The U.S. Supreme Court last week provided real estate brokers a lot of clarity about administrative fees charged by brokerages when it ruled in favor of Quicken Loans in a lawsuit over unearned fees in the Real Estate Settlement Procedures Act (RESPA).
At issue was whether fees the lender charged, known variously as a loan processing or a loan discount fee, violated federal settlement laws. The plaintiffs in the lawsuits argued that the fees violated settlement laws because they weren’t tied to a specific service. But Quicken argued that the prohibition, in RESPA, only applied to fees that are split with another settlement service provider. Since it wasn’t split with anyone else, Quicken’s loan processing fee couldn’t constitute a RESPA violation. NAR, siding with Quicken, filed an amicus brief with the Court supporting the lender’s argument.
Short message on the case from NAR President Moe Veissi.
The Supreme Court agreed with Quicken and NAR, saying the RESPA provision very clearly applies only to fees that are split with another provider, therefore it affirmed the appeals court decision in favor of the lender.
“In order to establish a violation of [of the RESPA provision], a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons,” the court said in its ruling. “Because petitioners do not contend that respondent split the challenged charges with anyone else, summary judgment was properly granted in favor of respondent. We therefore affirm the judgment of the Court of Appeals.”
The case is important for real estate brokerages, because although the defendant was a lender, many brokers charge their own version of an administrative fee, on top of the sales commissions, and in some previous cases, courts have ruled that the fees violated RESPA. With this case, therefore, the Supreme Court has made it clear that the fees are okay, so long as the fees are not split with a third party who provides no services in exchange for the fee.
Read an analysis of the case by NAR Legal Affairs.
The most recent Gallup poll on perceptions of professional integrity shows 77 percent of consumers have either an average, high, or very high view of the honesty and integrity of real estate brokers and sales associates. Of that figure, the percentage that constitutes high or very high perceptions of integrity is 20 percent, suggesting the profession continues to have its work cut out for it in changing public perceptions. But the trend is moving in the right direction. Back in 1996, the corresponding figure was only 15 percent.
More consumers view practitioners' integrity high or very high than before. Source: REALTOR® Magazine analysis of Gallup data
As tough as it is for real estate practitioners, the picture is even bleaker for members of Congress, of whom consumers say only 7 percent have high or very high ethics or honesty. Advertising professionals also don’t score well, with consumers saying only 11 percent have high or very high ethics or honesty.
As they have for some time, nurses and doctors tend to rank high in consumers’ minds, with 84 percent of consumers saying nurses have high or very high ethics and honesty. The corresponding figure for doctors is 75 percent and for pharmacists, another high-scoring profession, 73 percent.
The bottom line: Despite the tough times the real estate market has been through, consumers’ views of the honesty of real estate professional has continued to improve, albeit not as quickly as anyone would like to see. But, steadily, the perception of the profession is moving up.
Practitioners come in the middle of the pack on perceptions of integrity.
From NAR Legal Affairs:
Resolving a circuit split in the manner urged by NAR, the Court rules that RESPA requires a fee split of a settlement-service fee for a §2607(b) violation.
In a case involving mortgage lending but which has direct application to real estate brokerage, the Supreme Court of the United States has determined that a violation of §2607(b) of the Real Estate Settlement Procedures Act (“RESPA”) only occurs when a split of a settlement-service fee paid by a consumer to a real estate settlement-service provider is split with a third party.
RESPA §2607(b) states that “[n]o person shall give and no person shall receive any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service [involving] a federally related mortgage loan”. “Real estate settlement services” are defined as covering all services connected to a real estate settlement, including real estate brokerage services.
Three married couples (collectively, “Consumers”) received mortgage loans from Quicken Loans, Inc. (“Lender”). The Consumers filed three separate lawsuits against the Lender, alleging that the Lender had charged fees for which no services were provided and therefore the fees violated RESPA. One such charge was labeled a “loan processing fee”, while another charge was a “loan discount fee”, even though it was alleged the Lender had not provided a discount. The Consumers did not allege that the Lender had split any of these fees with a third party.
The Lender argued that because it had not split its fees with any third parties there was no RESPA violation. The Consumers asserted that a 2001 policy statement issued by the United States Department of Housing and Urban Development (“HUD”) prohibited the collection of unearned fees for real estate settlement services and therefore any of the Lender’s charges where no services were provided violated RESPA. After the lawsuits were consolidated in federal court, the lower courts ruled in favor of the Lender and the Consumers appealed.
