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Respa Section 8 Construed By U.S. Supreme Court

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The Real Estate Settlement Procedures Act [RESPA],12 U.S.C. §§2601 et seq., governs one-to­four family residential real estate closing procedures where the property is sold or refinanced, or where a mortgage is secured by a subordinate lien, and financing is provided by an institutional lender. Section 8 of RESPA, 12 U.S.C. §2607, regulates cer - tain abuses (or perceived abuses) by prohibiting kickbacks, unearned fees and certain arrangements tied to the referral of business.

 

RESPA Section 8 prohibits (in general) any person, in a residential real estate transaction which involves mortgage financing, from giving or receiving anything of value pursuant to an agreement or understanding for the referral of any settlement service. It further prohibits related activities such as fee-splitting, overcharges, etc. The phrase settlement service (as used above) is not limited to closing-related services (as is customary in South Jersey, for example), but includes most residential real estate-related activities, such title insurance, mortgages, credit reports, document preparation, hazard, flood and homeowners’ insurance, and any other services which a provider requires a borrower or seller to pay for in connection with a real estate transaction. RESPA §8(a) provides:
No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
In other words, a Section 8(a) violation may occur
when there is: (a) an agreement or understanding; (b)
referral of settlement business; and (c) payment or
receipt of a thing of value. RESPA Section 8(b) states: 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.
In 2001, HUD issued a statement of policy which identified four (4) types of overcharge schemes could potentially be covered by Section 8(b):
(1) for two or more persons to split a fee for settlement services, any portion of which is unearned [fee-splitting]; or (2) for one settlement service provider to mark-up the cost of the services performed ... by another settlement service provider without providing additional, actual necessary and distinct services; ... to justify the additional charge [mark-ups]; or (3) for one settlement service provider to charge the consumer [un -divided, unearned fees], or (4) the fee is an excess fee where no, nominal or duplicative work is provided for the reasonable value of ... the services actually performed [overcharges].
HUD Statement of Policy No. 2001-1, 66 Fed. Reg. 53,052 (Oct. 18, 2001).
Notwithstanding the foregoing, courts have reached inconsistent results in deciding whether HUD’s policy statement correctly interprets the statute. Courts which have considered these issues generally agree that Section 8 prohibits fee-splitting (as defined above). On the other hand, most courts have rejected the contention that simple overcharges are actionable per se under RESPA. With respect to mark-ups and undivided, unearned fees, courts have come to different conclusions. Consumers who have been aggrieved by alleged RESPA violations sometimes file suit against settlement service providers seeking monetary damages and other relief.
One such suit, recently decided by the United States Supreme Court, is Freeman v. Quicken Loans, 566 U.S. ___ (2012), wherein several borrowers filed suit against their lender. They alleged that they were charged loan origination and processing fees for which no services were provided in return, and that this constituted a violation of. RESPA §8(b). In response, the defendant lender argued that because the fees were not split with another party, no violation of RESPA §8(b) could have occurred. The United States District Court agreed with the lender, and the Fifth Circuit Court of Appeals affirmed. 626 F.3d 799 (2010).
The Supreme Court, in a unanimous opinion by Justice Scalia, affirmed the holding of the lower courts. After discussing the history of RESPA, he noted that the dispute . boils down to whether [§8(b)] pro- hibits the collection of an unearned charge by a single settlement-service provider what we might call an un- divided unearned fee or whether it covers only trans- actions in which a provider shares a part of a settlement -service charge with one or more persons who did noth- ing to earn that part.
Slip Op. at 3-4. The borrowers found support for their position in HUD’s 2001 Policy Statement (quoted above). Nevertheless, the court found that HUD’s interpretation of the law was inconsistent with the text of the statute itself and its legislative history. Id. at 5. The court stated that
By providing that no person “shall give” or “shall accept” a “portion, split or percentage” of a “charge” that has been “made or received”, §2607 (b) clearly describes two distinct exchanges.
In other words, since a settlement service provider cannot share or split an unearned fee with itself, such fees do not contravene §8(b) of RESPA.
What is the significance of the holding in Freeman v. Quicken Loans for the title insurance industry? The Supreme Court has once and for all resolved the controversy over whether undivided unearned fees violate §8(b) by determining that they do not. Nevertheless, the court did not hold, or even suggest, that other activities which may violate §8(b) of RESPA are acceptable. Furthermore, the decision did not address §8(a), which is discussed above. Thus, one may still run afoul of the statute (or a regulator’s interpretation of same) by engaging in other prohibited conduct, such as unearned fee-splitting.
Finally, title insurers and their agents must be sensitive to state laws and regulations which parallel (and in some instances go beyond) RESPA. For example, the Title Insurance Act prohibits payment of a “commission . or other consideration as an inducement or compensation for the placing or procuring of any order for title insurance.”, as well as the payment of any “rebate, discount, abatement .”[etc.]. N.J.S.A. 17:46B-34; -35. Unlike RESPA, the Title Insurance Act extends to both residential and commercial transactions.
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