Mortgage Banking & Consumer Credit Alert
November 2008
Authors:
Phillip L. Schulman
+1.202.778.9027
phil.schulman@klgates.com
R. Bruce Allensworth
+1.617.261.3119
bruce.allensworth@klgates.com
Andrew C. Glass
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andrew.glass@klgates.com
David D. Christensen
+1.617.951.9077
david.christensen@klgates.com
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Eleventh Circuit Rejects Challenge to Optional
Discounts under RESPA
Through a spate of lawsuits, the plaintiffs’ class action bar has sought to articulate a
novel theory of RESPA1 “required use” liability against home builders. Specifically,
the plaintiffs’ bar has brought RESPA Section 82 claims against home builders and
their affiliates who offer optional discounts on settlement costs if home buyers choose
to use the affiliates’ services. In conflict with RESPA’s goal of lowering settlement
costs3, plaintiffs’ lawsuits challenge the ability of home builders, as well as of affiliated
mortgage lenders, title insurance companies, and other settlement service providers, to
offer meaningful discounts to consumers. Becoming the first federal appellate court to
consider the issue, the United States Court of Appeals for the Eleventh Circuit recently
rejected plaintiffs’ theory.4
Tanya Spicer sued The Ryland Group, Inc. (“Ryland”) and its affiliate Ryland Mortgage
Company (“Ryland Mortgage”), alleging that defendants violated RESPA Section 8
through offering an optional settlement costs discount if Spicer chose to use Ryland
Mortgage to finance the purchase of her home from Ryland.5 Spicer attempted to
articulate a theory of “economic coercion” in support of her claim. In particular, Spicer
argued that because the amount of the discount allegedly was too great to pass up, she
had “no viable economic option but to use the affiliated lender.”6 The Eleventh Circuit,
however, affirmed the dismissal of Spicer’s lawsuit in its entirety. Joining every district
court that has addressed the issue7, the Eleventh Circuit held that offering optional
discounts on settlement costs if home buyers choose to use affiliates’ services does
not violate RESPA or its implementing regulations.8
RESPA Section 8 and HUD Regulation X
RESPA Section 8 prohibits: (1) fees, kickbacks, or any thing of value in exchange
for the referral of real estate settlement services; and (2) unearned fees received in
connection with real estate settlement services.9 RESPA, however, provides a qualified
exemption from Section 8 liability to affiliated business arrangements.10 Specifically,
12 U.S.C. § 2607(c)(4) provides that the referral of settlement services to an affiliated
service provider is permitted if: (a) the existence of the affiliated business arrangement
is disclosed to the person referred; (b) the person referred is not required to use any
particular settlement service provider; and (c) the only thing of value that is received
from the arrangement is the return on the ownership interest.11 Spicer’s claims focused
on the “required use” provision of Section 2607(c)(4).