The Court affirmed the rulings of the lower court, resolving a split among federal circuit courts of appeal. Previously, some circuits had required a fee split with a third party in order for there to be a §2607(b) violation, while others had followed the HUD policy statement and prohibited unearned fees, even when a settlement-service fee was not split with a third party.
The Court rejected HUD’s policy statement and ruled that a §2607(b) violation requires the payment of a portion of a settlement-service fee by the party collecting the fee to a third party who performed no services in exchange for the fee. Looking at the plain language of §2607(b), the Court found that this section “unambiguously covers a settlement-service provider’s splitting a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.” Further, the Court stated that the language used by Congress in drafting §2607(b) describes two separate exchanges, where one party receives a settlement fee and then pays a portion of the fee to a third party. Without such payment to a third party, the Court determined that there is no violation of §2607(b).
The Court found the Consumer’s arguments unpersuasive. First, the Court declined to defer to HUD’s RESPA policy statement because HUD’s interpretation was inconsistent with the plain language of the statute. The Court also rejected the argument that the consumers were the ones making the prohibited payments when they paid settlement service providers unearned fees, as Congress could not have intended to make consumers potentially criminally liable when it banned both the payment and acceptance of certain types of payments.
Finally, the Court also stated that §2607(a) and §2607(b) contain separate prohibitions, rejecting the Consumers’ argument that the two sections must be read in conjunction with each other to ban unearned fees. Section 2607(a) broadly bans kickback arrangements in exchange for referrals of real estate settlement services, whereas §2607(b) covers arrangements dividing specific settlement service payments between two parties. Thus, the Court affirmed the rulings of the lower courts.
NAR filed an amicus curiae brief, arguing that a violation of §2607(b) occurs only when a real estate settlement service provider pays a portion of a settlement service fee to a third party who performs no services in exchange for the fee.
Freeman v. Quicken Loans, Inc., No. 10-1042 (U.S. May 24, 2012).
What the Freeman decision means for real estate brokerages
Suits alleging a violation of Section 8(b) of RESPA have been brought against real estate brokerages that charge consumers a flat fee in addition to a percentage-based commission. The first such suit, decided in 2009 in the case of Busby v. JRHBW Realty, Inc. d/b/a Realty South, sent shock waves through the brokerage community. In that case the court found that a fully disclosed administrative brokerage commission paid by a buyer violated Section 8(b) of RESPA because it was not sufficiently related to any specific service performed for the buyer’s benefit and could not be justified by the entire array of services provided to the buyer. In essence, the court found that a price increase violated RESPA merely because it was imposed as a flat fee added to a percentage-based commission as opposed to the brokerage simply charging a higher percentage-based commission. In spite of the fact that the ruling defied logic and was contrary to the language of the statute, other cases alleging the same violation soon followed, with equally troubling results. Today, in light of the unanimous Supreme Court ruling, such fees do not violate Section 8(b) of RESPA unless the broker who is paid the fee splits it and pays a portion of it to a third person outside of the brokerage firm who provides no services in exchange for the fee.
Today’s decision has no impact on any state laws that prohibit charging an administrative fee. Likewise, the decision does not in any way alter RESPA’s prohibition against the payment by a broker of anything of value in return for the referral of business to the brokerage.
Short message on the case from NAR President Moe Veissi.
By Wendy Cole, Managing Editor, REALTOR® Magazine
A year ago, Daryl Braham, CRB, GRI, was featured in REALTOR® Magazine as a standout broker for seamlessly juggling his duties as broker-owner of Prudential Premier Real Estate in Fargo, N.D., with his role as CEO and co-owner of innovative home construction company Heritage Homes. Somehow he also managed to serve as 2011 President of the North Dakota Association of REALTORS® at the same time. We wrote about his company’s distinguished honor in being named one of seven national finalists for the U.S. Chamber of Commerce’s Dream Big Small Business of the Year award, chosen from 75 impressive semi-finalists. Representing the Midwest region, Heritage Homes was recognized for its pioneering business practices, including its focus on women buyers, and for great success in driving local economic growth.
