Originally published May 24, 2012

Keywords: real estate, settlement procedures act, unearned charges, residential mortgages

Real Estate Settlement Procedures Act — Prohibition on Unearned Charges

Freeman v. Quicken Loans, Inc., No. 10–1042 (previously discussed in the October 11, 2011 Docket Report).

Section 8(b) of the Real Estate Settlement Procedures Act ("RESPA") provides that "[n]o person shall give [or] 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." 12 U.S.C. § 2607(b).  Today, the Supreme Court held in Freeman v. Quicken Loans, Inc., No. 10-1042, that to establish a violation of Section 8(b) of RESPA, a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons.

Petitioners, the plaintiffs in three consolidated cases, obtained residential mortgages from the respondent, Quicken Loans.  Petitioners alleged that Quicken had violated Section 8(b) of RESPA by charging them fees at closing for which no services were provided.  The fees at issue included "loan discount fees," which Quicken allegedly charged without giving petitioners lower interest rates in return, as well as disputed loan "processing fees" and "loan origination fees."  Petitioners did not allege that Quicken split any of these fees with another party.

The district court granted summary judgment in favor of Quicken, holding that "the plain language" of Section 8(b) "requires an allegation that the challenged fees have been split in some fashion."  The Fifth Circuit affirmed, widening a circuit split on the question whether Section 8(b) prohibits the collection of an unearned charge by a single settlement-service provider—an "undivided unearned fee"—or instead covers only transactions in which a provider shares a part of a settlement-service charge with one or more persons who did nothing to earn that part.  In today's decision, the Supreme Court affirmed, holding that Section 8(b) is "unambiguously limited" to "the splitting of fees paid for settlement services" and therefore does not prohibit a single provider's retention of an undivided unearned fee.

Writing for a unanimous Court, Justice Scalia explained that Section 8(b) describes two distinct transactions.  In the first transaction, a "charge" is "made" to or "received" from a consumer by a settlement-service provider.  That provider then "give[s]," and another person "accept[s]," a "portion, split, or percentage" of the charge.  Congress thus used two different sets of verbs, with distinct tenses, to distinguish between an initial consumer-provider transaction and a subsequent fee-sharing transaction.  Section 8(b), by its plain terms, therefore "cannot be understood to reach" a single provider's retention of an unearned fee.

The Court's holding substantially limits the scope of Section 8(b) liability.  Petitioners argued, and several circuits had held, that a single settlement-service provider can violate Section 8(b) in any given transaction, by charging an unearned fee and "accept[ing]" a "portion" of the fee consisting of 100 percent.  But that expansive interpretation, the Court concluded, "collaps[es] the sequential relationship" of the transactions described by the statute.  Slip op. 7.  Moreover, when a single provider retains an unearned fee collected from a consumer, it is the consumer who "give[s]" a "portion, split, or percentage" of the charge to the provider who "accepts" it.  On petitioners' interpretation, consumers would therefore violate Section 8(b) whenever a provider charges and retains an unearned fee. RESPA, however, was enacted for the benefit of consumers, not to impose liability on them.  Lastly, the Court found further support for its conclusion in the normal usage of the statutory terms "portion," "split," and "percentage," which ordinarily mean less than 100 percent.  Thus, the most natural reading of Section 8(b) is that it prohibits only fee-splitting, not a single provider's retention of an entire unearned fee.

The Court left open the important question whether loan discount fees fall outside the scope of Section 8(b) because they are not fees for "settlement service[s]," but rather, as some circuits have held, are part of the pricing of a loan.

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