Mortgage Fraud by hcj

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									White Paper on REALTORS®, Home Warranty Companies, and RESPA By Seth G. Weissman, GAR General Counsel A recent letter written by a HUD assistant general counsel suggests that marketing and administrative services agreements between REALTORS® and Home Warranty Companies (“HWC’s”), in general, likely constitute violations of RESPA. While the letter is an unofficial staff interpretation of RESPA, and therefore not binding upon any settlement service provider, it has prompted a firestorm in the REALTOR® community since such agreements between HWC’s and REALTORS® are fairly common. NAR has written a 14-page letter to the secretary of HUD, urging, among other things, that the letter be withdrawn for further consideration. In light of the abrupt change in the legal landscape regarding agreements between HWC’s and real estate brokers and agents, REALTORS® in Georgia should review their practices in this area and decide, depending on their tolerance for risk, whether changes in their current agreements with HWC’s are appropriate. BACKGROUND Real estate closings involve any number of what are known as “settlement service providers” including closing attorneys, mortgage lenders, home inspectors, surveyors, appraisers, and title insurers and home warranty companies. Home warranties are an increasingly standard protection sought by home buyers as part of the closing process. Real estate agents and brokers are often responsible for performing a variety of services related to the marketing and/or issuance of home warranties and agents and/or brokers are normally paid a fee by HWC’s for performing these services. The letter from the HUD assistant general counsel has called into question the legality of these arrangements, citing Section 8 of RESPA. RESPA regulates real estate settlement procedures, and these regulations apply to all settlement service providers, including real estate brokers, agents and HWC’s. Section 8 of RESPA concerns kickbacks and referral fees between such service providers. In general, any fee paid by one service provider to another, for the referral of settlement services business, is a violation of Section 8. The only formal opinion of HUD on the arrangements between HWC’s and real estate agents and brokers was issued on November 15, 1996 by Nelson A. Diaz, who was secretary of HUD at the time. Mr. Diaz’s letter read, in part, as follows: “A home warranty is a settlement service covered by RESPA. The RESPA regulations do not prohibit a person [e.g., a REALTOR®] from receiving more than one fee in the transaction. However …the payment must be for services that are actual, necessary and distinct from the services provided by such person. Additionally, the fee itself must be reasonably related to services actually performed.” Based on this opinion, REALTORS® and HWC’s have entered into a variety of different types of marketing and administrative agreements.

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The majority of the agreements between REALTORS® and HWC’s are either “marketing agreements” or “administrative services agreements.” As NAR pointed out in its letter, HWC’s have entered into marketing agreements with real estate brokers under which the broker is required to perform a number of general advertising and promotional services on behalf of the HWC on an ongoing basis, that are separate and distinct from real estate brokerage services. These include the following:  marketing and promoting the HWC, its products, policies and services to the broker's customers and agents through the broker's advertisements, publications and other materials, and specifically include the HWC's name and logo in such materials; assisting the HWC in preparing advertisements, pamphlets, brochures, flyers and other marketing and promotional materials that the HWC will target towards and distribute to the broker's agents; permitting the HWC to advertise and promote its products in the broker's publications, including newsletters, articles for publication and other written materials; displaying the HWC's signage, advertisements, pamphlets, brochures, flyers, and other marketing and promotional materials at all broker locations and open houses, and use commercially reasonable efforts to cause its agents to do the same; making the HWC's advertisements, pamphlets, brochures, flyers, and other marketing and promotional materials outlining pertinent information about the HWC's products available to the broker's customers and agents at broker-sponsored events; providing the HWC with access to and sponsorship credit and recognition at broker-sponsored events for agents;  using commercially reasonable efforts to cause its agents to market, promote and advertise the HWC's products and request that they distribute information concerning the HWC's products to prospective providing the HWC with access to its sales meetings so that the HWC may offer updates and explain warranty products and policies to agents, assist the HWC in coordinating any such presentations, and use commercially reasonable efforts to cause its agents to do the same; making additional times available for the HWC to conduct educational training, and use commercially reasonable efforts to cause its agents to do the same; including voice promotion messages for the HWC on telephone lines when callers are on hold; including information about the HWC's products and services on the broker's website, including banner advertisements and links to the HWC's web page; providing the HWC with mailing lists for offices and agents; incorporating into Listing and Purchase Agreements a clause providing the option to purchase a home warranty product or waive the right to purchase a home warranty product in such agreements, where permissible;

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including a HWC product application in seller and buyer information packets; meeting periodically with HWC representatives to review the parties' performance under the marketing agreement; and monitoring claims and loss experience to manage risks and adverse selection of homes with the HWC's home warranties.