Braham (left) and Leslie were elated at their company's Dream Big Award from the U.S. Chamber of Commerce.
What a difference a year makes. This week Braham and co-owner Tyrone Leslie found out that the dream had come true. Heritage Homes was just named Dream Big Small Business of the Year by the U.S. Chamber. The company was cited for it exemplary performance in the areas of staff training and motivation, community involvement, customer service, and business strategy. “This was our Oscar moment,” said a giddy-sounding Braham, the day after receiving the award at a luncheon in Washington, D.C. “We had tears rolling down our cheeks. We were blown away.”
Heritage Homes has 24 employees and reported sales of $19.4 million last year, up 20 percent from a year earlier in a market in which new home construction starts were down nearly 20 percent. “We were told we had one of the best business plans they had ever seen in this competition,” added Braham, who is also currently NAR’s political fundraising liaison.
Had Heritage Homes waited until next year to apply for the award, its business success may well have kept it out of the running. Eligible companies must have revenue below $20 million. “This was probably our last chance to win,” Braham said.
Braham is understandably proud of his employees and their tireless efforts to keep Heritage at the top. “We have a great team, and we’ve empowered them all to execute on their great ideas. Everyone on the team is a leader,” he said. Among the company’s innovative practices: “We have mandatory reading. And it helps. Everyone had to read Jack Stack’s The Great Game of Business, which helps you see how to turn business into a game. Everyone working with us has an important role.”
The award included a plaque and a $10,000 cash prize.
May 17 was a good day for real estate. Some 13,000 REALTORS® from every part of the country—and even many real estate professionals from outside the country—joined together at the Washington Monument for one of the most spirited rallies Washington has surely ever seen.
NAR President Moe Veissi summed it all up when he said that home ownership is too important to the American economy and to the American identity for the federal government to consider doing anything that could harm it—especially at a time when the economy continues to struggle with a recovery. Six of the last eight recessions ended only after real estate recovered, so clearly now is not the time for lawmakers and policymakers to consider any rules or legislation that could destabilize the market.
Sen. Johnny Isakson (R-Ga.), who spoke at the rally, called housing “the answer to get us from where we are to where we want to go.” That’s a way of saying home ownership is the key to the economic recovery. Rep. Steny Hoyer (D-Md.), the House minority whip, also spoke, calling REALTORS® the best advocates home ownership could possibly have on Capitol Hill.
Almost 20 members of Congress joined REALTORS® at the rally and almost two dozen media outlets were there. And more than 14,000 REALTORS® attended virtually. More are going to the virtual site even now.
The message is clear. Home ownership is a bedrock value of our country, core to the American Dream, and, as NAR President Moe Veissi put it, REALTORS® are the architects of the American Dream.
That’s something lawmakers in Washington from both parties always knew, but it can’t be any fresher in their minds than it is now—thanks to everyone’s outpouring of activism on May 17.
Make sure you check out the FanCam from the rally. If you were there, you can find your picture and tag yourself. It’s quite a thing to see. Go to the REALTOR® Rally FanCam.
For a taste of the Rally, watch the 2-minute video above.
More than 10,000 REALTORS® are expected to descend on the National Mall in our nation’s capital tomorrow morning for the Rally to Protect the American Dream, and not all of them are attending the NAR Midyear Legislative Meetings & Trade Expo. In fact, a bus left from Bismarck, N.D., yesterday morning to bring a handful of REALTORS® to Washington just so they can attend the Rally and remind legislators that home ownership matters.
The group got some big assists from local real estate-related organizations, which donated gift cards to help alleviate some of the travel costs. Additionally, the Greater Baltimore Association sent a care package with games, snacks, Baltimore Orioles sports paraphernalia, and Old Bay seasoning to help make the journey a bit more pleasant.
The group is heading into Indiana as I’m writing this, and they’re expected to arrive sometime either late tonight or early tomorrow morning. Here are some photos of their journey so far.
Getting started...
Welcome to the Badger State!
Hope the bus driver isn't in this photo.
We hope to see you at the Rally to Protect the American Dream tomorrow. If you can’t make it, be sure to attend virtually.
