HUD decided it was time to put out an interpretive ruling to clarify the situation. In other words, HUD asked, what is legal in regards to referral fees paid to brokerages for Home Warranty business? As it turns out the answer is very little.
We all know that the paying of referral fees with the flimsiest of justification has been going on not just with Home Warranty, but with all settlement services for a long time. It has become one of the dirty little secrets of our industry that periodically pops up and gives a public black eye to all involved. Sadly it is usually the brokerage which is perceived to be violating the public trust more than the services paying the referral fees. Not a good thing for any brokerage’s public image.
So what should we take from this? Those that want to walk the tight rope of what is legal and what is not for accepting referral fees from Home Warranty companies should read HUD’s new interpretive rule on this subject here: www.hud.gov/offices/hsg/rmra/res/homewar625.pdf
While you could talk to your Home Warranty representative to pick the path that is legal, but experience tells us that most of the time the advice you get is more directed to securing your business rather than observing RESPA. It sure seems that if you want to avoid a lawsuit, the safest course is to assume that referral fees based on the number of orders is going to be risky.
I think HUD is sending a message to the real estate community that is telling us that Home Warranty referral income is going to be looked at a lot more carefully in the future. I believe that the smart course is to assume that what goes for one settlement service will be applied to all settlement services.
Perhaps it is time to just pick your settlement service providers based on the quality of the products and the service you receive. Leave the minimal income along with the inherent legal problems that comes with it on the table.