The Supreme Court of the United States issued a rare unanimous ruling May 24, 2012 that resolves early lower court divided decisions, stating that a violation of Section 8(b) of the Real Estate Settlement Procedures Act ("RESPA") happens only when a fee charged for settlement services has actually been split between two or more parties and not when an unearned fee has been kept solely by the settlement service provider (or agent thereof) that is charging the fee.
In the initial court case, Freeman, et al. v. Quicken Loans, Inc., a claim was made by those who had closed residential mortgage loans from Quicken Loans, Inc. that the Lender had violated Section 8(b) of RESPA when it charged them a fee for which no services were provided in return. RESPA Section 8(b) states as unacceptable "any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service… other than for services actually performed."
The court reasoned that the parties who brought the case were required to show that a settlement charge, regardless of whether it was earned or not, was actually divided between two or more settlement entities (lenders, settlement agents, etc.) This decision affirms a lower appeals court ruling that granted judgment in favor of Quicken Loans. The Supreme Court opined that RESPA "unambiguously covers only a settlement-service provider's splitting of a fee with one or more persons; it cannot be understood to reach a single provider's retention of an unearned fee." The plaintiffs in the case did not prove (nor did they state originally) that the fee in question charged by the Lender had been split between itself and another party. Therefore, based on the language of the regulation, no RESPA violation was found.
There were many industry eyes on this case, including the National Association of Realtors, the American Land Title Association, and others, who were all backing the position taken by Quicken Loans.
If the Court had sided with the plaintiff’s assertions that RESPA had been violated, this would have had fairly large negative repercussions on the mortgage and real estate world. The purpose of RESPA is to rein in abusive practices such as kickbacks and fee splitting among multiple parties where no actual work was performed by one of the parties receiving a portion of the fee, and wasn’t meant to give loan customers the ability to in effect dictate their own charges for settlement services. The final ruling by the Court has returned a bit of stability to these industries, allowing them to charge what has become a customary fee without the fear of being faced with claims of RESPA wrongdoing. Any kind of stability in the uncertain lending world right now is a good thing.
A link to the decision can be found here. http://www.supremecourt.gov/opinions/11pdf/10-1042.pdf
Manager, Lending and Lending Compliance
Thomas LaChac is Manager of P&G Associatesâ€™ Lending and Lending Compliance team, and brings a wide range of experience in regulatory underwriting, quality assurance, regulatory compliance management and the banking and mortgage industries.