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Residential Real Estate Closing and Settlement Fees for Non-Existent Services are Prohibited under RESPA – But Excessive Fees are Not

A federal judge has ruled against an increasingly common practice of real estate brokers in Vicki Busby v. JRHBW Realty, Inc., 2009 U.S. Dist. LEXIS 41720 (N.D. Ala., Apr. 20, 2009). The District Court ruled that the charging of unearned administrative brokerage commission (ABC) fees by real estate brokerage firms at closings was unlawful under § 8(b) of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C.S. § 2607(b).
The class plaintiff purchased a home in Jefferson County, Alabama and employed a real estate agent who earned a commission based upon the purchase price. The agent worked for RealtySouth, which was a brokerage unit of HomeServices of America, Inc., the second largest realty firm in the country. At the closing of the property, RealtySouth charged the plaintiff an ABC fee of $ 149. The fee was in addition to the commission that was earned by RealtySouth and the real estate agent.
RealtySouth began collecting ABC fees in 2003 in order to recoup its overhead expenses. The fees were not for any new, additional, or distinct services, and RealtySouth conceded in the litigation that the fees were not for any specific service that it provided. By 2006, RealtySouth had collected 15,000 such fees, and it is estimated that the prospective members of the class who will be entitled to a refund of such fees is now 30,000 customers.
The district court initially denied the plaintiff’s motion for class certification, Busby v. JRHBW Realty, 2006 U.S. Dist. LEXIS 98169 (N.D. Ala. 2006), but that ruling was reversed by the Eleventh Circuit, Busby v. JRHBW Realty, Inc., 513 F.3d 1314 (11th Cir. Ala. 2008). The parties then filed summary judgment motions, and the district court last month granted the plaintiff’s motion for partial summary judgment.
The district court noted that RealtySouth conceded that the fee was “simply an increase in the price or fee that RealtySouth charges for all its brokerage services rendered to most buyers and sellers…..not intended to cover a specific service…. covers a whole variety of services provided to both buyers and sellers and helps defray significant increases in overhead that RealtySouth had incurred for many years and continues to incur.”
The district court examined the Department of Housing and Urban Development’s formal policy statement and prior Eleventh Circuit rulings and held that § 8(b) of RESPA prohibits all unearned fees and permits only fees for services that are actually performed. The defendant argued that § 8(b) of RESPA allowed for an “array of services” defense. The district court outlined the defendant’s array of services defense as follows:
“RealtySouth has described the ABC Fee in several different ways. One definition is that it is an amount charged to a borrower as an increase in the price for brokerage services generally (as opposed to a specific identifiable service or group of services). Another explanation is that it accounts for RealtySouth’s costs associated with regulatory compliance.
A third description is that it helps defray significant increases in overhead incurred by RealtySouth in the past and presently. A fourth is that it is one component of the collective costs a buyer (or seller) incurs to do business with RealtySouth (with the other piece being the percentage commission charge that is split with the real estate agent).
A fifth is that it relates to RealtySouth’s costs attributable to providing facilities, offices, equipment, a far more functional and enhanced web-site and other technological departments, greater availability of information along with a better ability to search for and access such information, and contracts and other business forms for its agents and customers. A sixth suggestion relating to Busby specifically is that the ABC Fee (at least in part) is connected to the time spent in locating and buying the house that Busby desired to purchase.”
The district court clearly was not impressed with this kitchen sink approach. “[T]he court concludes as a matter of law that the array of services defense for the type of items described by RealtySouth is not a valid counter to Busby’s § 8(b) no services claim….because the services listed by RealtySouth….are not settlement-related and/or provide little or no benefit to the borrower, they cannot defeat a § 8(b) no services claim.”
The district court noted that the Eleventh Circuit has been clear that such costs are chargeable under RESPA, a consumer protection statute, only if the borrower receives some direct benefit. Furthermore, the plaintiff had not argued that the fee was unreasonable, but only that no services were provided. “In particular, the court still has difficulty accepting RealtySouth’s proposition that a closing charge attributable to an ill-defined or non-specific set of services (or alternatively to all services) could ever be legally sufficient to defeat a § 8(b) no services provided claim….the court determines that the ABC Fee is unearned, because as defined by RealtySouth, it really represents a price and/or cost allocation measure as opposed to a RESPA-compensable settlement service.”
Fees such as the ABC fee are called mystery fees in the industry. They often appear only at the closing, with no explanation to the borrower and no realistic opportunity for the borrower to have the fee removed. Brokers justify the fees on the basis that their profit margins from sales commissions continue to shrink as consumers demand lower commissions and technology impacts the real estate sales market. As with so many transactions, the problem is not the fee itself, but the lack of transparency. Brokers could go to a flat fee plus commission contract, in which the “overhead” or “processing” fee was openly set at the time that the customer entered into the brokerage contract. The problem with that approach, of course, is that the fee becomes negotiable; a customer might attempt to negotiate a lower fee or seek out a broker who did not charge such a fee.
If you represent clients in the residential real estate arena, does Busby represent the final word on § 8(b) fees? Unfortunately, no. The Busby ruling is very fact dependent; RealtySouth conceded that no services were performed for the ABC fee. The Eleventh Circuit, as well as the Second, Third, Fourth, Seventh, and Eighth Circuits have held that § 8(b) of RESPA is not a price control provision and thus does not prohibit the charging of excessive fees. The difference between an excessive fee and a fee for non-existent services may be determined by how answers are framed in discovery. Without increased transparency in the residential real estate process, litigation will likely continue.