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Transaction Coordinator Fees and RESPA Violations

In recent years, transactions using Transaction Coordinators (“TCs”) have increased. This article examines risk management issues surrounding not only the charging of TC fees but also the scope of the TC’s duties in the transaction.   If TC fees are charged to principals in a transaction, how and when does the agent disclose the fee? Is a principal required to pay the TC fee, and can the payment of a TC expose agents and brokers to the risk of a RESPA violation?  

The California Association of REALTORS® (“CAR”) describes the duties of a Transaction/Escrow Coordinator as follows “A person who assists the agent and broker in the processing of the real estate file. Gathering all information, paperwork, and following up of the contractual items. Putting together the final Broker file of the real estate transaction.”  Another description of the TC’s role is “to assist an agent with various aspects of the real estate transaction, including communications, paperwork, and compliance issues.”

Agents vary in their use of TC services from gathering paperwork to scheduling of inspections and walkthroughs.   Regardless of the extent of the TC’s role in any transaction, it is prudent for the agent to retain control of the transaction by direct communications with the principal.

The TC must not encroach on the agent’s responsibilities to the principal; otherwise, the risk of exposure to liability could be exponential.

The principal hires the agent to protect their interests in the sale or purchase of real property. In most cases, the principal’s largest asset is usually their home or investment property. The real estate transaction is serious business for the principal and should be treated as such by agents.

Depending on the agent’s business model, TC duties can include, but are not limited to, the following: 

  • Assist agent with compliance and escrow preparations.
  • Assist with arranging the home inspection, dealing with the mortgage company, handling repairs, termite inspection and completion, setting up walk-throughs, arranging for the signing of loan documents, handling keys, handling all correspondence and interaction necessary throughout the escrow, confirming possession.
  • Maintain files and paperwork, coordinate escrow documentation, follow-ups, order inspections required by purchase agreements, administration.

Given the variety of services a TC may provide, the agent should particularly define the duties for their own TC and place restrictions on the TC’s conduct keeping within the supervision of the responsible broker.  

Definitions and restrictions should be the subject of a contract between the TC and the agent/broker.  

Any TC fee charged to a principal must be disclosed upfront and agreed to in writing by the principal either as an Addendum to, or a provision of, the Residential Listing Agreement (RLA) or Buyer Broker Exclusive Representation Agreement (BRE) or as a stand-alone agreement. The RLA and BRE have Compensation provisions which provide for the possibility of including TC fees; however, the amount of space in those Compensation paragraphs is insufficient to fully describe the scope of the TC’s duties in the principal’s transaction.  

The principal’s obligation to pay the TC fee arises from the broker/principal contract if the TC fee is expressly included in the contract.  If the TC fee is not referenced in the broker/principal contract, the principal has a basis to refuse to pay the fee. Therefore, an Addendum can be incorporated by reference in the Compensation provision to the principal/broker contract to specifically describe the TC’s duties for the anticipated sale, purchase, or other real property transaction such as lease or lease listing.    

RESPA Concerns

Whether the charging of a transaction coordination fee is a RESPA violation when the TC is an independent contractor is unclear according to CAR’s publication “Administration Fees under RESPA and the Unfair Competition Law” (March 6, 2018 (revised). Per Question 43 of this CAR article: “It is arguable that if a separately charged transaction coordination fee is split with an independent contractor, such as a sales agent, then there is an issue as to whether the fee is “unearned” or is a “junk fee.” This argument carries more weight if a transaction coordinator is provided in every single transaction even where the client does not separately pay for the service.”  

Some Brokers retain TCs as W2 employees and charge the additional TC fee to later split with the TC.  In such cases, Brokers might include the additional TC charge on the Listing Agreement or Buyer Broker agreement as an additional fee. The compensation provisions of the broker/principal contracts might set a percentage of the gross sales price as commission plus a fixed dollar amount associated with the TC service to reduce the risk of possible RESPA implications. Such attempts to legitimize the additional TC fee are questionable under RESPA. The best practice is to avoid them altogether.  

With respect to RESPA, problems arise in charging a TC fee and then splitting it with a TC engaged as an independent contractor.  While possibly a small risk, such a fee split could trigger a RESPA violation resulting in consequences to the broker.  Some brokers charge additional TC fees and view the charge as a negligible or small risk; however, additional TC fees simply should not be passed on to the consumer.  The true benefit in not charging an additional TC fee but giving consumers great service is having satisfied clients who consistently post positive reviews and refer future business to the broker/agent. 

RESPA seeks to restrict situations where consumers are charged fees for services which should already be performed by the professional.  In the case of a real estate transaction, a real estate licensee’s responsibility to prepare a transaction file is part of the real estate licensee’s required duties.  As such, one might argue that the TC fee is a “junk” fee.  Even though the precise issue of transaction coordination fees has never been addressed by a court, some cases have decided that services must be provided in exchange for the fee, that is, in a quid pro quo transaction, otherwise those fees could be deemed “unearned.” (See Cohen v J.P. Morgan Chase & Co. (2009) 608 F.Supp.2d 330).  

In the Alabama case of Busby v. JRHBW (2009) 642 F. Supp 2d 1283 (“Busby”) the Court found a $149 admin brokerage commission fee was prohibited under RESPA. The Busby Court rejected the “array of services” defense to justify an administrative fee to cover as an overhead expense. (See Q13 of the above referenced CAR article on RESPA).  This same reasoning might apply regarding transaction coordination fees.  In general, to avoid even the appearance of a RESPA violation, specific services provided in a transaction, over and above the services described in the commission agreement, should be specifically defined; but there is no need to charge an additional fee for these services.  If in doubt, consult with competent real estate legal counsel.

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About the Author

Jacqueline A. Oliver, Esq has been a real estate licensee since 1983, first as a salesperson in Arizona and later as a salesperson and Broker in California.  Ms. Oliver is the former Broker/Owner of RE/MAX Grand Central, Tarzana, CA and the former General Counsel/VP of RE/MAX Associates San Diego which operated 15 offices through San Diego County.  Currently, Ms. Oliver is private counsel for numerous private parties, several independent real estate brokerages, and a number of national franchise brokerages in San Diego County.

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