by Peg Ritenour
Vice President of Legal Services

As a result of an interpretative rule issued by HUD in June, home warranty companies (HWCs) are beginning to issue notices to real estate brokers regarding their compensation arrangements.  In some cases, the home warranty companies are suspending payments to agents and brokers, other HWCs are imposing new obligations on licensees to qualify for payment.

These changes are in response to HUD’s interpretative rule addressing its position that in many instances, the payment of a fee to a REALTOR for “selling” a home warranty constitutes a referral fee in violation of RESPA.  HUD has indicated that directly marketing a warranty to a consumer (i.e., a “sales pitch”) constitutes such a prohibited referral.

In order to be permissible, HUD stated that REALTORS have to perform other substantive services that are actual, necessary and distinct from the services they provide as REALTORS.  HUD provided a few examples of such services along with other factors it will consider, but clearly stated that it would make determinations in a case by case basis.

Following the issuance of this rule, HUD accepted comments for 30 days.  NAR and RESPRO submitted such comments, indicating why they believe such payments are permissible under RESPA and seeking further clarification from HUD on many points.  To date, HUD has not issued any revision to its rule.

It is important to note that the interpretative rule issued by HUD represents merely that HUD’s interpretation of how RESPA applies to such fees.  It is not the result of legislation and it is possible that the courts may not agree with HUD’s interpretation.

However, many home warranty companies are concerned about HUD’s position and are taking a cautious approach.  Real estate brokers around Ohio are being notified by some HWCs that they will no longer pay agents for each policy sold.  Others are imposing new duties that agents must perform in order to qualify for payment.

Although HUD did provide a few examples of additional services REALTORS could perform, it is important to note that HUD did not provide any absolute guarantee that these will insulate a home warranty company or REALTOR from scrutiny.  Instead, HUD clearly stated that it will make case by case determinations.

For this reason, brokers should carefully review any new programs submitted by a home warranty company that are touted as being in compliance with the new rule.  This vagueness to HUD’s rule makes it difficult, if not impossible, for any home warranty company or brokerage to know with any certainty whether its compensation program will pass HUD’s review.