Bill Would Exempt Home Warranty Providers from RESPA Rules

The question at issue has been, "Is providing a home warranty a settlement service?" If it is, then home warranty companies, as settlement service providers, would be subject to RESPA's Section 8 (12 U.S.C. 2607) prohibition against paying referral fees for business. The NAR discussion put it as follows:

"Real estate professionals and home warranty companies routinely partner to provide home warranties to consumers. For nearly two decades, the industry was led to believe there were no problems with this under RESPA. In 2008, HUD issued an informal letter that called into question the practice and led to several class action lawsuits. HUD compounded the problem by issuing an interpretive rule in 2010 that made the situation worse."

In a background paper supporting H.R. 2446, NAR provided a legal analysis on the issue of whether or not providing a home warranty should be considered a settlement service. The paper notes that HUD's only authority for this position is a RESPA regulation (24 C.F.R. § 3500.2), whereas the enabling legislation (12 U.S.C. § 2602) does not mention home warranties. The latter point, in itself, is hardly persuasive. The legislation provides one of those lists that is "including, but not limited to..."; so the fact that home warranties are not mentioned hardly implies that they don't belong there.

The NAR analysis also points out that various court decisions have treated settlement services as services necessary for a closing. It is then argued that, inasmuch as home warranties are not necessary for a closing – though they may often be included – they should not be treated as settlement services. This, too, would be a position one wouldn't want to lay a lot of money on. After all, even title policies and loan originations are not necessary for a closing -- cash transactions come to mind – but, rather, they are only necessary depending on the kind of transaction the principals agree to.

Be all that as it may, it all comes down to the point that whether or not something is a settlement service in the context of RESPA depends on what Congress says. In this case, Congress (at least, so far, the House) has said, "Nothing in this section, section 2, or section 3 [of RESPA] shall be deemed to include, or be deemed to have included, homeowner warranties or similar residential service contracts…" So, there.

The legislation also includes two disclosure provisions: (1) If the Home Warranty company does pay anyone not employed by them (in particular, a real estate agent/broker) for selling, advertising, marketing, or otherwise assisting in the placement of a home warranty contract, then they must make a disclosure of that fact in boldface type of 10 points or more. (2) If an agent or broker receives payment for such services, they must make a similar disclosure in a similar manner.

H.R. 2446 was opposed by Americans for Financial Reform. That organization argued that "exempting payments related to these products from the ban on kickbacks and referral fees would be harmful to consumers." They believed it would result in consumers paying higher fees, and sometimes receiving inferior services. Their letter of opposition was co-signed by the Center for Responsible Lending, Consumer Watchdog, and the National Consumer Law Center (On behalf of its low income clients) (sic). H.R. 2446 has been received in the Senate and referred on to the Senate Committee on Banking, Housing, and Urban Affairs.



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