In a unanimous decision, the U.S. Supreme Court ruled today that to establish a violation of Section 8(b) of the Real Estate Settlement Procedures Act (RESPA), a plaintiff must show that a charge for a real estate settlement service was divided between two or more persons.
The Court’s opinion in Freeman, et al. v. Quicken Loans, Inc., by Justice Antonin Scalia, holds that RESPA Section 8(b) prohibits a service provider from charging an unearned fee if the provider shares the fee with at least one other party, but not if the provider retains the entire fee. Section 8(b) states that no person shall give or accept “any portion, split, or percentage of” a charge for a real estate settlement service except for services actually performed. The plaintiffs in Freeman had alleged that “loan discount fees” paid to the lender were unearned because they did not result in a lower interest rate and a “loan origination fee” paid to the lender was also unearned because it was duplicative of the lender’s “loan processing fee.”
The U.S. Department of Housing and Urban Development (HUD), in a 2001 Statement of Policy, interpreted Section 8(b) to prohibit all unearned fees, regardless of whether the fees are divided between two or more parties. Now the Supreme Court has refused to give deference to HUD’s interpretation, finding that the statutory language “unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons.” That language, the Court said, “cannot be understood to reach a single provider’s retention of an unearned fee.”
The Court rejected the borrowers’ argument that Section 8(b) should be read to prohibit the charging of undivided unearned fees because it would further RESPA’s goal of protecting consumers from unnecessarily high settlement charges. “Vague notions of statutory purpose,” the Court wrote, do not justify expanding Section 8(b)’s prohibition beyond its unambiguous limited application to fee splitting.
The Court also rejected the borrowers’ argument that reading Section 8(b) to allow undivided unearned fees would lead to an absurd result by allowing a provider to keep the entirety of a large unearned fee while imposing liability if the provider shared even a nickel of a small charge with someone else. In the Court’s view, that result was not “particularly anomalous” because Congress may have determined that existing remedies such as state law fraud actions were adequate to deal with entirely fictitious fees. (During oral arguments, through the questioning of counsel, Justice Scalia made the point that consumers would have the avenue of state laws to pursue claims regarding unearned fees.)
The Court also noted that, since the borrowers acknowledged that Section 8(b) did not reach overcharges, a service provider could avoid liability under the borrowers’ reading by providing one dollar’s worth of services in exchange for a large fee. According to the Court, limiting Section 8(b) to fee-splitting transactions “at least has the virtue of making it a coherent response [to fee splitting], rather than an incoherent response to the broader problem of unreasonably high fees.”
The Court’s decision represents a defeat for the Consumer Financial Protection Bureau. At the Supreme Court’s invitation, the Solicitor General, joined by the CFPB, had filed an amicus brief that urged the Supreme Court to adopt the borrowers’ interpretation of Section 8(b). However, the possibility exists that the CFPB may seek to use its authority to prohibit unfair, deceptive or abusive practices to achieve the outcome it sought in the Supreme Court.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The Group has been actively involved in defending many RESPA cases. The Group also regularly counsels clients on state law fee limits (which continue to apply notwithstanding that no RESPA violation may be involved).
The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions.
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