Freeman v. Quicken Loans, Inc. (10-1042)
Appealed from: United States Court of Appeals for the Fifth Circuit (Nov. 17, 2010)
REAL ESTATE SETTLEMENT PROCEDURES ACT, SETTLEMENT SERVICES, KICKBACKS, REFERRAL
Quicken Loans charged three couples with mortgage discount fees that were allegedly unearned. One couple, the Freemans, initiated a civil action under Section 2607(b) of the Real Estate Procedures Act of 1974 (“RESPA”), claiming that RESPA prohibits a settlement services provider from charging any unearned fees. The district court dismissed the suit, holding that Section 2607(b) only applies to fees split with another culpable party. The Fifth Circuit affirmed. Now, after consolidating their case with the other couples’ claims, the Freemans argue that the Fifth Circuit’s decision should be overturned because the intent of RESPA was to proscribe all unearned fees, including fees charged by settlement service providers acting unilaterally. Quicken Loans counters that Congress intended to restrict only split fees, protecting consumers such as the Freemans through extensive disclosure requirements. The Supreme Court’s decision will clarify the judicial interpretation of Section 2607(b) and determine which fees RESPA forbids.
Whether Section 8(b) of the Real Estate Settlement Procedures Act prohibits a real estate settlement services provider from charging an unearned fee only if the fee is divided between two or more parties.
Whether the Real Estate Settlement Procedures Act extends its prohibition to all cases where a settlement services provider retains fees for services it did not perform, or is more limited in prohibiting only kickback and referral arrangements where the service provider shares fees with a third party.
Tammy and Larry Freeman secured a mortgage from Quicken Loans ("Quicken"), a settlement services provider, and were charged a “loan discount fee” of $980. See Brief for Petitioners Tammy Foret Freeman, et al. at 7. Similarly, John and Stacey Bennett were charged a loan discount fee of $1100 when they closed their mortgage with Quicken. See id. A “loan discount fee” is money the mortgagor pays to purchase “points,” which are used to lower the interest rate that the mortgagee would otherwise charge against the mortgagor. See id. at 7–8. In another mortgage transaction, Quicken charged Paul and Irma Smith a “loan processing fee” of $575 and a “loan organization fee” of $5107; the latter fee, though, was later characterized by Quicken as a loan discount fee. See id. at 8.
The Freemans initiated suit against Quicken in state court, alleging that Quicken did not provide them with any interest rate reduction but charged them an unearned discount fee, thus violating Section 8(b) of the Real Estate Settlement Procedures Act (“RESPA”) and various state laws. See Freeman v. Quicken Loans, Inc., 626 F.3d 799, 801 (5th Cir. 2010); 12 U.S.C. § 2607(b). Quicken removed the suit to federal court, where it was consolidated with a similar case brought by the Smiths, who were pursuing the same cause of action against Quicken under the RESPA, and a putative class action case filed by the Bennetts. See Freeman, 626 F.3d at 801. Quicken moved for summary judgment, contending that none of the claims were actionable under Section 8(b) of the RESPA, because the provision only applied to kickbacks and referral transactions where settlement service fees were split with another party, and did not reach settlement services providers that retained loan discount fees unilaterally. See id. The district court ruled in favor of Quicken and dismissed the case, stating that the language of Section 8(b) does not reach undivided unearned fees. See id.
The United States Court of Appeals for the Fifth Circuit affirmed, ruling that only claims alleging a split of unearned fees between a settlement services provider and a third party can be actionable under Section 8(b) of the RESPA. See Freeman, 626 F.3d at 801. Despite acknowledging the existence of a circuit split over Section 8(b)’s applicability to undivided unearned fees, the Fifth Circuit held that the language of Section 8(b) plainly and unambiguously covers a situation in which two parties commit distinct culpable acts—that is, the provision requires that two culpable parties split and share an unearned fee. See id. at 802–03. In addition, the Fifth Circuit reasoned that, because the language of the statute is unambiguous, the court need not abide by recent regulatory interpretations provided by the Department of Housing and Urban Development (“HUD”), the agency which has interpreted and regulated the RESPA since its inception. See id. at 805. Moreover, the Fifth Circuit noted that, because the recent HUD statements were not issued in the required notice-and-comment manner, they did not carry the force of law, and did not warrant the court’s deference. See id. at 805–06.
