In the June 25, 2010 issue of the Federal Register, the department of Housing and Urban Development (HUD) published a response (Docket # FR-5425-IA-01) to a 2009 request from the National Association of Realtors® (NAR) asking for clarification regarding compensation paid by home warranty companies to real estate agents and brokers. In particular, NAR wanted to know HUD's position regarding such compensation when given on a per-transaction basis.

NAR was not happy with the HUD response.

First of all, the HUD ruling noted that the provision of a home warranty policy is a settlement service. It then pointed out that, while it is perfectly legal to refer business to a home warranty company (or any other settlement service provider) it is illegal, under RESPA (the Real Estate Settlement Procedures Act) to receive payment for such a referral. The heart of the HUD ruling is this: "…a real estate broker or agent is in a unique position to refer settlement service business and through marketing can affirmatively influence a homebuyer's or seller's selection of an HWC [home warranty company]. 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.

Therefore, marketing performed by a real estate broker or agent on behalf of an HWC to sell a homeowner warranty to particular homebuyers or sellers is a 'referral' to a settlement service provider.

Accordingly, in a transaction involving a federally related mortgage loan, an HWC's compensation of a real estate broker or agent for marketing services that are directed to particular homebuyers or sellers would be a payment that violates section 8 of RESPA as an illegal kickback for a referral of settlement service business."

HUD did note that there could be compensable services ("For example, conducting actual inspections of the items to be covered by the warranty to identify pre-existing conditions …, recording serial numbers of the items to be covered, documenting the condition of the covered items by taking pictures …"), but the mere act of marketing a company's services to a particular buyer did not qualify.

Responding to the interpretive ruling on July 22, NAR President, Vicki Cox Golder, sent a 16-page letter to the office of HUD's general counsel. To say that the letter was comprehensive would be an understatement.

Specifically and primarily, the letter challenges HUD's characterization of an agent's activity as "mere referral". "…HUD incorrectly concludes that such activities are limited to the distribution of a brochure or flyer to the consumer and a verbal sales pitch designed only to sell the product. Home warranty products are optional in a real estate transaction, and consumers must be educated about these products. Real estate brokers and agents, therefore, devote valuable time to explaining home warranty products and assisting consumers in understanding the features, limitations, coverage, and pricing of home warranties. To the extent a consumer has a question about a home warranty that the agent cannot answer, the broker or agent also reaches out to the home warranty company on the consumer's behalf for more information. In addition, if a consumer decides to purchase a home warranty, he or she knows that the real estate broker or agent understands the details of the product, and the broker or agent often assists the consumer in working through coverage or claim issues."

More broadly, Golder's letter disputes the characterization of home warranty as a settlement service. "Home warranties…are not services that are necessary for closing or to effectuate the purchase of a home, and, as a result, should not be considered 'settlement services'. In fact, home warranties are optional products that should have never been included in the list of settlement services… home warranties should only qualify as 'settlement services' if a lender requires such a product as a condition of the loan."

There is far more detail in the NAR letter than could be covered here. It is, though, important to note that it also emphasizes that HUD should make clear that the ruling only applies to compensation on a per-transaction basis. It is still ok, presumably, for a broker to have a flat fee marketing services agreement whereby compensation from a home warranty company is received for general marketing to consumers through agents, and such compensation is not contingent upon specified purchases of the home warranty product.

HUD has not yet responded to the NAR letter. It would be surprising if HUD agrees with the objections. Until and unless they do, the ruling stands: no referral fees from home warranty companies to real estate agents or brokers.

Published: August 24, 2010

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .