Home warranty fees coming under scrutiny

July 1, 2011

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

The case involves potentially thousands of home buyers and sellers who purchased warranty coverage from American Home Shield 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.

Attorneys representing the plaintiffs say as many as 500,000 consumers may be members of the class, though neither they nor American Home Shield would speculate on how many ultimately will file for and receive cash from the settlement.

In their suit, the plaintiffs alleged that American Home Shield violated federal law by paying kickbacks to real estate 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.

American Home Shield denied any wrongdoing in the settlement 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 real estate agent by American Home Shield.

Real estate professionals and consumer groups say payments such as these have been commonplace and controversial in the industry for years. Typical warranty policies cost anywhere from $400 to $500; fees to real estate 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.

Some real estate companies refuse to participate in payment plans, while others defend the practice. Glenn Kelman, chief executive of Redfin, a national online brokerage, says if his firm finds that any agent “accepts gifts or payments from any party in the transaction, we fire the agent.”

Douglas R. Miller, executive director of Consumer Advocates in American Real Estate and former head of a title insurance agency in Minnesota, calls payments to real estate brokers and agents by home warranty companies “bribes,” whether clients know about them or not.

The 1.1 million-member National Association of Realtors has been outspoken on the issue, arguing 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. In a letter to the Department of Housing and Urban Development — the chief regulator of the real estate settlement statute — the association argued that brokers and agents provide a valuable service in alerting sellers and buyers to the existence of warranties.

“Consumers are often not familiar with the numerous home warranty products,” wrote Vicki Cox Golder, 2010 president of the association. “Real estate brokers and agents do not merely flash a brochure concerning these products to individual buyers and sellers.” Instead, they “devote valuable time educating consumers about the features, limitations, coverage and pricing of home warranties.”

HUD has disagreed, however. In an interpretive rule issued last summer, HUD 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. If a case-by-case factual analysis demonstrates that agents provided substantive services beyond their normal duties, the department said, then the fees may not be in violation. Real estate professionals have said the ruling is unacceptably vague.

Attorneys for the plaintiffs in the American Home Shield settlement cited the HUD guidance extensively. 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.

Bottom line for you as a seller or buyer: Be aware of the practice and the legal controversy surrounding it. Ask for full disclosure on fees. And, before you sign up, go online and check out customer reviews for the company being promoted. More than a few consumers aren’t happy about the quality of service they get for their $400 to $500.

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