The U.S. Supreme Court last week provided real estate brokers a lot of clarity about administrative fees charged by brokerages when it ruled in favor of Quicken Loans in a lawsuit over unearned fees in the Real Estate Settlement Procedures Act (RESPA).
At issue was whether fees the lender charged, known variously as a loan processing or a loan discount fee, violated federal settlement laws. The plaintiffs in the lawsuits argued that the fees violated settlement laws because they weren’t tied to a specific service. But Quicken argued that the prohibition, in RESPA, only applied to fees that are split with another settlement service provider. Since it wasn’t split with anyone else, Quicken’s loan processing fee couldn’t constitute a RESPA violation. NAR, siding with Quicken, filed an amicus brief with the Court supporting the lender’s argument.
Short message on the case from NAR President Moe Veissi.
The Supreme Court agreed with Quicken and NAR, saying the RESPA provision very clearly applies only to fees that are split with another provider, therefore it affirmed the appeals court decision in favor of the lender.
“In order to establish a violation of [of the RESPA provision], a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons,” the court said in its ruling. “Because petitioners do not contend that respondent split the challenged charges with anyone else, summary judgment was properly granted in favor of respondent. We therefore affirm the judgment of the Court of Appeals.”
The case is important for real estate brokerages, because although the defendant was a lender, many brokers charge their own version of an administrative fee, on top of the sales commissions, and in some previous cases, courts have ruled that the fees violated RESPA. With this case, therefore, the Supreme Court has made it clear that the fees are okay, so long as the fees are not split with a third party who provides no services in exchange for the fee.
Read an analysis of the case by NAR Legal Affairs.
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.
News 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 EPA wetlands case before the U.S. Supreme Court this week involves a narrow due process issue but for NAR the case provides an opportunity for real estate interests to press their property-rights effort on behalf of property owners.
In the wetlands case, EPA stopped a couple from building their home in an already developed subdivision out of a concern that the property contains a wetlands. The couple wants to have that question reviewed—that is, is there or isn’t there a wetlands on the property? But EPA says that question can’t even be looked at until the couple first restores the land to the way it was before try started to build and then monitor the property for three years.
For the couple, that directive amounts to a violation of their due process rights. NAR agrees.
But NAR also sees an opportunity in the case, because from its point of view, EPA’s action is an example of the kind of regulatory overreach that’s been a problem with the agency since the Clean Water Act was enacted in 1972. That law very clearly says EPA and the U.S. Corps of Engineers have Clean Water Act jurisdiction over navigable waters. But for years, the agencies have been using guidance documents to expand that definition to include other types of water. In the case before the Supreme Court this week, the property doesn’t even contain water except for periodically throughout the year. For NAR, should EPA even be regulating this piece of property?
In the video above, NAR analyst Russell Riggs explains what’s at stake in the case.
January 10 update. Read the Washington Post’s report on the Supreme Court’s hearing, called “Justices are skeptical of EPA actions in land case.”
NAR is part of a group that has submitted a friend of the court brief to the Supreme Court arguing that the actions by the U.S. EPA violated the property rights and right of due process of Chantell and Mike Sackett of Priest Lake, Idaho. Although the Court will hear arguments on a the relatively narrow legal issue of due process and the wetlands appeals process, NAR believes that broader principles are at stake, including the overreaching regulatory authority of the EPA.
Four years ago the couple bought a piece of land of under an acre that sits squarely in a developed subdivision, with a sewer infrastructure already in place, overlooking Priest Lake in the Idaho panhandle. The couple secured local building permits and even received a verbal okay from the U.S. Army Corps of Engineers that the property, which has water on it periodically but isn’t adjacent to any standing body of water, is not a wetlands. But as soon as the Sacketts started to build their home, EPA officials, citing the agency’s authority under the Clean Water Act, ordered them to stop and restore the property to the way it was before they did any work on it.
They were also ordered to take other costly restoration and monitoring activities. Once these requirements were met, only then could they go through the wetlands permitting appeals process. What’s more, the EPA said it could impose a fine of up to $32,500 a day for every day they didn’t comply.
Although this sounds like a case of over-reach by the EPA, the issue before the Supreme Court only concerns whether the Sacketts have the right to challenge the EPA’s assertion that the property contains a wetlands. EPA says the Sacketts can’t challenge its assertion until after it files formal charges against the Sacketts for building on a wetlands, which it hasn’t done yet. And it won’t consider that question until the Sacketts first spend the money and take the time to restore the property to its previous state.
The Sacketts say the issue of whether the property is a wetlands is central to the dispute and needs to be resolved in court now if they’re to get their proper due process rights. NAR agrees, but the lower courts have sided with the EPA, saying regulatory agencies would be hamstrung in their ability to enforce their rules if parties like the Sacketts can chellenge them in court before they’ve taken formal regulatory action.
NAR will be monitoring the case closely when the court hears oral arguments on Monday, Jan. 9, because of its importance to the protection of private property rights.
Read the brief filed by NAR and the other associations.