Court Side: Supreme Court Should Settle Contentious RESPA Issue

Court HouseNews Flash: On May 24, the Supreme Court decided in favor of NAR’s position on the Quicken case (discussed in this April 30 post). Here’s a link to the decision. Guidance from NAR will be forthcoming soon.

Earlier this month, the magazine hosted a webinar with two NAR attorneys—Ralph Holmen and Finley Maxson—in which we examined six cases (including one still pending) and their potential impact on your business. Some of you have said you’d like to see a written summary rather than listen to the 60-minute session. Fair enough! Because the cases are complex, however, I’ll cover one at a time.

Here’s a look at the first case, plus additional commentary and resources. The usual warning applies:  Brokers and salespeople who have questions about how or whether these laws or cases apply to their situation should seek the counsel of a qualified attorney.

Issue: Does the RESPA prohibition on unearned fees apply to transaction fees?

The Law: One year before the Home Mortgage Disclosure Act, three years before the Community Reinvestment Act, and 38 years before the Consumer Financial Protection Bureau, there was RESPA. RESPA—the Real Estate Settlement Procedures Act—was passed in 1974 to prevent kickbacks in the provision of settlement services, and it has been a source of angst and debate among real estate, title, and mortgage professionals ever since. One contentious provision, Sec. 8(b), prohibits settlement service providers from imposing so called “unearned fees” on borrowers. Seems simple enough. Not really.

The Case: We looked at Freeman v. Quicken Loans, in which a group of Louisiana borrowers, led by Tammy Foret Freeman, charged Quicken with violating RESPA’s prohibition on unearned fees. Quicken argued that the fee in question, discount points paid to reduce the mortgage interest rate, was standard practice across the industry. Quicken prevailed in District Court and the Federal Circuit Court of Appeals, but the plaintiffs appealed to the U.S. Supreme Court.

The Supreme Court heard arguments in February. The plaintiffs claimed that although they paid the fees they did not receive a reduced interest rate, and thus the fees were “unearned.” Quicken argued that Sec. 8(b) applies only to fees that are split with other parties to the transaction. Because the points weren’t split, Quicken said, there was no violation. Here’s the Sec. 8(b) language:

“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.”

The Decision: The Supreme Court heard arguments in February and is expected, but not guaranteed, to make a decision by the end of June. Circuit courts have been split on the issue of splitting (no pun intended). But HUD has been unequivocal: It issued a policy statement back in 2001 saying if fees exceed the reasonable value of goods provided or services performed—whether or not there’s a split—they violate Sec. 8(b).

The Supreme Court decision should settle once and for all whether splitting fees is required for a Sec. 8(b) violation to occur.

Why It’s Significant for Real Estate Professionals: In another recent case, Busby v. JRHBW Realty Inc. d/b/a Realty South, an Alabama Court ruled that the brokerage’s $149 administrative fee was an unearned fee and, therefore, in violation of RESPA. The fee was not split.

Many real estate companies charge administrative fees, often known as transaction fees. NAR has long held that these fees do not violate RESPA because (1) they aren’t split with other settlement service provider as stipulated in Sec. 8(b), (2) such fees are a part of the total compensation a consumer agrees to pay for many various services provided by a broker, and (3) RESPA was never intended to regulate what brokerages may charge their customers.

Companies that charge such fees, NAR has said, should be prepared to show that the fees are for services that are “actual, necessary, and distinct” from other services or goods provided by the broker and match the value of those services. (See “Real Estate Transaction Fees,” by Phillip L. Schulman)

After the Busby case, many real estate brokers restructured their compensation, combining any administrative fees into the percentage or flat fee commission and listing the combined amount on Line 700 of the HUD-1. HUD has issued an informal letter endorsing the approach but warning that, if the full commission (including the fee) isn’t spelled out in the listing or buyers broker agreement, then the fee may be subject to review under Sec. 8(b) of RESPA.

When the Supreme Court hands down its decision on Quicken, NAR will issue additional guidance to brokers at

What Else Do You Need to Know About RESPA? The law covers a wide range of topics related to the provision of settlement services, including promotional and educational activities; payment for goods and services provided; and affiliated business arrangements, such as partnerships between real estate brokerages and mortgage brokerages. For a terrific summary, see “Following RESPA Rules” in the Association Executive section of (You’ll need your login.)

Then, test your knowledge by taking REALTOR® Magazine’s RESPA quiz.

Next Up: Can the federal Fair Housing Law be used to battle local ordinances that might disproportionately hurt minorities?

Additional Resources:

Newsletter covering recent legal decisions: Letter of the Law

At Legal case summaries

REALTOR® Trademark: “Make Our Marks Remarkable” video (under 3 min.)

At REALTOR Magazine Online: Law & Ethics:

Infographic: 23 Federal Laws that Apply to Real Estate

Stacey Moncrieff

Stacey is vice president of business-to-business communications for the National Association of REALTORS®, overseeing the association's key communications with NAR members and REALTOR® association executives.

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  1. Question: If companies like Quicken simply restructure their fees, didn’t that destroy the whole point of the legislation in the first place?

  2. I think that Quicken’s argument has some merit, although I’m not sure it would benefit the industry if upheld.

  3. Lilly, thanks for the question. Quicken didn’t restructure its fees — it simply charged a fee that the borrowers thought was unfair. Quicken’s contention is that it engaged in a standard mortgage-industry practice, charging prepaid points to reduce the mortgage interest rate. The borrowers, however, claimed that they received no discount on their interest rate. Quicken prevailed in Federal Court.

    The issue of restructuring fees is a separate issue that applies to real estate company transaction fees. Where the two cases merge is in the shared contention that RESPA Sec 8(b) doesn’t apply because the fees aren’t split with another party. We’ll see what the Supremes say!