The Supreme Court granted certiorari to determine whether Section 8(b) of the RESPA prohibits a real estate settlement services provider from charging an unearned fee only if the fee is divided between two or more parties.
In response to high settlement costs resulting from abusive market practices, Congress enacted the Real Estate Settlement Procedures Act (“RESPA”) in 1974. See 12 U.S.C. § 2601(a). Section 8(b) of the RESPA prohibits collection of unearned settlement fees. See id. at § 2607(b). Petitioners Tammy and Larry Freeman, John and Stacey Bennett, and Paul and Irma Smith (collectively “Freeman”), along with their amici curiae, argue that Section 8(b) prohibits a settlement services provider (“SSP”) from charging an unearned fee, even when the SSP keeps the fee entirely for itself. See Brief for Petitioners Tammy Foret Freeman, et al. at 16. In contrast, respondent Quicken Loans contends that the plain language of Section 8(b) only reaches fee splitting between two or more SSPs, and argues further that the RESPA targets only kickbacks and referral transactions. See Brief for Respondent Quicken Loans at 13, 21.
Impact on Consumers
Freeman argues that Quicken’s reading of Section 8(b) as only prohibiting fee-splitting transactions would not effectively protect consumers from abusive market practices. See Brief for Petitioners at 25–26. Freeman contends that a SSP that retains unearned fees entirely for itself puts consumers in an equally disadvantaged position as a SSP that shares such fees with another party, since consumers in either situation will be paying much higher settlement charges. See id. at 26–27. The State of California and twenty other States, in support of Freeman, argue that higher settlement costs often strain the cash many consumers have on hand and potentially paralyze consumers’ ability to obtain mortgages. See Brief for the State of California, et al. as Amici Curiae in Support of Petitioners at 12–13. The amici States further argue that, without RESPA’s protection from undivided unearned fees, many consumers would be either unaware of the items being charged, or unable to contest those charges when such costs are disclosed to them at the closing, due to the complex nature of mortgage transactions. See id. at 16.
On the other hand, Quicken and its amici contend that their reading of Section 8(b) will afford enough protection to consumers. See Brief for Respondent at 38–39. Quicken notes that the conduct of settlement services providers is regulated primarily through the RESPA’s disclosure mechanism, which requires itemization of all settlement service charges at the beginning and end of mortgage transactions. See id. Quicken reasons that, with such information disclosures, consumers will be able to compare different prices and negotiate the best deals. See id. at 39. Supporting Quicken, the American Bankers Association (“ABA”) argues that discount fees are an integral part of settlement pricing, and that such charges allow SSPs to create a range of pricing options catering to different consumers. See Brief for American Bankers Association, et al. as Amici Curiae in Support of Respondent at 9–10. The ABA further contends that imposing regulation on unilateral conduct would render the RESPA a rate-setting statute, which consequently would reduce the number of choices available to consumers. See id. at 21.
Impact on the Real Estate Market
Petitioners and their amici argue that Quicken’s interpretation of Section 8(b) would lead to an absurd result in the real estate market: under Quicken’s approach, they assert, a SSP that retains the entirety of an unearned fee would remain legally unassailable, while another SSP that shared a nominal amount with a third party would face liability under the RESPA. See Brief for the State of California at 20–21. The amici States also contend that it is unrealistic to expect the real estate market to self-regulate, as consumers lack the experience and financial resources required to scrutinize the behavior of SSPs. See id. at 12–13. Furthermore, the States explain that increased closing costs prevent potential homeowners from entering the market and increase the number of distressed properties. See id. at 13–14. The States note that unnecessarily high settlement costs would be especially detrimental under current conditions because the market is still coping with the foreclosure crisis. See id.
Quicken, in contrast, contends that the RESPA struck a balance between consumer protection and market self-regulation, narrowly prohibiting only kickbacks and referral transactions. See Brief for Respondent at 1–2, 38. Supporting Quicken, the American Escrow Association argues that the application of Freeman’s broad reading of Section 8(b) has led to anomalous results in federal courts, creating an unpredictability that has consequently frustrated participation in the settlement services industry. See Brief of American Escrow Association, et al. as Amici Curiae in Support of Respondent at 21, 28–29. The National Association of Realtors further asserts that an overly broad interpretation of Section 8(b) would prohibit SSPs from adopting flexible fee structures and thus obstruct the competition that creates competitive pricing arrangements in the real estate market. See Brief of National Association of Realtors as Amicus Curiae in Support of Respondent at 31–32.
