By Peg Ritenour
Vice President, OAR Legal Services
Last month, another lawsuit was filed against an Ohio brokerage challenging the administrative fee it charges its customers. This case, involving a central Ohio brokerage, was filed in federal court and alleges that such fees violate RESPA. Like the two other cases filed against a Cleveland brokerage late last year, this new case is a class action suit, seeking treble (or triple) damages for all parties who were charged the fee, injunctive relief, court costs and attorney fees.
This Ohio litigation follows a 2009 decision by an Alabama federal court that held that such fees violate Section 8(b) of RESPA. In that case, Busby v. Realty South, the court found the brokerage performed no separate and distinct services to justify the fee. In the opinion of many RESPA experts and the National Association of REALTORS (NAR), the Busby decision misinterpreted RESPA and could be possibly overturned on appeal. However in the meantime, NAR has provided advice for brokers who charge such fees to avoid defending a costly class action challenge.
It is believed the basis for the court’s decision in Busby partially stemmed from the fact that the administrative fee charged by the brokerage was listed separately from the commission on the HUD-1 Settlement Statement. Additionally the court found that the administrative fee represented an additional charge to defray the overall costs of the services the brokerages provided, and was not for any additional services.
As a result, NAR and other RESPA experts have recommended that brokerages restructure how they handle such administrative fees to avoid a similar challenge. Rather than charge a separate fee for specific services, such as record retention, operating a Web site or regulatory compliance, NAR recommends that a brokerage include the fee as part of its over-all compensation for its service. For example, the brokerage would indicate in its listing that the fee for its service would be the percentage of the sales price plus the flat fee, (i.e., X % of the sales price plus $Y). To also avoid the outcome that occurred in Busby, brokerages need to make sure that the combined amount of the percentage plus the flat fee is indicated as one dollar amount on line 700 of the HUD-1 Settlement Statement.
This approach has been reviewed by HUD for compliance with RESPA. In a letter it recently issued to legal counsel in the Busby case, HUD makes it clear that RESPA does not regulate how a broker determines what it charges for its service. HUD indicated that a broker’s commission “may be determined using a flat fee, a percentage of the sales price or a combination of these methods.” Thus, it is strongly advised that brokers follow the approach recommended by NAR to avoid having to justify their administrative fee.
On the other hand, if brokers continue to break out their administrative fee as being separate from their commission, HUD’s letter makes it clear that the broker may be required to demonstrate that it performs separate and distinct services for that fee. If brokers are unable to demonstrate what additional services are provided for the fee, they could be exposing themselves to a RESPA challenge. (To see the HUD letter click here.)
OAR will closely monitor the class action litigation that has been filed in Ohio and will report developments in future issues of the Ohio REALTOR.