America's Preferred Home Warranty a RESPA violation in the making, or just bad PR?

From one of the foremost experts in Settlement Service Providers as it relates to RESPA issues and particularly “Administrative Fees” relating to home warranty service contracts – P. Nathan Thornberry, CEO of Residential Warranty Services, Inc.

https://www.federalregister.gov/documents/2010/12/01/2010-30243/real-estate-settlement-procedures-act-respa-home-warranty-companies-payments-to-real-estate-brokers

See the above link which contains links to official government issued information on this topic. Of course everything is up to some level of interpretation, but once you read it you will find agreement on a few points:

Administrative Fees are fine, if:
- The fee is reasonable
- The work is not duplicative
- The fee is flat and not commission based
- The fee is disclosed

Now let’s go to “The fee is reasonable”. When everyone in the market pays $50-$75, but America’s Preferred Home Warranty pays $100 as an extreme outlier with a fee of 33%-100% more than the rest of the market, there is no possible way anyone could argue it is a “reasonable fee”. To put this in perspective, if I went to one builder as an agent for a buyer to bid a house and it was $500,000.00 to build, and I took the exact same house to another builder with the same plans and finishes and the second builder bid between $665,000-$1 Million, there would be absolutely no justification for the differential other than the second builder in this example must have some gambling debt he owes to the mob and is desperately trying to avoid hearing from their collection agents. America’s Preferred has taken the value of their product in coverage down by that differential in this case, handed an unreasonable fee to the agent, and delivered less to the client in what I can’t imagine wouldn’t be interpreted by HUD as an inducement with exactly the adverse results the regulations seek to prevent. In other words, just to be completely and totally clear and not be misunderstood, it is absolutely my position that America’s Preferred Home Warranty is putting all of their referring agents and brokers at risk of being fined heavily due to a RESPA violation. It’s not a fact, it’s up to interpretation, I’m not the enforcing authority, so consider that just a simple opinion from the foremost expert on the topic.

Putting all of the legal issues aside and just focusing on disclosure and integrity for a moment, let’s just say all coverage and prices were the same, the only difference was the extra $40 in administrative fees to the agent. Of course that’s not the case, we can name dozens of components and coverage areas where AP falls well short of our own coverage (and many other players in the market as well), but let’s say they were the same. Putting my broker hat on for a moment, I’m not sure I would want to disclose to my client “Here’s the warranty we chose so we could make an extra $40 off of your transaction”, which in that case would be the only honest way to disclose the reasoning behind that choice there would be.

Now let’s not only put legal issues aside…let’s put disclosure issues aside and the obvious moral hazard of agents selling one product over another based on some increased fee and let’s just go back to some very simple math:

X-$60 > X-$100

No matter how you slice it, $100 is a huge amount of money when you’re looking at a $400-$500 warranty product. It’s a greater percentage than even insurance agents get as a commission for selling homeowner’s insurance and the workload behind that type of insurance product is phenomenally high. Nevertheless, in some way shape of form that $100 in value is not going to make its way to the client in the form of coverage or benefits when it is sitting in their real estate agent’s bank account.

Now let’s go back to Moral Hazard. Don Thornberry told me this many times over. If you don’t want it on the front of the newspaper, don’t do it. “(Your Brokerage Name) chooses vendors for their clients based on how much money they will pay them, even if the benefits to clients are lesser” is a really bad headline.

Read the 1st Chapter of the #1 most distributed book in Real Estate, The Savvy Agent, by P. Nathan Thornberry: http://thesavvyagent.net/TheFrontPageoftheNewspaper

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