Tuesday, December 13, 2011

HUD's Position On Administrative Broker Fees

 If you purchased a home in Pittsburgh in the past 10 years, think back…did your real estate agent charge you a flat commission rate and that was the only way they were paid?  Or, did the agent and their firm get the commission and hundreds of dollars on top of that as a separate charge under the title "admin" “abc” or administrative fee?  Maybe you don’t even know if you were charged such a fee because the fee blended in with all the other charges on the settlement statement.  Regardless, it’s worth taking a look back at your HUD-1 settlement statement because you may be entitled to a refund.

To increase revenues brokerage companies add extra fees into their commissions.  The fees, called "processing" "ABC" and “Administration” among others, are charged to sellers and buyers at closing.  Below I have embedded a redacted copy of a HUD-1 where a buyer was charged a $695 BCG Administration Fee (I am in no way suggesting Achieve’s fee was illegal as the buyer in this case may have had a pre-existing agreement with Achieve Realty permitting this charge).

But, as I have previously blogged about in my posts "Refund On Illegal Home Purchase Brokerage Fees" and "Mystery Administrative Settlement Fees Are Illegal"  a U.S. District Court decision last year determined that said add-on fees violate the federal Real Estate Settlement Procedures Act when there are no specific services performed to justify the additional charge.

Following the U.S. District Court’s decision, HUD has clarified its position on ABC fees.  It is now HUD’s position that Federal law does not govern how much realty brokers can charge their customers. But it does govern how brokers and agents disclose their compensation to consumers.  Though this seems like a hedge HUD goes on to state that “Commissions may be quoted using a flat fee, a percentage of the sales price, or a combination of the two.”

Most important to consumers is HUD’s position that if the total charges on the settlement statement are more than the amount of the commission stated in the real estate broker's/ agent's listing agreement, then HUD can review the extra charge to see whether additional services were, in fact, provided to justify the add-on.  If little or no services are performed, the additional charge will be considered a violation of the Real Estate Settlement Procedures Act (RESPA).

HUD also warns that real estate brokers could be in violation of RESPA when there is no contract or agreement permitting the agent or broker to impose those charges.  For example, if a listing broker charged the buyer an administrative fee of $250 but there was no contractual language sanctioning the charge, HUD will likely treat that add-on as an illegal fee.  So it is critical to also look back and see if you ever had an agreement with your agent for them to charge fees over and above the commission.

What's the likely practical effect of HUD's clarifications?

The larger brokerage firms appear to have clarified their procedures on commission rates and fees.  Many smaller and mid-size firms, however, have not been as quick to act and may still be tacking on questionable fees.

Worse yet is that some firms have agents who tack on their own extra fees on top of the broker's commission and administrative fees.  This is a practice that is very likely to be deemed a violation of RESPA.  What you will hear from Brokers who tack admin fees on top of commissions is that the charges are an integral part of their compensation package and are justified by the work provided to clients.  But that raises the question “then what was the commission for?”

For example, the LA Times quoted Chris Heller of Heller Real Estate Group of Encinitas California as saying his standard brokerage charge is 6% plus a $695 "transaction" or administrative fee.  Heller claims the fee pays for the work of the "administrative people" who assist on all transactions. Only 2 out of 10 clients even ask about the charge or its purpose, he said, "and maybe 1 out of 10 takes issue with it."

Bottom line: Ask about all compensation and fees in any transaction. If you're asked to pay fees that you've never heard of or that come with vague justifications, don't roll over.  In almost every case in which a client really fights the charge the broker will cave and “waive” the fee. 

If you have contested an administrative charge and your broker has refused to remove it, please call me and I can help you get rid of that fee.
Pittsburgh Hud 1
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