PROPERTY LAW: What Constitutes "Unearned" Fees Charged to Borrowers Under RESPA § 8(b)?
October 25, 2011
Steve Friedman, Senior Attorney, National Legal Research Group
Congress enacted the Real Estate Settlement Procedures Act ("RESPA") of 1974, 12 U.S.C. §§ 2601-2617, in response to the need for significant reforms in the residential real estate settlement process. See RESPACReal Estate Settlement Procedures Act Home Page (last visited Oct. 12, 2011) ("[RESPA] insures that consumers throughout the nation are provided with more helpful information about the cost of the mortgage settlement and protected from unnecessarily high settlement charges caused by certain abusive practices.").
Indeed, the legislation expressly states that it is intended to, among other things, eliminate "kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services." 12 U.S.C. § 2601(b)(2). To that end, § 8(b) of RESPA provides as follows: "No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." Id. § 2607(b).
The U.S. Department of Housing and Urban Development, the federal agency responsible for enforcing RESPA, has asserted that four types of overcharging schemes are prohibited by § 8(b):
1. Fee splitting, where two or more persons split a fee, any portion of which is unearned;
2. Mark-ups, where a service provider charges the borrower for services performed by a third party in excess of the cost of the services to the service provider but keeps the excess itself [without providing any additional goods or services];
3. Undivided unearned fees, where a service provider charges the borrower a fee for which no correlative service is performed; and
4. Overcharges, where a service provider charges the borrower for services actually performed but in excess of the service's reasonable value.
Freeman v. Quicken Loans, 626 F.3d 799, 802 (5th Cir. 2010) (citing RESPA Statement of Policy 2001-1, 66 Fed. Reg. 53,052 (Oct. 18, 2001)).
All U.S. Courts of Appeals that have addressed the issue agree that § 8(b) plainly prohibits the first and fourth types of schemes, fee splitting and overcharges. See id. (citing cases). However:
The circuits disagree on the remaining two types of fees: mark‑ups and undivided unearned fees. The Fourth, Seventh, and Eighth Circuits have each held that RESPA § 8 is exclusively an anti‑kickback provision. [See Boulware v. Crossland Mortg., 291 F.3d 261 (4th Cir. 2002); Krzalic v. Republic Title, 314 F.3d 875 (7th Cir. 2002); Haug v. Bank of Am., 317 F.3d 832 (8th Cir. 2003).] Accordingly, RESPA ' 8(b) requires two culpable parties, a giver and a receiver of the unlawful fee, rendering mark‑ups by a sole services provider not actionable. The Second, Third, and Eleventh Circuits have rejected the two‑party requirement and held that RESPA § 8(b) prohibits mark‑ups. [See Kruse v. Wells Fargo Home Mortg., 383 F.3d 49 (2d Cir. 204); Santiago v. GMAC Mortg. Group, 417 F.3d 384 (3d Cir. 2005); Sosa v. Chase Manhattan Mortgage Corp., 348 F.3d 979 (11th Cir. 2003).] Only the Second Circuit has explicitly addressed whether RESPA § 8(b) prohibits a sole provider's undivided unearned charges and found that it did. Cohen v. JP Morgan Chase & Co., 498 F.3d 111 (2d Cir. 2007). Presumably, the three circuits that require two culpable actors would not find undivided unearned charges actionable.
Id. at 802-03 (footnotes bracketed as citations).
In Freeman, a three-judge panel of the Fifth Circuit joined the fray regarding § 8(b). In relevant part, Chief Judge Jones and Judge Elrod held that RESPA § 8(b) does not cover undivided fees of a sole provider, thus reaching the opposite conclusion than did the Second Circuit in Cohen v. JP Morgan Chase & Co., 498 F.3d 111 (2d Cir. 2007). In reaching that conclusion, the majority opinion in Freeman set forth four reasons: (1) the language of RESPA § 8(b) is unambiguous and does not cover the undivided fees of a sole provider, see 626 F.3d at 803; (2) RESPA § 8(b) must be read in conjunction with its companion provision, RESPA § 8(a), which requires two culpable actors, see id.; (3) the statutory phrase "any portion, split or percentage" necessarily requires that two parties share something, see id. at 803-04; and (4) when viewed as a whole, "RESPA is an anti-kickback statute, not an anti-price gouging statute," id. at 804.
Although HUD's 2001 Policy Statement suggests a different outcome, when the statute at issue is plain and unambiguous, as was concluded in Freeman, the HUD 2001 Policy Statement is not entitled to Chevrondeference.1 See id. at 805. And even if the agency interpretation is entitled to the lesser Skidmoredeference,2 the HUD 2001 Policy Statement is nevertheless unpersuasive because it "is perfunctory and conclusory," without any "concrete reasoning for its conclusion." Id. at 806.
Whereas the majority opinion in Freeman rejected the Second Circuit's holding in Cohen, Judge Higginbotham wrote a dissenting opinion in which he argued in favor of the substantive portions of Judge Raggi's opinion in Cohen. See id. at 806-08 (Higginbotham, J., dissenting). The sole aspect of Cohen with which Judge Higginbotham disagreed was the Second Circuit's decision to give Chevron deference to the HUD 2001 Policy Statement. See id. at 807. In short, Judge Higginbotham found the statutory language to be ambiguous and reasoned that prohibiting such fees would strike at a core objective of RESPA: promoting the transparency of costs associated with settlement.
By way of appeal from the Freeman decision, the U.S. Supreme Court has recently granted certiorari on the issue of whether RESPA § 8(b) prohibits the acceptance of unearned fees only when those fees are divided between two or more parties, as in a kickback arrangement, or whether the provision also applies to unearned fees retained by a single defendant. See Freeman v. Quicken Loans, 626 F.3d 799, cert. granted, 79 U.S.L.W. 3494 and 80 U.S.L.W. 3015 (U.S. Oct. 11, 2011) (No. 10‑1042). Thus, the above-summarized circuit split will hopefully come to an end sometime in 2012.
1In Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984), the U.S. Supreme Court held that the courts cannot disturb an agency rule unless it is procedurally defective, arbitrary, or capricious in substance or manifestly contrary to the statute. See id. at 843-44.
2In Skidmore v. Swift & Co., 323 U.S. 134 (1944), the U.S. Supreme Court held that agencies' views are "entitled to respect" to the extent that they have "the power to persuade." Id. at 140.