United States: It Takes Two To Tango (Or To Split A Fee)

In a major win for the mortgage lending industry last week, the United States Supreme Court ruled unanimously that the prohibition under the Real Estate Settlement Procedures Act ("RESPA") on splitting fees requires at least two or more persons to satisfy the statutory requirement of Section 8(b), 12 U.S.C. § 2607(b). In its ruling in Freeman, et al. v. Quicken Loans, Inc., No. 10-1042, May 24, 2012, the Court found the statutory language to be plain and unambiguous, and rejected the efforts of HUD and of the United States to establish a more expansive theory of liability.

12 U.S.C. § 2607(b) specifically provides as follows:

For some time, and as published in its Statement of Policy 2001-1, HUD has taken the position that a single settlement service provider, acting alone, can violate this fee-splitting prohibition under RESPA simply by overcharging a borrower for settlement services, even if there is no other party with whom such provider splits or pays any part of the charge. HUD's Statement of Policy provided that Section 2607(b) could be violated by a single provider under either of the following scenarios: (1) if it marks up the cost of services performed or goods provided by another person without furnishing additional distinct services to justify the additional charge, or (2) if it charges a fee to a consumer where no, nominal or duplicative work is done, or if the fee is judged to be in excess of the reasonable value of the services provided.

The courts had split on the first of the two scenarios, with some courts agreeing with HUD's view while others had rejected it. But, even courts that had followed HUD's approach in which a "fee split" might involve only one party did not agree with HUD's attempts to apply Section 2607(b) to excessive fees or overcharges.

But in Quicken Loans, Inc., the Court found that Section "2607(b) unambiguously covers only a settlement service provider's splitting of a fee with one or more other persons," and "it cannot be understood to reach a single provider's retention of an unearned fee."

The claimants in Quicken Loans, Inc. were three married couples who argued that Quicken charged them fees (respectively, loan discount, processing and loan origination fees) for which no services were provided. The Court indicated that the dispute between the parties boils down to whether Section 2607(b) "prohibits the collection of an unearned charge by a single settlement service provider" or "whether it covers only transactions in which a provider shares a part of a settlement service charge with one or more other persons who did nothing to earn that part."

Utilizing HUD's Policy Statement to support their view, the claimants took the position that no split of the fee between persons is required to establish a violation. The claimants argued that deference should be given to HUD's interpretation in its Policy Statement since it was the federal agency charged with interpreting RESPA, and adopting and implementing its regulations – a role that now falls under the purview of the CFPB. The Court concluded, however, that deference to HUD's views in its Policy Statement was not appropriate because HUD's interpretation went beyond RESPA's statutory framework to regulate the mortgage industry in a way beyond that which Congress had enacted.

Examining the actual language appearing in the RESPA at Section 2607(b), the Court explained that the statute describes two distinct exchanges. First, there is a charge made to or received from a consumer by a settlement service provider. Second, that provider then gives and another person accepts a portion, split or percentage of the charge. The Court found that "Congress's use of different sets of verbs, with distinct tenses, to distinguish between the consumer-provider transaction (the "charge" that is "made or received") and the fee-sharing transaction (the "portion, split or percentage" that is "give[n]" or "accept[ed]") would be pointless if, as petitioners contend, the two transactions could be collapsed into one."

All in all, the Court's decision confirms that notwithstanding broad regulatory authority granted to HUD (or to the CFPB), such regulatory authority cannot exceed (or transform) the statutory authority and language relating to the law being regulated. This decision will benefit lenders not only in RESPA cases, but also in other financial services litigation where regulators have expanded requirements or liabilities which go "beyond the meaning that the statute can bear" and in any litigation in which financial service providers seek to have the plain statutory language enforced and implemented as written, rather than as a regulator might otherwise have wished or written the law.

In that regard, and particularly given the unanimous nature of the decision, one can only wonder if this Court may have taken a similarly dim view under Fair Lending of "disparate -impact" discrimination in the Magner case that had been briefed and argued but was ultimately dismissed by the City of St. Paul before a decision on the merits. Given the Court's willingness to limit remedies and enforce the law as written evidenced in Quicken Loans, Inc., the 20-year history of disparate-impact discrimination might have come to an end this year as well.

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