The growing practice among real estate brokers of collecting extra money from their clients at closing has been placed under a cloud by the Department of Housing and Urban Development.
More and more brokers have been charging either one side of the transaction or the other -- and sometimes both -- so-called "administrative" or "processing" fees. Such charges, often several hundred dollars over and above commissions, is supposed to offset added costs brokers attribute to government-mandated record keeping and disclosure requirements.
But in a policy statement issued late last month, Assistant Housing Secretary John Weicher indicated that such charges could run afoul of Section 8(b) of the Real Estate Settlement Procedures Act (RESPA), which prohibits anyone from collecting fees for anything other than goods or facilities actually provided or services actually performed.
Some have interpreted RESPA to mean that as long as two or more settlement service providers don't split a fee, it is legal. And earlier this year, the Seventh Circuit Court of Appeals held that the 1974 law prohibits payments for which no services are performed only if those payments are shared with another party.
But HUD, which was not a party to that or other court cases involving RESPA, disagrees, saying that such a conclusion is "inconsistent" with its long-standing regulations and interpretations.
The courts can disagree with HUD's policy statements. But if they don't, and Weicher sticks to his guns, the plaintiff bar can be expected to have a field day, with the number of class action suits easily totally in the thousands. If they prevail, the real estate brokerage business is so highly leveraged that it's doubtful many could keep their doors open.
It's difficult, if not impossible, to determine how many brokers charge administrative or processing fees. They rarely discuss their rates and fees in public for fear of violating anti-trust laws.
The National Association of Realtors has no idea about how widespread the practice is, only that it is a custom mostly among larger brokerage firms. But judging from Internet discussion groups, the number appears to have increased significantly in the few years since it was first introduced by realty agencies on Florida's West Coast.
It also appears that few consumers have complained about the fees. For one thing, most buyers and sellers are probably unaware of them. While the charge is normally mentioned in a brokerage firm's listing agreement and possibly even the sales contract, it is rarely discussed out loud unless the client reads the documents and asks for additional information.
Moreover, since most people buy and sell their homes only a few times in their lives, many probably believe the fees are "normal"and do not question them.
When there is a complaint, it tends to come from agents, some of whom refer to the toll as a "greed-gouge tax" and wonder how their brokers and others can get away with it.
While some realty professionals maintain that the add-on fee is necessary because they have to print and store more forms than ever before, and must be able to access them upon request, others say that's hogwash; that there is no justification other than to squeeze a few more dollars out of every transaction without charging a commission that's higher than the competition.
HUD appears to be taking that view, too. Section 8(b) "is intended to eliminate unearned fees," Weicher said in the housing agency's latest policy statement. "Such fees are contrary to the Congressional finding when enacting RESPA that consumers need protection from unnecessarily high settlement charges."
Furthermore, he said the law is clear that a charge that is unearned or exceeds the reasonable value of goods, facilities or services is prohibited. Consequently, it forbids accepting any portion of a fee, including up to 100 percent, that is unearned.
"Simply put," he wrote, "HUD does not regard the provision as restricting only fee splitting among settlement service providers."
That doesn't sit too well with the politically powerful NAR, which believes HUD has gone too far and has asked the department to reconsider. With 802,000 members, NAR is the world's largest trade group.
Arguing that the government is "going down the road of setting rates," Jeanne Delgado, managing director of NAR's new regulatory and industry relations division, says the prohibition against unearned fees should be limited to the splitting of fees and not interfere with anyone's pricing structure, especially that of real estate brokers at whom the settlement services law was never directed.
"These fees are the price of doing business today. It's their price; if consumers don't want to pay it, they can go elsewhere," says Delgado.
"RESPA was never a rate-setting statute, and it was directed at third-party service providers, not real estate brokers. But if you follow HUD's reasoning, you could conceivably question the entire real estate commission. Did the broker earn every bit of that? Did they really earn 6 percent or 7 percent?"
Washington attorney Phillip Schulman, an expert on RESPA who represents many mortgage companies, believes NAR has a strong case.
Noting that no court has yet to agree with HUD's policy statement, which does not have the effect of law, Schulman says the government is "reaching" beyond Congressional intent.
He says that as he reads the law, as long the charge is not split between two third party service providers -- a real estate broker and an appraiser, for example, or a title attorney -- the broker should be free to charge whatever he wants, "whether it is reasonable or not," and the consumer should be free to take his business elsewhere if he believes the charges are out of line.