The settlement of a major class-action suit is shedding new light, according to an article last week by syndicated real estate columnist Kenneth R. Harney, on a controversial real estate practice that homebuyers and sellers typically know little about: fees paid to realty brokers and agents for promoting home warranty policies.

The case involves potentially thousands of homebuyers and sellers who purchased warranty coverage from American Home Shield Corp. between May 2008 and March of this year, the article, which appeared in The Washington Post, said. 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.

The article said that "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."

The article said that "in their suit, the plaintiffs alleged that American Home Shield violated federal law by paying kickbacks to realty 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 article said, adding that "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 realty agent by American Home Shield."

According to the article, "realtors and consumer groups say payments like these are rarely disclosed to buyers or sellers but have been commonplace in the industry for years. Typical warranty policies cost anywhere from $400 to $500; fees to realty 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."

The fees have been controversial within the real estate brokerage industry itself, the article said, and it added that "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 realty 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, the article said.

HUD has disagreed, however, the article maintained: "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 homebuyers' for compensation is considered to be making a 'referral' that violates federal law."