Realtors' Add-On Fees Invite Trouble From HUD


WASHINGTON--The top lawyer for the nation's 800,000-plus members of the National Assn. of Realtors has just issued an unusual warning to realty brokers: Be careful if you charge home sellers or buyers any extra fees beyond your standard commission. You could be inviting trouble from the federal government or private lawsuits.

Laurie Janik, general counsel for the trade group, said the growing number of brokerage firms that charge extra fees--typically ranging from $250 to $595--may draw "unwanted attention" from federal regulators and consumers. In particular, Janik said, regulators from the Department of Housing and Urban Development might view these burgeoning charges as "unearned fees" if they are not accompanied by "bona fide" services performed on behalf of the consumers asked to pay them.

The extra charges, often labeled "transaction fees," "processing and handling" or "regulatory compliance" on buyers' and sellers' settlement sheets, are popping up across the country. Janik said some brokers are imposing additional fees on top of their regular commissions "in reaction to increasing costs and pressure to reduce commission rates."

Some brokers confirm that part of their motivation for imposing add-on transaction fees is purely economic: To retain their most productive sales agents, they are under increasing pressure to share higher and higher percentages of the commission dollar. Some firms give agents 90% to 100% of the commission proceeds, a huge change from the 50/50 or 40/60 splits commonplace 10 to 15 years ago.

Janik says the question marks now surrounding these add-on fees arise from a policy statement issued by HUD last October. In that statement, the agency said that federal law prohibits charges imposed by any settlement-service provider for which nominal, duplicative or no work is performed. The same holds for fees charged that exceed the reasonable value of the goods, facilities or services provided.

In the latest issue of the realty association's monthly magazine, Janik warned members that HUD "may challenge your company if it adopts a commission-plus-flat-fee form of compensation." Whether HUD's view of the law ultimately will be upheld in a court test is somewhat unclear.

Janik cited two federal cases that disagreed with the agency's underlying position. In Echevarria vs. Chicago Title & Trust Co., a title company marked up recordation charges to consumers. An appellate court held that the federal settlement procedures law does not specifically ban such practices, since no split of the extra charge was shared with another participant in the transaction.

That decision provoked HUD to "reiterate" its position on all forms of home real estate settlement-cost markups. The agency said no markups are permitted unless accompanied by extra services, goods or facilities commensurate with the extra charges. HUD officials have not issued specific written guidance to Realtors on the increasing imposition of transaction and processing fees on their commission-paying customers. But Janik thinks HUD's overall policy could be construed to cover these add-on fees, and that firms which charge them risk regulatory entanglements that could prove costly.

For example, in one recent settlement, a prominent mortgage banking company admitted no wrongdoing but paid $50,000 to the federal Treasury and put aside an additional $35,000 for refunds to customers. HUD investigators alleged that the firm, headed by John A. Courson, incoming chairman of the Mortgage Bankers Assn. of America, illegally marked up credit report charges on hundreds of its loan applicants from 1998 to 2001.

Although HUD also found that many other borrowers were undercharged by the firm on credit reports during the same period, Courson decided to settle rather than fight a federal agency in court, with attendant high costs and unfavorable publicity.

Implicitly, the same arguments could be made on the Realtor transaction fees flagged by Janik. Brokers say they have legitimate reasons for charging the fees. But do they want to fight the federal government over them? Aggressive federal regulators have the odds on their side, according to legal experts.

Janik advised realty firms that until HUD's position is either upheld or reversed in court, "brokers must carefully examine the justification for any charges to consumers" beyond their traditional compensation.

"To play it safe," said Janik, "brokers should be sure they aren't charging consumers additional fees for services that have traditionally been provided as part of the base compensation."

The bottom line for consumers: Be aware that "transaction fees" and other add-ons are increasingly being charged by brokers, but that even the Realtors' top legal authority wonders if they're a smart idea.


Kenneth R. Harney's e-mail address is Distributed by the Washington Post Writers Group.

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