Court case sheds light on fees paid to promote home warranty policies

7/3/2011

WASHINGTON -- The settlement of a major class-action suit is shedding new light on a real estate practice that home buyers and sellers typically know little about: Fees paid to realty brokers and agents for promoting home warranty policies.

The case involves potentially thousands of buyers and sellers who bought warranty coverage from American Home Shield Corp. between May, 2008, and March of this year. American Home Shield is the dominant player in the home warranty field, with sales of $657 million in 2010, according to the company.

Home warranty policies offer repairs and replacements for owners when specified home systems and appliances malfunction.

Lawyers for the plaintiffs say the class may grow as large as 500,000, although neither they nor American Home Shield would speculate on how many ultimately will file.

The plaintiffs allege that American Home Shield violated federal law by paying kickbacks to realty brokerage firms and agents for promoting warranty policies to their customers.

The Real Estate Settlement Procedures Act prohibits payments for referrals of "settlement services" in connection with most mortgage transactions. It also bans the giving or receiving of fees or other compensation when no substantive services are rendered.

In the settlement, American Home Shield denied any wrongdoing and said it sought to limit its exposure to litigation costs by resolving the dispute.

The complaint, filed by homeowners in Alabama, involved payment of a $524 fee at closing for a one-year home warranty from American Home Shield. A portion of that amount allegedly was paid to the realty agent by American Home Shield.

Realtors and consumer groups say payments like these are rarely disclosed to buyers or sellers but have been commonplace in the industry for years. The cost of a typical warranty policy ranges from $400 to $500; fees to realty brokers and agents range from $60 to $90. Warranty companies took in an estimated $1.5 billion in sales during 2009, according to Warranty Week, a trade publication.

The fees have been controversial within the real estate brokerage industry itself, with some companies refusing to participate in payment plans, while others defend the practice.

The 1.1 million-member National Association of Realtors has argued that federal anti-kickback regulations should not cover warranties because they are not "settlement services" and have no effect on the closing of a real estate transaction.

The Department of Housing and Urban Development, the chief regulator of the real estate settlement statute, has disagreed. In a ruling issued last summer, it said that "a real estate broker or agent actively promoting [a home warranty company] and its products to sellers or prospective home buyers" for compensation is considered to be making a "referral" that violates federal law.

Other class-action suits challenging home warranty payments to agents are at various stages in federal courts around the country, according to attorneys familiar with the issue.