Home Warranty Companies and Section 8 Violations

HUD issues Final Rule RE: Home Warranty Companies and Section 8 Violations On June 25, 2010, HUD issued a final rule addressing whether compensation paid by Home Warranty Companies to real estate and mortgage brokers violates Section 8 (the “anti-kickback” section) of RESPA. The rule is effective on the date it was published (June 25), but HUD is accepting public comments until July 26, 2010. Some real estate and mortgage brokers have partnered with home warranty companies to sell warranties in connection with the sale or purchase of a home. The warranty companies typically pay the referring broker a fee on a per transaction basis. The problem with this of course is that home warranties are considered a “settlement service” under RESPA – and this type of compensation is considered a “kickback” unless: “The broker or agent provides services that are not nominal and there is not a duplicative charge”. What does this mean for the average originator or real estate agent? RESPA Section 8 states that a referral is not a compensable service. If an originator or agent is receiving money from a home warranty company, they must be providing an actual and necessary service that is distinct from their primary duties. HUD interprets that marketing the product is a referral to the settlement service provider and any compensation received for marketing activities would be considered an illegal kickback. HUD will determine in each case if the services rendered meet the criteria for legitimate compensation based on several factors including: • Were the services to be performed outlined in a contract between the agent and the warranty company? • Were the services performed outside of what an average originator or agent would typically do? • Did the originator/broker fully disclose to the client that they were being compensated by the warranty company? • Was it made clear to the client that they may purchase a home warranty from another vendor, or choose not to purchase one at all? • Is the originator/broker a legal agent of the home warranty company, and the company assumes liability for any representations made by the broker about the warranty product? • Is the compensation reasonable for the services performed? If it is factually determined that only actual compensable services have been performed, then transaction based compensation would be reasonable and not an indicator of an unlawful referral arrangement. Bottom line: A payment by a home warranty company for marketing services performed by a real estate agent or loan originator is an illegal kickback for a referral under section 8.