The Real Estate Settlement Procedures Act of 1974 (“RESPA”) regulates fees related to federal mortgage loans. See 12 U.S.C. § 2607(b). Respondent Quicken Loans, Inc. argues that Section 2607(b) of RESPA is an anti-kickback statute, and therefore does not apply to claims that Quicken overcharged its clients or did not earn the fee for an alleged service. See Brief for Respondent Quicken Loans Inc. at 13. In contrast, Petitioners Tammy and Larry Freeman and two other couples (collectively “Freeman”) contend that the purpose of RESPA, in addition to prohibiting kickbacks, is to prevent a real estate settlement services provider (“SSP”) like Quicken from charging any unearned fees. See Brief for Petitioners Tammy Foret Freeman et al. at 16.
Freeman argues that the U.S. Department of Housing and Urban Development (“HUD”) was correct in determining that Section 2607(b) prohibits a SSP such as Quicken from charging unearned fees, even if the fees are not split with another party. See Brief for Petitioners at 16–17. Freeman contends that the opening text of the provision—“No person shall give and no person shall receive”—creates two distinct restrictions, prohibiting actors from providing and from accepting unearned fees. See id. at 21–22. Here, Freeman notes, a consumer was the giver of the unearned fee and Quicken—a commercial SSP—was the receiver; requiring culpability from both parties to the transaction would thus be unreasonable. See id. Furthermore, Freeman asserts that Section 2607(b) applies to SSPs who keep the entire unearned fee without splitting it, because the words “any portion” and “any percentage” can reasonably be interpreted to encompass the full fee amount. See id. at 17–18.
In contrast, Quicken argues that Section 2607(b) applies only to charges split between at least two culpable parties, making RESPA inapplicable here because Quicken’s fees were not shared with anyone else. See Brief for Respondent at 13. Quicken reiterates the Fifth Circuit’s determination that the introductory text of Section 2607(b)—“No person shall give and no person shall accept”—requires at least two culpable actors, one who gives and one who accepts. See id. at 13–14. If Congress had intended to prohibit unearned charges across the board, Quicken contends, then the statute would have been phrased as “No person shall give or accept.” See id. at 14. Additionally, Quicken argues that RESPA’s prohibition against transferring “any portion, split, or percentage” of an unearned fee does not cover full fee amounts, because in common usage a “portion” or “percentage” of something indicates less than the entire amount. See id. at 35–36.
Freeman contends that Section 2607’s structure indicates Congress’s intent to include undivided fees in prohibited SSP transactions. See Brief for Petitioners at 23. Freeman notes that RESPA already forbids kickbacks—or sharing portions of an unearned fee—even without the text of Section 2607(b). See id. at 16, 19. Freeman also argues that, if interpreted as Quicken suggests, Section 2607(b) would remove an anti-kickback limitation established in Section 2607(a). See id. at 24. According to Freeman, if one were to follow Quicken’s interpretation, it is hard to imagine why Congress would not simply amend Section 2607(a) instead of creating an entirely new subsection. See id. To avoid reading Section 2607(b) as mere surplusage, Freeman contends that the provision must apply to something other than kickbacks, preventing SSPs from charging a unilateral, unearned fee. See id. This interpretation, according to Freeman, is consistent with RESPA’s essential purpose of eliminating abusive practices in the real estate settlement field. See id. at 25–26. Additionally, Freeman argues that Congress understood the complications and costs associated with settlement; thus, when Congress enacted the RESPA it was more concerned with SSPs unfairly inflating settlement costs than with the cost to consumers of kickbacks. See id. at 26. Finally, Freeman rejects the notion that, through RESPA, Congress prevented SSPs from collecting small unearned fees that are split with another party, but allowed SSPs to retain much larger fees when no split occurrs. See id. at 27.
