October 24, 2011
Practice Group(s):
Mortgage Banking &
Consumer Financial
Products
No More Split Decisions: The Supreme
Court Grants Certiorari to Address What it
Means to Split Charges under RESPA
Section 8(b)
By Phillip L. Schulman, Andrew C. Glass, and Roger L. Smerage
The United States Supreme Court recently granted certiorari in Freeman v. Quicken Loans, Inc.,1 to
review what it means to split settlement service charges under Section 8(b) of the Real Estate
Settlement Procedures Act (“RESPA”).2 Specifically, the Court will review whether an entity is liable
under Section 8(b) even where it does not divide a fee with a third party.3 Lower courts have provided
differing answers to the question for the better part of a decade, causing uncertainty in the residential
mortgage and real estate industries. This alert outlines the current state of the law and the impact that
the Supreme Court’s decision may have.
Background
Congress enacted RESPA Section 8(b) to address so-called “unearned fees” charged in connection
with residential real estate settlements.4 The statute provides that:
No person shall give and no person shall 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.5
In interpreting Section 8(b), the Department of Housing and Urban Development (“HUD”)6 has
identified categories of unearned fees that it believes violate Section 8(b),7 namely (1) unearned,
divided fees,8 (2) markups,9 (3) unearned, undivided fees,10 and (4) overcharges.11 Federal circuit
courts agree that “unearned, divided fees” violate Section 8(b),12 and those circuits that have addressed
“overcharges” – where a provider renders services at a purportedly higher-than-reasonable price –
agree that those types of charges do not violate the statute.13 The circuit courts, however, have
disagreed about whether an entity faces Section 8(b) liability for charging “markups” – where a
provider purportedly marks up the cost of the services performed by another without providing
additional services – or “unearned, undivided fees” – where a provider purportedly charges a fee
without rendering any services and retains the entire fee. In particular, the courts are split over
whether Section 8(b) requires the division of a charge between two or more entities for liability to
attach.
Joined by the Fifth Circuit Court of Appeals in Freeman, the Fourth,14 Seventh,15 and Eighth16 Circuit
Courts of Appeals have held that there is no Section 8(b) violation where there is only one entity
involved in charging a fee. These circuits’ holdings rely on the interpretation of one (or both) of two
parts of Section 8(b), namely, that (1) the language prohibiting the giving and accepting of a fee
requires two entities, and (2) the language addressing a “portion, split, or percentage” of an unearned
No More Split Decisions: The Supreme Court Grants Certiorari to
Address What it Means to Split Charges under RESPA Section 8(b)
fee contemplates the participation of two entities.17 In contrast, the Second,18 Third,19 and Eleventh20
Circuits have held that a charge involving only a single entity may violate Section 8(b). These courts
have either interpreted Section 8(b) as unambiguously supporting this conclusion,21 or have found that
Section 8(b) is ambiguous and that deference is owed to HUD’s interpretation that a charge involving
only a single entity may violate Section 8(b).22 District courts in those circuits where the court of
appeals has not addressed the issue have been equally conflicted.23
The Fifth Circuit “Enters the Interpretive Fray”24
In Freeman, the district court rejected the plaintiffs’ claim that RESPA Section 8(b) applied to a
defendant who purportedly charged a loan discount fee without providing a loan discount, where the
fee was not divided with another entity.25 The district court reasoned that because “the fees were not
split with another party,” there was no violation of Section 8(b).26 On appeal, the Fifth Circuit agreed,
ruling “that the language of RESPA § 8(b) is unambiguous and does not cover undivided unearned
fees.”27 The court adopted the same analysis as the Fourth, Seventh, and Eighth Circuits had applied
to Section 8(b). Regarding the provision that “[n]o person shall give and no person shall accept,” the
Fifth Circuit held that “[t]he term ‘and’ normally means that both of the listed conditions must be
satisfied,” such that “the provision requires two parties each committing an act: one party gives a
‘portion, split, or percentage,’ and another party receives a ‘portion, split, or percentage.’”28
Furthermore, the court found that the “language ‘any portion, split or percentage’ requires that two
parties share something.”29 Moreover, because it found no ambiguity in the language of Section 8(b),
the court declined to defer to HUD’s interpretation of the statute.30
The Likely Impact of the Supreme Court’s Decision in Freeman
In reviewing Freeman, the Supreme Court will address the question of “[w]hether [RESPA] Section
8(b) … prohibits a real estate settlement services provider from charging an unearned fee only if the
fee is divided between two or more parties.”31 In all likelihood, the Court will use Freeman as a
vehicle to provide a uniform interpretation of Section 8(b). At the very least, a uniform interpretation
would provide clarity to the residential mortgage and real estate industries, allowing them to employ
uniform practices across all jurisdictions in which they operate or to expand into jurisdictions where
previously they had been reluctant to operate because of the uncertainty of liability. Uniform
practices, and expanded business opportunities with concomitantly greater competition, could lead to
lower costs for service providers and consumers alike. K&L Gates will analyze the Supreme Court’s
disposition of the Freeman matter after the Court renders its opinion later this term. If you have
questions about how your business practices are impacted by RESPA, please give us a call.