Regulation X, promulgated by the United States Department of Housing and Urban
Development (“HUD”) to implement RESPA, permits affiliated service providers to
offer “a package (or combination of settlement services) or … discounts or rebates
to consumers for the purchase of multiple settlement services.”12 Such discounts do
not constitute an impermissible “required use” if the discounts are “optional to the
purchaser” and are “true discount[s] below the prices that are otherwise generally
available, and must not be made up by higher costs elsewhere in the settlement
process.”13
Mortgage Banking & Consumer Credit Alert
Spicer’s Class Action Claims
In January 2006, Spicer entered into an agreement to
purchase a home from Ryland. The sales agreement
provided for an optional discount on settlement costs
if Spicer chose to finance her home through Ryland
Mortgage. 14 Eligible settlement costs included
loan origination fees and discount points, transfer
taxes, recording costs, surveys, attorneys’ fees, and
title insurance premiums.15 The sales agreement
disclosed the affiliated business arrangement
(“ABA”) between Ryland and Ryland Mortgage
and informed Spicer that she was not required to use
Ryland Mortgage as a condition for settlement of
her loan.16 Indeed, the ABA disclosure specifically
stated that “You are NOT required to use the listed
provider(s) as a condition for settlement of Your
loan.… You are free to shop around to determine
that You are receiving the best services and the
best rate for these services.”17 Spicer signed the
ABA disclosure indicating that she had read and
understood its contents.18
In bringing her lawsuit, Spicer alleged that she was
“economically coerced” into using the affiliated
lender because the settlement costs discount was too
good a deal to refuse.19 Thus, Spicer asserted that the
discount was not actually optional and constituted
an impermissible “required use” in violation of
RESPA Section 8, 12 U.S.C. § 2607.20
The Court Rejects Plaintiff’s “Economic
Coercion” Theory
On their motion to dismiss, defendants successfully
argued that Spicer’s claims failed as a matter of
law because the offered discount was expressly
permitted by Regulation X.21 The district court
found that the sales agreement plainly indicated
that the offering of the settlement costs discount to
Spicer and the choice to use Ryland Mortgage as her
lender were entirely optional.22 Contrary to Spicer’s
claims, nothing in the sales agreement indicated
that choosing a mortgage lender other than Ryland
Mortgage would result in an increase in the purchase
price of her home.23
The district court specifically rejected Spicer’s
claim that offering an optional settlement costs
discount amounted to “economic coercion.” This
finding is consistent with the other federal courts
that have addressed the issue. 24 In particular,
Spicer’s argument failed to distinguish between
(1) the situation where a purchaser is required to
use an affiliate of the settlement service provider
or pay an additional charge, and (2) the situation
where a purchaser is offered an optional discount
if the purchaser chooses to use an affiliate of the
settlement service provider. While “upcharging”
the purchaser is impermissible, offering an optional
discount is permitted.25 Moreover, the district court
held that HUD’s own website contradicted plaintiff’s
theory.26 The website states that a builder may offer
an optional discount if a buyer chooses to finance
the home purchase through the builder’s mortgage
company.27
Finally, as the district court in a related case held,
acceptance of the plaintiffs’ bar’s “economic
coercion” theory of required use would lead to
absurd results.28 Specifically, under that theory,
anytime a settlement provider offered the most
competitive discount on a package of services,
that discount could lead to RESPA liability. Such
an interpretation would eviscerate Regulation X’s
provision for optional discounts. Accordingly,
the district court held, and the Eleventh Circuit
affirmed per curiam, that offering optional discounts
on settlement costs if home buyers choose to use
affiliates’ services does not constitute a required use
under RESPA or Regulation X.29
Impact on Home Builders and Affiliated
Settlement Service Providers
The federal district court decisions to date have
rejected the “economic coercion” theory of
required use, and the Eleventh Circuit’s affirmation
of the dismissal of the Spicer matter reinforces
the consensus among federal courts that offering
optional discounts on settlement costs if home buyers
choose to use affiliates’ services does not violate
RESPA.30 Changes to Regulation X’s definition of
“required use” effective in January 2009, however,
November 2008 | 2
Mortgage Banking & Consumer Credit Alert
may alter the landscape for home builders and their
affiliates.31
Phillip L. Schulman, R. Bruce Allensworth, Andrew
C. Glass, and David D. Christensen of K&L Gates
LLP represented The Ryland Group, Inc. and Ryland
Mortgage Company.
12
24 C.F.R. § 3500.2. Changes to Regulation X’s definition of
“required use,” however, will become effective on January 16,
2009. See 73 Fed. Reg. 68204, 68239 (Nov. 17, 2008).
13
Id.
14
Spicer, 523 F. Supp. 2d at 1357-58.
15
Id. at 1357.
16
Id. at 1357-58.
Endnotes
17
1
18
Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et
seq.