Quicken responds, however, that Congress’s express purpose in enacting RESPA was to increase transparency and protect consumers from abusive practices in the settlement industry, not to flatly forbid all unearned fees. See Brief for Respondent at 24–25; 12 U.S.C. § 2601(a). According to Quicken, in the 1970s, when RESPA was reviewed and then enacted, Congress’s limited goal was to eliminate hidden kickbacks and fees shared among SSPs. See Brief for Respondent at 29–30. Quicken contends that Congress intended to protect consumers like Freeman by mandating fee disclosure, but stopped short of dictating which disclosed fees consumers could choose to accept. See id. at 27. Congress, Quicken argues, knew how to unilaterally prohibit a certain type of conduct and did so in other sections of RESPA. See id. at 20; 12 U.S.C. § 2610. Yet in Section 2607(b), Quicken points out, Congress chose to regulate consumer charges through disclosure requirements instead of directly prohibiting SSPs from charging “unearned” fees. See Brief for Respondent at 20–21. Quicken further observes that Section 2607(b) mirrors the language used in Section 2607(a)’s anti-kickback clause, providing further evidence that Congress did not intend for either provision to apply to a SSP’s unilateral conduct. See id. at 21. Quicken contends that these two sections of the Act are not redundant because they work together to address different situations. See id. at 22–23.
If Section 2607(b) is ambiguous, Freeman contends, then HUD’s interpretation of the statute is entitled to deference. See Brief for Petitioners at 29. Congress gave HUD the authority to resolve any statutory ambiguity in RESPA, and Freeman asserts that the agency’s decisions must therefore be given deference unless the statute “cannot bear” the interpretation. See id. Freeman argues that, for over a decade, HUD has consistently interpreted Section 2607(b) as unambiguously prohibiting SSPs from charging any type of unearned fees. See id. at 31. Freeman contends that, because HUD’s interpretation is not clearly invalid or flawed, it is entitled to Chevron deference. See id. at 31–32. Additionally, Freeman argues that a Policy Statement HUD released in 2001 is also owed Chevron deference in its determination that Section 2607(b) unequivocally disallows all unearned fees. See id. at 33. Freeman also notes that HUD has directly stated to Congress its view that RESPA prohibits even a SSP acting in isolation from charging undivided, unearned fees. See id. at 40. Freeman contends that the determinations of a federal agency such as HUD do not require the typical formal procedures of notice-and-comment to have the effect of law. See id. at 33–34. In Freeman’s view, Congress’s grant of lawmaking power to HUD—recognizing HUD’s expertise in the housing market—means that the agency’s interpretation of RESPA is owed deference. See id. at 34–35, 39.
In response, Quicken argues that, even if Section 2607(b) is ambiguous, it should not be extended to fees retained entirely by a single SSP. See Brief for Respondent at 44–45. Quicken asserts that the Fifth Circuit’s decision to limit RESPA’s reach to split fees is consistent with the rule of lenity, which requires criminal statutes to be construed in favor of defendants. See id. at 44. Furthermore, Quicken contends that HUD’s RESPA regulations, the 2001 Policy Statement, and a 1992 amendment support the Fifth Circuit’s holding. See id. at 45, 48. Although the text of HUD’s regulations briefly states that unearned fees violate Section 2607(b), Quicken asserts that the relevant language does not set forth a broad rule but merely clarifies a prior discussion of split fees; the function of the text, according to Quicken, is evidenced by its heading, which addresses only split charges. See id. at 47–48. Quicken also argues that, even if HUD’s Policy Statement was intended to support Freeman’s position, it still did not comply with the required lawmaking formalities and therefore does not carry the weight of law. See id. at 53–54. Additionally, had the HUD intended to alter Section 2607(b)’s focus on split charges, Quicken contends that the agency’s position should not receive deference because the change was not reasonably foreseeable. See id. at 58–59. Moreover, Quicken notes that Congress has directly addressed the scope of Section 2607(b)’s prohibitions, leaving no room for HUD to provide a contrary interpretation. See id. at 49–50.
This case will determine the reach of Section 2607(b) of the Real Estate Procedures Act of 1974. Petitioners Freeman et al. argue that RESPA proscribes a settlement services provider from charging any unearned fees to the homebuyer. In contrast, Respondent Quicken Loans maintains that Section 2607(b) only applies to unearned fees that are split with another culpable party. The Supreme Court’s decision will elucidate which fees a SSP may charge under RESPA. This case will also determine how much choice is left to the consumer in accepting unearned settlement fees as part of a negotiated home purchase.
Edited by: Edan Shertzer
Grant E. Mitchell: RESPA: The Inside Story (Nov. 1999)
Howell E. Jackson and Jeremy Berry: Kickbacks or Compensation: The Case of Yield Spread Premiums (Jan. 8, 2002)
Elizabeth Renuart and Jen Douglas: The Limits of RESPA: An Empirical Analysis of the Effects of Mortgage Cost Disclosures (Apr. 30, 2011)