2
No More Split Decisions: The Supreme Court Grants Certiorari to
Address What it Means to Split Charges under RESPA Section 8(b)
Authors:
Phillip L. Schulman
phil.schulman@klgates.com
+1.202.778.9027
Andrew C. Glass
andrew.glass@klgates.com
+1.617.261.3107
Roger L. Smerage
roger.smerage@klgates.com
+1.617.951.9070
1
No. 10-1042 (U.S.).
2
12 U.S.C. § 2607(b).
3
The Freeman case does not present the question of whether a settlement service provider may face liability for
purportedly unearned settlement service charges under other theories, such as pursuant to a state unfair and deceptive
trade practice statute.
4
Section 8 is entitled “Prohibition against kickbacks and unearned fees.” 12 U.S.C. § 2607. Section 8(a) addresses
kickbacks, and Section 8(b) addresses unearned fees. See HUD Policy Statement 2001-1, 66 Fed. Reg. 53052, 53058
(Oct. 18, 2001).
5
12 U.S.C. § 2607(b).
6
HUD was the federal agency charged with administering RESPA before the passage of the Dodd-Frank Act. See 12
U.S.C. § 2617(a) (2006). The Dodd-Frank Act transferred administration of the statute to the newly formed Consumer
Finance Protection Bureau. See Dodd-Frank Wall Street Reform and Consumer Protection Act § 1098, Pub. L. No. 111203 (2010).
7
HUD Policy Statement 2001-1, 66 Fed. Reg. at 53059. Although courts and, interestingly, the Solicitor General of the
United States, have stated that HUD identified four examples of unearned fees, see, e.g., Freeman v. Quicken Loans,
Inc., 626 F.3d 799, 802 (5th Cir. 2010) (“HUD … issued a statement of policy that identified four types of overcharge
schemes that [Section 8(b) could potentially cover”); Brief for the United States as Amicus Curiae at 4, Freeman, No. 101042 (U.S. Aug. 25, 2011), HUD’s policy statement actually identified only three categories and did not distinguish
between what have later been termed “overcharges” and “unearned, undivided fees.” HUD Policy Statement 2001-1, 66
Fed. Reg. at 53059; see Cohen v. JP Morgan Chase & Co., 498 F.3d 111, 114 (2d Cir. 2007). For a more in-depth
discussion of the way the federal circuit courts have analyzed the various examples of unearned fees, see the analysis in
Patino v. Lawyers Title Insurance Corp., No. 3:06-cv-1479-B, 2007 WL 4687748, at *3-5 (N.D. Tex. Jan. 11, 2007).
8
See Cohen, 498 F.3d at 114 n.2. HUD defined an “unearned, divided fee” as the instance where “[t]wo or more persons
split a fee for settlement services, any portion of which is unearned.” HUD Policy Statement 2001-1, 66 Fed. Reg. at
53059.