2
12 U.S.C. §§ 2607(a), (b).
3
RESPA’s stated purpose is to protect consumers from
“unnecessarily high settlement charges,” 12 U.S.C. § 2601(a),
and thus to encourage opportunities for consumers to lower their
overall settlement charges.
4
S ee Spicer v. The Ryland Group, Inc., Appeal No. 07-15426, 2008
WL 4276909 (11th Cir. Sept. 16, 2008) (per curiam), aff’g 523
F. Supp. 2d 1356 (N.D. Ga. 2007). In its per curiam opinion,
the Eleventh Circuit adopted the “well-reasoned opinion” of the
district court. Id. at *1.
Id. at 1358 (emphasis in original).
Id.
19
Id. at 1361.
20
Id. at 1359.
21
Id. at 1362.
22
Id. at 1361-62.
23
Id. at 1362.
24
See Yeatman, 2008 WL 1847087, at *2-3; Capell II, 2008 WL
269521, at *3-*4; Capell I, 2007 WL 3342389, at *7-*8; Hopkins,
515 F. Supp. 2d at 657-58; Geisser, 2001 WL 36016177, at *3.
25
Regulation X, 24 C.F.R. § 3500.2(b) & App. B(11).
5
26
6
27
Spicer, 523 F. Supp. 2d at 1358-59.
Id. at 1361.
Spicer, 523 F. Supp. 2d at 1362.
I d. at 1361; U.S. Dep’t of Housing & Urban Development,
“Frequently Asked Questions about RESPA,” at http://www.hud.
gov/offices/hsg/sfh/res/resconsu.cfm#HV (last checked Nov. 17,
2008).
7
See Yeatman v. D.R. Horton, Inc., 2008 WL 1847087, at *2-3
(S.D. Ga. Apr. 23, 2008), appeal docketed, No. 08-12929 (11th
Cir. 2008); Capell v. Pulte Mortgage LLC, 2008 WL 269521,
at *3-*4 (E.D. Pa. Jan. 14, 2008) (“Capell II”); Capell v. Pulte
Mortgage LLC, 2007 WL 3342389, at *7-*8 (E.D. Pa. Nov. 7,
2007) (“Capell I”); Hopkins v. Horizon Mgmt. Servs., Inc., 515 F.
Supp. 2d 649, 657-58 (D.S.C. 2007); Geisser v. NVR, Inc., 2001
WL 36016177, at *3 (M.D. Tenn. May 15, 2001).
28
See Capell I, 2007 WL 3342389, at *7; Capell II, 2008 WL
269521, at *4 (“HUD did not intend to make every rebate and
discount suspect under RESPA, and that is what would happen
if we accept [plaintiff’s] extravagant argument”).
29
Spicer, 523 F. Supp. 2d at 1362; Spicer, 2008 WL 4276909, at
*1.
8
United States Department of Housing and Urban Development
Regulation X, 24 C.F.R. § 3500.1, et seq.
30
See Yeatman, 2008 WL 1847087, at *2-3; Capell II, 2008 WL
269521, at *3-*4; Capell I, 2007 WL 3342389, at *7-*8; Hopkins,
515 F. Supp. 2d at 657-58; Geisser, 2001 WL 36016177, at *3.
9
12 U.S.C. §§ 2607(a), (b).
10
“The term ‘affiliated business arrangement’ means an
arrangement in which (A) a person who is in a position to refer
business incident to or a part of a real estate settlement service
involving a federally related mortgage loan, or an associate of
such person, has either an affiliate relationship with or a direct or
beneficial ownership interest of more than 1 percent in a provider
of settlement services; and (B) either of such persons directly or
indirectly refers such business to that provider or affirmatively
influences the selection of that provider.” 12 U.S.C. § 2602(7).
31
See 73 Fed. Reg. at 68239-4
11
12 U.S.C. § 2607(c)(4).
November 2008 | 3
Mortgage Banking & Consumer Credit Alert
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Mortgage Banking & Consumer Credit Alert
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