Co-Author: Jeremy S. Durham
The Buzz about Busby Part II- Busby v. JRHBW Realty, Inc. d/b/a Realty South
This article is Part II of a two part series. Part I is available here: The Buzz about Busby (Part I).
In January 2008, the 11th Circuit Court’s decision in Busby v. JRHBW Realty, Inc. d/b/a RealtySouthgranted class action status to a group of homebuyers who had paid administrative fees to RealtySouth, a Mortgage Broker. In April 2009, the U.S. District Court ruled RealtySouth violated RESPA section 8(b) by charging an “administrative brokerage commission,” commonly called an ABC, which the Court determined constituted an “unearned fee.”
RESPA Section 8(b) prohibits brokers from charging “unearned fees,” establishing that “no person shall give and no person shall receive any portion, split, or percentage of any charge . . . for . . . a real estate settlement service . . . other than for services actually performed.” The Busby case arose because RealtySouth had been charging its customers a $149 ABC fee at closing, a fee that was recently increased to $250.
RealtySouth presented several justifications to the Court for the ABC fee, including that (1) the ABC fee “is an amount charged to a borrower as an increase in the price for brokerage services generally,” (2) the ABC fee “accounts for RealtySouth’s costs associated with regulatory compliance,” (3) the ABC fee “helps defray significant increases in overhead incurred by RealtySouth,” (4) the ABC fee is a “component of the collective costs a buyer (or seller) incurs to do business with RealtySouth,” (5) the ABC fee “relates to RealtySouth’s costs attributable to providing facilities, offices, equipment, a far more functional and enhanced web-site and other technological departments,” and (6) the ABC fee “is connected to the time spent in locating and buying the house that [the consumers] desired to purchase.”
The Busby Court determined that these services listed by RealtySouth are either “not settlement-related and/or provide little or no benefit to the borrower.” The Busby Court concluded that RealtySouth’s ABC fee is therefore an unearned fee under RESPA Section 8(b). The Court rejected each of the justifications listed by RealtySouth, stating that “‘services actually performed’ must be settlement services.” Ultimately, the Court determined that the RealtySouth ABC 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.”
There is a substantial risk that other circuit courts will adopt the rule in Busby. Wherever Busby is adopted, brokers will not be able to successfully argue that an ABC fee is “earned” by simply demonstrating what overhead costs the ABC is allocated to cover. Under Busby, a fee is unearned unless it accounts for a settlement service provided to the individual consumer who is charged the fee. Successful plaintiffs under RESPA may be entitled to both treble damages and attorney fees. Brokerage firms that seek to charge flat fees in addition to commissions based upon a percentage of the gross sales price should work with their RESPA counsel to manage their exposure to Busby like claims.
Read Part I of this article.