Co-Author: Peter G. Sotiropoulos
In Augenstein v. Coldwell Banker Real Estate LLC, decided on August 30, 2011, a federal district court held that a brokerage firm violated Section 8(b) of the Real Estate Settlement Procedures Act of 1974 (“RESPA”) by charging a client $199 plus three percent of the purchase price for sale and settlement services. The court determined that the $199 was “unearned” under RESPA Section 8(b) because the brokerage firm could not “connect the fee to any specific service” rendered to the client.
RESPA Section 8(b) prohibits brokers from charging “unearned fees,” mandating that “no person shall… accept any portion, split, or percentage of any charge… for… a real estate settlement service… other than for services actually performed.”
Prior to Augenstein, the conventional wisdom was that there could be two components of brokerage compensation, one part of which was based upon a percentage of the sales price, and the other part being a flat fee, so long as the firm provided “settlement services” to the consumer in exchange for the fee. To comply with RESPA Section 8(b), brokerage firms were advised to charge such a fee as part of their total compensation packages rather than labeling the fee as payment for a specific service. For a more detailed explanation of the pre-Augenstein treatment of RESPA Section 8(b), see “The Buzz about Busby” Part I and Part II.
However, the Augenstein court appears to take judicial scrutiny of brokerage fees to a new level. The court heard testimony that the fee was part of the total compensation of the brokerage firm, which consisted of $199 plus three percent of the sale price. The brokerage firm explained that in exchange for this commission package, the firm “(1) represented [its clients] as buyers’ brokers, and undertook fiduciary duties to them under [state] law; (2) showed them properties and provided them with information; (3) prepared and presented offers and counteroffers, and assisted with negotiating the Purchase Agreement; (4) attended the closing with the [clients]; and (5) assisted the [clients] in their dealings with the builder post-closing.” The flat fee component of the compensation package was part of the consideration that sellers or buyers paid for all of the broker services.
Despite the court’s acknowledgment of the foregoing services, it rejected the brokerage firm’s two-part commission package, holding that the flat fee was “unearned” under RESPA Section 8(b) because the brokerage firm could not “connect the fee to any specific service” rendered to the client. Although theAugenstein court acknowledges that RESPA does not authorize courts “to analyze the adequacy or value of settlement services provided, or to determine if the compensation for those services was reasonable,” the court seems to have done just that.
Strictly speaking, the Augenstein decision is not binding precedent as it is merely a trial court decision. Despite this limitation, Augenstein should be serious cause for concern among all brokerage firms charging clients a flat fee and a percentage commission; the Augenstein court’s reasoning may be persuasive to other courts around the country as they continue to evaluate RESPA issues. This case may serve to embolden potential plaintiffs, including the plaintiffs’ class action bar, to file similar claims in the future. Brokers should consult their lawyers to evaluate and manage these risks.
Peter G. Sotiropoulos is a law clerk at Frascona, Joiner, Goodman and Greenstein, P.C.