agent and the broker, not to the buyer or seller. Moreover, to be charged at closing, the fee must represent some activity that aided the closing process. For example, charging a fee to provide a buyer or seller with a CD containing all the transaction documents is not a fee for a settlement service. It may be a nice thing to do, but it is neither necessary nor helpful for bringing about a closing.
Both NAR and CAR counsel their members that they need to be very careful as to how they characterize their compensation. Better to charge a higher commission rate, or even to have a flat fee in addition to a percentage commission; but to show it all as commission. Don’t specify an additional service unless it can be properly documented.