NAR similarly pointed out that with administrative services agreements, the real estate agent or broker might perform other services that are also separate and distinct from real estate brokerage services. These include the following, among other things:  presenting a description of home warranty products to potential customers, including features, benefits and limitations of the products, coverage, and pricing options; performing visual inspections of covered systems and appliances on covered properties to help identify pre-existing conditions that could affect home warranty coverage and report to the HWC regarding such inspections; completing home warranty product applications, including customer and property information and coverage options, and submit such applications to the HWC via telephone, facsimile, U.S. mail, electronic mail, or Internet for processing, approval, and contract issuance; collecting and remitting payments from sellers or buyers, or provide payment instructions to settlement agents and ensure that payments are remitted to the HWC; providing customer service to sellers and/or buyers after closing during the initial coverage period under the home warranty contract; assisting in resolving disputes between the HWC and the seller and/or buyer if and when they occur during the initial coverage period under the home warranty contract; submitting on a monthly basis, the names, offices, addresses, and e-mail addresses for agents/sales associates to the HWC; electronically transmitting to the HWC on a daily basis transaction data, including at least addresses, sales associates' names, office listing expirations, terms of listings, status (active, terminated, expired, closed), closing dates, and buyer- or sellercontrolled (or both); and conducting surveys of why customers purchased or elected not to purchase home warranties, and report the customers' responses to the HWC.

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NAR made these arguments to rebut the HUD attorney’s comments that “The experience of HUD’s RESPA enforcement staff is that it would be difficult for real estate agents and brokers to establish that the services they provide in connection with a homeowner warranty merit additional compensation that is in accordance with Section 8 and HUD’s regulations.” The problems with the HUD assistant general counsel’s letter are: 1) its incredible breadth suggesting a blanket disapproval of all marketing and administrative services

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agreements between HWC’s and real estate brokers and agents, and 2) the surprise nature of a communication that appears to deviate from HUD’s prior interpretations of RESPA. In this regard, Sections 8(a) and 8(b) of RESPA prohibit payments in return for the referral of business incident to or part of a settlement service in connection with a federally related mortgage loan and the splitting of unearned fees, 12 U.S.C. § 2607(a) and (b). However, Section 8(c)(2) expressly permits bona fide compensation in return for goods or facilities actually furnished or for services actually performed, 12 U.S.C. § 2607(c)(2). It is this section which REALTORS® and HWC’s have traditionally relied upon in entering into administrative services agreements. According to HUD, a payment will qualify for the Section 8(c)(2) exception and comply with RESPA so long as: (1) the payment recipient furnishes actual goods or facilities or performs services that are actual, necessary and distinct from the primary services provided by such person; and (2) the payment amount is reasonably related to the value of such goods, facilities or services, without taking the value of any referral into consideration, 24 C.F.R. § 3500.14(g). Moreover, specifically with respect to marketing agreements, RESPA does not prohibit normal promotional activities on the part of settlement service providers such as HWC’s. Regulation X, 24 C.F.R. § 3500.14(g)(i)(vi). It is this language which is the basis for the type of marketing agreements between real estate agents and brokers and HWC’s. HUD has stated that the payment of marketing costs "in a manner that does not bear on the amount of loan business referred" may be permissible. See HUD Informal Advisory Opinion, dated December 11, 1986, by Grant E. Mitchell. In both of the scenarios evaluated by the HUD attorney, the payments by the HWC’s were paid on a transaction basis where the real estate agent/broker is only compensated when the consumer purchases the HWC product. It may well be that this was the primary concern of the HUD assistant general counsel with the marketing and administrative services agreements he reviewed. NAR, in it’s letter to HUD on these issues, acknowledged that transactionbased compensation in return for general marketing services may be difficult to justify under RESPA (at least when there is no cap on those payments). NAR’s point, however, which is the correct one, is that HUD should not prohibit all marketing and/or administrative agreements between HWC’s and REALTORS® but should instead evaluate each case on its merits. CONCLUSIONS AND RECOMMENDATIONS In light of this adverse opinion by the HUD attorney, what should Georgia REALTORS® who have entered into such agreements do? My conclusions and recommendations are as follows: 1. Any type of administrative/marketing agreement between an HWC and a real estate broker/agent is at risk of being found to violate RESPA until such time as HUD modifies or withdraws its informal opinion. The agreements with the greatest potential for risk are likely those where fees are paid on a transaction basis. The hope is that HUD will issue further guidance on this issue before commencing enforcement

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action since the opinion of the HUD assistant general counsel was informal and nonbinding. 2. If a broker/agent is willing to accept some degree of risk in entering into or continuing a marketing/administrative services agreement with an HWC, the agreement should be in writing and reviewed by an attorney for compliance with RESPA in light of the new risks posed by the recent opinion of HUD’s legal counsel. 3. Any payments made to a real estate broker/agent pursuant to a marketing/administrative services agreement should be reasonably related to the fair market value of the services being performed by the brokers/agents, must be separate distinct from the services normally performed by a real estate broker/agent in the course of their business and should not under any circumstances be for the referral of business from the brokers/agents to the HWC’s. Wherever possible, the agreements should be revised so that payments are not transaction based, i.e. tied to the issuance of home warranties.

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