Fee Split Required for RESPA Violation
May 24, 2012
From NAR Legal Affairs:
Resolving a circuit split in the manner urged by NAR, the Court rules
that RESPA requires a fee split of a settlement-service fee for a
§2607(b) violation.
In a case involving mortgage lending but which has direct application
to real estate brokerage, the Supreme Court of the United States has
determined that a violation of §2607(b) of the Real Estate Settlement
Procedures Act (“RESPA”) only occurs when a split of a
settlement-service fee paid by a consumer to a real estate
settlement-service provider is split with a third party.
RESPA §2607(b) states that “[n]o person shall give and no person
shall receive any portion, split, or percentage of any charge made or
received for the rendering of a real estate settlement service
[involving] a federally related mortgage loan”. “Real estate settlement
services” are defined as covering all services connected to a real
estate settlement, including real estate brokerage services.
Three married couples (collectively, “Consumers”) received mortgage
loans from Quicken Loans, Inc. (“Lender”). The Consumers filed three
separate lawsuits against the Lender, alleging that the Lender had
charged fees for which no services were provided and therefore the fees
violated RESPA. One such charge was labeled a “loan processing fee”,
while another charge was a “loan discount fee”, even though it was
alleged the Lender had not provided a discount. The Consumers did not
allege that the Lender had split any of these fees with a third party.
The Lender argued that because it had not split its fees with any
third parties there was no RESPA violation. The Consumers asserted that
a 2001 policy statement issued by the United States Department of
Housing and Urban Development (“HUD”) prohibited the collection of
unearned fees for real estate settlement services and therefore any of
the Lender’s charges where no services were provided violated RESPA.
After the lawsuits were consolidated in federal court, the lower courts
ruled in favor of the Lender and the Consumers appealed.
The Court affirmed the rulings of the lower court, resolving a split
among federal circuit courts of appeal. Previously, some circuits had
required a fee split with a third party in order for there to be a
§2607(b) violation, while others had followed the HUD policy statement
and prohibited unearned fees, even when a settlement-service fee was not
split with a third party.
The Court rejected HUD’s policy statement and ruled that a §2607(b)
violation requires the payment of a portion of a settlement-service fee
by the party collecting the fee to a third party who performed no
services in exchange for the fee. Looking at the plain language of
§2607(b), the Court found that this section “unambiguously covers a
settlement-service provider’s splitting a fee with one or more other
persons; it cannot be understood to reach a single provider’s retention
of an unearned fee.” Further, the Court stated that the language used
by Congress in drafting §2607(b) describes two separate exchanges, where
one party receives a settlement fee and then pays a portion of the fee
to a third party. Without such payment to a third party, the Court
determined that there is no violation of §2607(b).
The Court found the Consumer’s arguments unpersuasive. First, the
Court declined to defer to HUD’s RESPA policy statement because HUD’s
interpretation was inconsistent with the plain language of the statute.
The Court also rejected the argument that the consumers were the ones
making the prohibited payments when they paid settlement service
providers unearned fees, as Congress could not have intended to make
consumers potentially criminally liable when it banned both the payment
and acceptance of certain types of payments.
Finally, the Court also stated that §2607(a) and §2607(b) contain
separate prohibitions, rejecting the Consumers’ argument that the two
sections must be read in conjunction with each other to ban unearned
fees. Section 2607(a) broadly bans kickback arrangements in exchange
for referrals of real estate settlement services, whereas §2607(b)
covers arrangements dividing specific settlement service payments
between two parties. Thus, the Court affirmed the rulings of the lower
courts.
NAR filed an amicus curiae brief, arguing that a violation of
§2607(b) occurs only when a real estate settlement service provider pays
a portion of a settlement service fee to a third party who performs no
services in exchange for the fee.
Freeman v. Quicken Loans, Inc., No. 10-1042 (U.S. May 24, 2012).
What the Freeman decision means for real estate brokerages
Suits alleging a violation of Section 8(b) of RESPA have been brought
against real estate brokerages that charge consumers a flat fee in
addition to a percentage-based commission. The first such suit, decided
in 2009 in the case of Busby v. JRHBW Realty, Inc. d/b/a Realty South,
sent shock waves through the brokerage community. In that case the
court found that a fully disclosed administrative brokerage commission
paid by a buyer violated Section 8(b) of RESPA because it was not
sufficiently related to any specific service performed for the buyer’s
benefit and could not be justified by the entire array of services
provided to the buyer. In essence, the court found that a price
increase violated RESPA merely because it was imposed as a flat fee
added to a percentage-based commission as opposed to the brokerage
simply charging a higher percentage-based commission. In spite of the
fact that the ruling defied logic and was contrary to the language of
the statute, other cases alleging the same violation soon followed, with
equally troubling results. Today, in light of the unanimous Supreme
Court ruling, such fees do not violate Section 8(b) of RESPA unless the
broker who is paid the fee splits it and pays a portion of it to a third
person outside of the brokerage firm who provides no services in
exchange for the fee.
Today’s decision has no impact on any state laws that prohibit
charging an administrative fee. Likewise, the decision does not in any
way alter RESPA’s prohibition against the payment by a broker of
anything of value in return for the referral of business to the
brokerage.
Short message on the case from NAR President Moe Veissi.