9
See Santiago v. GMAC Mortgage Group, Inc., 417 F.3d 384, 388-89 (3d Cir. 2005); Kruse v. Wells Fargo Home
Mortgage, Inc., 383 F.3d 49, 53, 57-61 (2d Cir. 2004). HUD defined a “markup” as the instance where “one settlement
service provider marks-up the cost of the services performed or goods provided by another settlement service provider
without providing additional actual, necessary, and distinct services, goods, or facilities to justify the additional charge.”
HUD Policy Statement 2001-1, 66 Fed. Reg. at 53059.
10
See Cohen, 498 F.3d at 114. HUD defined an “unearned, undivided fee” as the instance where “one service provider
charges the consumer a fee where no, nominal, or duplicative work is done.” HUD Policy Statement 2001-1, 66 Fed.
Reg. at 53059.
11
See Santiago, 417 F.3d at 386-88; Kruse, 383 F.3d at 53, 55-57. HUD defined an “overcharge” as the instance where
“one service provider charges the consumer a fee … in excess of the reasonable value of goods or facilities provided or
the services actually performed.” HUD Policy Statement 2001-1, 66 Fed. Reg. at 53059.
3
No More Split Decisions: The Supreme Court Grants Certiorari to
Address What it Means to Split Charges under RESPA Section 8(b)
12
See Freeman, 626 F.3d at 802 (“[a]ll circuits agree that the statute plainly prohibits fee splitting”).
13
Martinez v. Wells Fargo Home Mortgage, Inc., 598 F.3d 549, 554 (9th Cir. 2010); Friedman v. Market Street Mortgage
Corp., 520 F.3d 1289, 1296-97 (11th Cir. 2008); Santiago, 417 F.3d at 387; Kruse, 383 F.3d at 56; Krzalic v. Republic
Title Co., 314 F.3d 875, 880 (7th Cir. 2002); Echevarria v. Chi. Title & Trust Co., 256 F.3d 623, 627 (7th Cir. 2001).
Because courts have concluded that Section 8(b) “is not a price-control statute,” Krzalic, 314 F.3d at 881; accord
Friedman, 520 F.3d at 1296; Santiago, 417 F.3d at 387 n.3; Kruse, 383 F.3d at 57 (“Congress did not intend section 8(b)
to serve as a price-control mechanism”); Haug v. Bank of Am., N.A., 317 F.3d 832, 837 (8th Cir. 2003) (“Congress …
rejected proposed legislation that would have set a system of price controls for settlement services fees”); Boulware v.
Crossland Mortgage Corp., 291 F.3d 261, 267-68 (4th Cir. 2002) (“RESPA was meant to address certain practices, not
enact broad price controls), courts have ruled that they owe no deference to HUD’s view that an overcharge violates
Section 8(b), Martinez, 598 F.3d at 554; Friedman, 520 F.3d at 1297; Santiago, 417 F.3d at 387; Krzalic, 314 F.3d at 879;
see also Kruse, 383 F.3d at 56.
14
Boulware, 291 F.3d at 265. Although the Fourth Circuit in Boulware used the term “overcharge,” 291 F.3d at 264-65,
the facts of the case appear to fall in what has subsequently been labeled the markup category, see id. at 264 (stating that
plaintiff alleged defendant charged her $65 for a credit report when it paid the credit reporting agency only $15).
15
Krzalic, 314 F.3d at 879; Echevarria, 256 F.3d at 627.
16
Haug, 317 F.3d at 836.
17
Haug, 317 F.3d at 836; Krzalic, 314 F.3d at 879; Boulware, 291 F.3d at 266; Echevarria, 256 F.3d at 628. Both the
Fourth and Seventh Circuits recognized that for markups or overcharges to violate Section 8(b), the consumer of the
settlement services – the person Congress intended RESPA to protect – would have to be the person “giv[ing]” the
unearned fee and, therefore, rejected this theory as “irrational.” Boulware, 291 F.3d at 265; see Krzalic, 314 F.3d at 879.
