RESPA: Confusion Still Reigns Over What Fees Are Prohibited

"RESPA" stands for the Real Estate Settlement and Procedures Act.  Title companies and real estate brokerages are keenly aware of RESPA as it affects them in their day to day business.  One area of confusion has been exactly what types of fees are prohibited under RESPA. You'd think it would be simple but that's asking too much. (Yes, there's some cynicism in that statement.)

There's not much argument that RESPA (section 8(b)) prohibits what is commonly referred to as "kickbacks".   An example of that would be if I were to refer a customer to a title company and the title company gave a cut back to me of the fees it earned on that customer's transaction. I didn't perform any services on the transaction but was paid a fee out of it. That would be considered a kickback and is prohibited.

However, the courts and HUD (the federal department in charge of enforcing RESPA) are not in agreement on whether other fees are prohibited or not. HUD has interpreted RESPA to outlaw unearned fees, overcharges and mark-ups. This is problematic as determining what amount is an overcharge, for example, can be quite subjective.

Some courts have disagreed with HUD and have taken a stricter reading of RESPA section 8(b). For example, some brokerages charge a flat commission fee on top of the percentage commission. The reason is to keep the commission fee from being split with the agent. However, some courts consider this flat commission fee to be "unearned," finding that it is not directly tied to a service performed and therefore prohibited. Other courts have taken a different position, holding that section 8(b) doesn't apply unless the unearned fee is being shared between two parties. This is the position held by the 5th Circuit Court of Appeals in Freeman v. Quicken Loans.

The bottom line is that confusion currently reigns when it comes to understanding what fees are permitted under RESPA. The US Supreme Court recently agreed to hear an appeal of the Freeman case. We can only hope that some of these questions can be answered. It's hard to comply with the rules, when no one can agree on what the rules are.
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