Additional fees charged by real estate agents separate from their basic contingency fee were the subject of a recent letter to industry lawyers from the federal Department of Housing and Urban Development (HUD). The HUD letter reiterated its long-held stance that the federal government does not cap the fee a broker may charge his client. However, it does require that all broker fees – both percentage-based and flat-rate contingency fees – be proper for the service rendered and be disclosed. The new HUD-1 form, in use since January 1, 2010, allows escrow to list the various separate charges comprising the broker fee. [See first tuesday Form 402]

Failure to disclose a fee to the buyer and seller on the sale of a one-to-four unit residential property exposes the broker to HUD review of the fee under the Real Estate Settlement Procedures Act (RESPA). RESPA requires all fees paid to brokers — settlement service providers — to be for services actually rendered by the brokers or their agents. RESPA violators are punished with stiff monetary penalties, imprisonment and possible loss of licensure, in addition to legal entanglements brought about by clients.

This letter clarifies the “garbage fee” issue about the no-service/duplicate-service, add-on fee prohibition set out by RESPA and the Busby v. JRHBW Realty, Inc. case. [For more information on the Busby v. JRHBW Realty, Inc. case, see the June 2009 first tuesday article, An ABC fee by any other name.]

first tuesday take: The HUD letter calls out the broker fees by making a reference to the listing agreement. However, it’s the HUD-1 that is the real controlling factor behind the contention. Violations of RESPA are complaint-driven; HUD only investigates HUD-1s for RESPA violations when buyers lodge complaints about fees that have been paid to brokers (or other service providers) on their purchase of a home.

The HUD-1 reflects fees paid to the broker whether or not they are set out (disclosed) in the purchase agreement as they should be, and the fees that are reflected in the purchase agreement typically exist due to the employment under a listing agreement — with the seller, the buyer or both.  Thus, it is important for there to be a proper structure of fees across all three forms to avoid being held liable for later claims of RESPA violation.

It’s rare to see a broker structure his contingency fees as fixed or percentage-based and then accompany them with an additional stated garbage fee. In most cases, fees collected in addition to the percentage contingency fees are garbage fees which invite RESPA trouble. The escrow industry is replete with these garbage fee violations itemizing additional fees for services necessarily performed by escrow for the sale to close.

In the recent past, purchase agreement forms provided by other California publishers contained boiler-plate provisions for payment of transactional fees — to so-called “transaction coordinators” — for services implicit in the services already included by their necessity in the contingency fee charged by the broker. These provisions have since disappeared from such purchase agreements.

To avoid misunderstandings down the line, go with either a single flat fee or a percentage fee, both contingent on closing the sales transaction. Listing brokers: don’t fall into the nickel-and-dime trap of adding garbage fees for services necessarily included in locating a buyer or a property, negotiating a purchase agreement and dictating escrow instructions or coordinating the client activities to close escrow.

Re:  “HUD taking a closer look at added realty fees” reported by the Washington Post