by Peg Ritenour
VP Legal Services & Administration

Last week a federal district court in Ohio issued a ruling that could impact brokerages that charge a flat fee as part of their commission. Like the Alabama case, Busby v. Realty South, the judge in this case found that a fee charged by a central Ohio brokerage violated the Real Estate Settlement Procedures Act, known as RESPA. Below is a summary and analysis of what this decision means for Ohio brokers.

The Facts of the Case
This lawsuit was filed in the U.S. District Court for the Southern District of Ohio, Eastern Division against a central Ohio brokerage by buyers it represented in the purchase of a home in 2009.  Prior to purchase, the buyers were presented with the brokerage’s Consumer Guide to Agency Relationships that included language explaining that the brokerage charged its buyers a total commission package that consisted of a $199  “broker’s commission,”  plus the cooperative commission offered by the listing broker.  Upon the closing of the transaction, this fee was paid to the brokerage by the buyer and the brokerage also collected a commission from the listing broker. However on the HUD-1 closing statement, the title company erroneously labeled the $199 an “admin fee” rather than a commission.

Following the closing, the buyers brought a class action suit on behalf of all persons who had paid the $199 fee to the brokerage. The plaintiffs alleged that payment of the $199 commission violated Section 8(b) of RESPA because (1) no services were rendered for the fee and/or (2) because it was a duplicative fee for services already rendered as part of the cooperative commission paid to the brokerage.

The Court’s Decision
Section 8(b) of RESPA is titled “Splitting Charges” and provides as follows: “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 in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

On its face, Section 8(b) appears to prohibit a settlement service provider (i.e., real estate brokers, lenders, title companies) from splitting a fee with another settlement service provider who did not perform any services in exchange for that fee.  In this case it is undisputed that the $199 fee paid to the brokerage was not split with any other person or entity.  Despite this fact, the district court denied the brokerage’s motion to dismiss the lawsuit, holding that a Section 8(b) violation could occur if a fee is charged for which no work is performed, even if it is not shared with anyone else.

Following discovery, both the plaintiff and brokerage filed motions for summary judgment arguing that because there was no genuine issue as to the facts, they should prevail based upon the law. In its brief in support of its motion for summary judgment, the brokerage presented testimony regarding the numerous services that it provided the buyers in the course of representing them in this transaction. The brokerage argued that the $199 fee was not for any specific service, but instead was a part of the total commission package it charged for all of the services involved in representing the buyer in the transaction.  The brokerage also argued that it began charging the $199 fee as a way to raise its prices to support new and upgraded services.  These included a robust website, mobile marketing system and other automated services.

In considering the motions for summary judgment, the judge acknowledged that RESPA is not a price control statute and that a broker can change its fee structure to increase its profits.  However, the judge concluded that because the intent of RESPA was to ensure that services are provided in exchange for fees, the judge held that the fee had to be tied to a specific service. In this case the court found the $199 fee was charged by the brokerage as simply a way to defray expenses and was not connected to a specific service provided to the buyers. Therefore, it found the fee to be unearned and granted the plaintiff’s motion for summary judgment. In reaching this decision the judge stated that the fact the fee was mistakenly called an “admin fee” on the closing statement was irrelevant. The sole issue was not what the fee was labeled, but rather whether a service was provided in exchange for that fee.

Why the Court Got it Wrong
Both NAR and OAR counsel believe the decision rendered in this case is flawed for several reasons.  First, as discussed above, Section 8(b) was intended to prohibit the splitting of fees between settlement service providers where one of those providers does not provide service.  In this case, the brokerage did not split this fee with anyone else and the motion to dismiss should have been granted. The issue of whether a split of fees is necessary for an 8(b) violation is one on which several federal courts have disagreed. The U.S. Supreme Court currently has a case before it that involves this issue and a decision on whether it will accept that case should be forthcoming in the next several months.

Moreover, because RESPA is not a fee setting statute (as the court recognized several times), a brokerage may raise its fees as it deems necessary. As HUD confirmed in a letter to NAR counsel in 2010, brokers are also free to charge consumers a fee that is a combination of a percentage of the sales price of the property and a flat fee without violating RESPA. In this case the brokerage was paid such a combination of fees; the mere fact that part of the compensation was in the form on a flat fee should not require the broker to attribute a specific service to that fee.

Advice for Brokerages
While this case is certainly one that brokers should carefully review, it should also be noted that this decision does not create a binding precedent. This means that judges in other districts, including the Northern District of Ohio, could rule differently on this issue, as other courts have previously done.

Although is expected that this decision will be appealed to the U.S. Sixth Circuit Court of Appeals, until that appeal process is concluded, brokerages that charge a flat fee as part of their compensation package are urged to review this decision with their legal counsel, especially those located within the jurisdiction of the Southern District.

It is recommended that a broker’s discussion with legal counsel should address ways to minimize the risk of having to defend a costly class action suit challenging a fee similar to the one charged in this case. Obviously the safest option is to discontinue charging the fee until this issue is resolved by either the Sixth Circuit Court of Appeals or the U.S Supreme Court. A second option is to identify a specific service that is provided in exchange for the fee charged.  When identifying that service, though, brokers must make sure that the fee charged is reasonably related to the service provided. Brokers should also avoid attributing the fee to a service that it performed before it began charging the fee or to one the brokerage is required by law to perform (i.e., providing mandatory disclosures , maintaining records, providing parties copies of signed documents, etc.).

Updates on the status of this case and other cases involving this issue will be reported as they occur.

To view a copy of the judge’s decision at
http://www.sconet.state.oh.us/PIO/summaries/2011/0914/091806.asp