About 13,000 REALTORS® are expected to be at the Washington Monument on Thursday, May 17, for the Rally to Protect the American Dream. If you can’t be one of them, you can participate virtually—and we hope you do. Participating in the virtual rally is easy and should be fun, too. But more than that, it’s important for advancing REALTORS®’ federal legislative and regulatory agenda in the months ahead. Because you can contact your members of Congress from the virtual rally site. Letting them know you care about home ownership is a big part of what the Rally is all about.
Here’s how the virtual rally works. On Wednesday, May 16, go to www.RealtorRally.org, and add your name to a map of the United States. You’re basically checking in to the virtual rally and letting your colleagues and friends know you’re participating with the 13,000 REALTORS® who will be at the Washington Monument.
On the site you can do a lot of things, including tweeting and adding posts to Facebook. And you can let your senators and your congressperson know that you’re as much a part of the Rally as those who are in Washington in person.
On the day of the Rally, there will be lots to do—videos, pictures, and more.
On the day after the Rally, there will be a fun FanCam image posted. If you’re not familiar with what that is, it’s a wide-angle image that essentially captures every person at a big event like the Super Bowl. Even if there’s 100,000 people at the event, the image captures each one, so on RealtorRally.org you can click on each person to get a snapshot of each one. It’s quite a momento from the event.
We hope to see you at the Rally—in -person if possible but virtually if not. Attending virtually is a great way to show you share your colleagues’ effort to protect home ownership as central to our country’s priorities.
How does the virtual rally work? Watch the 90-second video above to see.
Why the Northern Virginia Association of REALTORS® will be at the Rally in force.
NAR President Moe Veissi told a panel of U.S. senators yesterday that the last thing the housing market needs right now is another reason for lenders to decline your client’s mortgage loan application.
“Tight lending standards remain a problem,” he told the members of the U.S. Senate Banking Committee subcommittee on economic policy, “and we don’t want to give a lender another excuse not to approve a loan.”
The Senate panel was looking at long-term reauthorization and reform of the National Flood Insurance Program. NAR supports reauthorizing federal flood insurance for five years and making reforms that would strengthen the program. As it stands, the program is set to expire at the end of this month, and REALTORS®, when they’re in Washington next week for the Rally to Protect the American Dream and the NAR Midyear Legislative Meetings & Trade Expo, will make the program reauthorization an advocacy priority. Members will be meeting with members of Congress from their state in their annual Hill visits.
Many lawmakers on a bipartisan basis support reauthorization, but extending the program is always a challenge. Congress in the past several years has reauthorized the program in short-term increments, and a couple of times it allowed the program to lapse for a short period. Those lapses, as short as they were, have been very hard on the market. Thousands of transactions couldn’t close—and that’s what President Veissi means when he talks about giving lenders another reason to say no.
And the problem isn’t a coastal issue. As President Veissi says in his testimony, which you can see in the the 3-minute video above, flood plains are everywhere, so the absence of insurance is a nationwide problem.
In April, the magazine hosted a webinar with two NAR attorneys—Ralph Holmen and Finley Maxson—in which we examined six cases and their potential impact on your business. Last week, I wrote a post on the RESPA case, Freeman v. Quicken Loans. Here’s a look at the Fair Housing case that we discussed. Remember: If you have questions about how or whether these laws or cases apply to your situation, seek the counsel of a qualified attorney.
Issue: Can the federal fair housing law be used to battle local ordinances that might disproportionately hurt minorities?
The Law: The federal Fair Housing Act went into effect in 1968 and was amended in 1988. The law makes it illegal to discriminate in the sale, lease, or rental of housing—or to make housing otherwise unavailable—on the basis of race, color, religion, sex, handicap, familial status, or national origin.
The Case: We looked at Gallagher v. Magner, which I found fascinating because of the way it turned my conception of fair housing law on its head. I have always thought of property owners, managers, and salespeople as the targets of fair housing enforcement. But in this case, it was the property owners making the accusation. A group of owners in St. Paul, Minn.—with portfolios ranging from one property to 40—filed a claim against the city and city employees, including Steve Magner, supervisor of the city’s Department of Neighborhood Housing and Property Improvement. The owners argued that the city’s stepped-up enforcement of housing codes increased their costs in leasing their properties and so disproportionately affected low-income tenants—and minorities in particular—through increased rents. Among the owners’ arguments was that DNHPI’s policies and actions had a disparate impact on protected classes—in other words, the city’s policies and actions had the effect of discriminating.
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