18
Cohen, 498 F.3d at 117-26; Kruse, 383 F.3d at 61.
19
Santiago, 417 F.3d at 389.
20
Sosa v. Chase Manhattan Mortgage Corp., 348 F.3d 979, 982 (11th Cir. 2003). Although the Eleventh Circuit did not
employ the term “markup,” the facts of the case place it firmly within that category. See Sosa, 348 F.3d at 981 (plaintiffs
alleged defendant charged them $50 for courier services provided by independent contractors).
21
Santiago, 417 F.3d at 388-89 (“[t]he context in which Section 8(b) is found further supports the conclusion that markups
are included in the statute”); Sosa, 348 F.3d at 982 (“[t]he ‘and’ in subsection 8(b) … operates to create two separate
prohibitions”).
22
Cohen, 498 F.3d at 117-26 (“[b]ecause we determine that HUD reasonably construes RESPA § 8(b) to prohibit ‘one
service provider’ from charging the consumer a fee for which ‘no … work is done,’ we defer to that interpretation” (citation
omitted)); Kruse, 383 F.3d at 58-61 (“we conclude that Chevron deference is due to HUD’s interpretation of section 8(b)
with respect to mark-ups”).
23
Compare Molosky v. Wash. Mut. Bank, No. 07-cv-11247, 2008 WL 183634, at *6 (E.D. Mich. Jan. 18, 2008) (stating
that Section 8(b) does not apply to overcharges and unearned, undivided fees); Morales v. Countrywide Home Loans,
Inc., 531 F. Supp. 2d 1225, 1227-28 (C.D. Cal. 2008) (concluding markups do not violate Section 8(b)); Morrison v.
Brookstone Mortgage Co., No. 2:03-cv-729, 2006 WL 2850522, at *7 (S.D. Ohio 2006) (same); Welch v. Centex Home
Equity Co., 262 F. Supp. 2d 1263, 1269-70 (D. Kan. 2003) (predicting Tenth Circuit would require two parties to find
Section 8(b) violation), with Augenstein v. Coldwell Banker Real Estate LLC, 750 F. Supp. 2d 900, 905-07 (S.D. Ohio
2010) (concluding Section 8(b) prohibits unearned, undivided fees); Bushbeck v. Chi. Title Ins. Co., 632 F. Supp. 2d 1036,
1041-42 (W.D. Wash. 2008) (adopting Cohen); Maganallez v. Hilltop Lending Corp., 505 F. Supp. 2d 594, 605 (N.D. Cal.
2007) (stating “Section 8(b) prohibits mark-ups”). In dicta, the District Court for the District of Maine has noted that a third
party is required to state a claim for a Section 8(b) violation. See Campbell v. Machias Sav. Bank, 865 F. Supp. 26, 31
n.5 (D. Me. 1994).
24
Freeman, 626 F.3d at 803.
25
Id. at 801. A loan discount, also known as “points,” allows a borrower to pay money upfront in exchange for a lower
interest rate than would otherwise be offered.
26
Id.
27
Id. at 803.
28
Freeman, 626 F.3d at 803.
29
Id. at 803-04. The court also opined that RESPA is “not an anti-price gouging statute.” Id. at 804.
30
Id. at 805-06.
4
No More Split Decisions: The Supreme Court Grants Certiorari to
Address What it Means to Split Charges under RESPA Section 8(b)
31
Petition for Writ of Certiorari at i, Freeman v. Quicken Loans, Inc., No. 10-1042 (U.S. Feb. 15, 2011). Merits briefing
must be completed by early 2012. The Court has yet to schedule oral argument. The Court will hear another case
addressing RESPA on November 28, 2011, when the parties in First American Financial Corp. v. Edwards, No. 10-708
(U.S.), will present argument as to whether a plaintiff has standing to sue under RESPA where the plaintiff cannot allege
that the purported RESPA violation caused an increase in the settlement charge in question.
5
Mortgage Banking & Consumer Financial Products
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