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In a victory for the mortgage industry, a federal judge has dismissed a nationwide consumer class action against GMAC Mortgage Group after finding that the Real Estate Settlement Procedures Act does not prohibit mortgage brokers from “marking up” the fees charged by third-party services providers, such as underwriters, unless there is evidence of an illegal kickback. “Congress did not construct an elaborate regulatory structure of price controls over the mortgage industry. Instead, Congress sought the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services,” U.S. District Judge James Knoll Gardner wrote in Santiago v. GMAC Mortgage Group Inc. Gardner found that, in passing RESPA, “Congress decided to address areas of misconduct rather than to impose itself on the whole market.” Significantly, Gardner rejected the U.S. Department of Housing and Urban Development’s contrary reading of the law. Instead, Gardner followed decisions from the 4th, 7th and 8th Circuits that likewise rejected HUD’s interpretation. The ruling is a victory for attorneys Robert A. Nicholas, Leonard A. Bernstein and Kevin M. Toth of Reed Smith who argued that HUD’s interpretation of the law was entitled to no deference because it conflicted with the plain meaning of an unambiguous statute. Plaintiffs’ lawyers urged Gardner to adopt HUD’s view and take a more liberal, expansive reading of RESPA that would allow a claim against a mortgage broker that charges any fee that exceeds the value of the service provided. In a “statement of policy,” HUD concluded that RESPA is violated when a mortgage service provider charges any fee that exceeds the reasonable value of goods, facilities, or services provided. In the policy statement, HUD rejected the argument that RESPA required proof of a kickback or sharing of the excessive fee, saying it rejected the notion that “a single settlement service provider can charge unearned or excessive fees so long as the fees are not shared with another.” Such a reading of the law, HUD said, would be “an unnecessarily restrictive interpretation of a statute designed to reduce unnecessary costs to consumers.” Instead, the HUD policy statement announced that a settlement service provider “may not levy an additional charge upon a borrower for another settlement service provider’s services without providing additional services that are bona fide and justify the increased charge.” The plaintiffs’ lawyers argued that under HUD’s interpretation of the law, GMAC’s markups on fees of third party service providers violated RESPA. In the suit, lead plaintiff Francis Santiago of Provo, Utah, claimed that when he obtained a GMAC mortgage in January 2002, he was required to pay fees for several settlement services — a tax service, flood certification and underwriting. The suit alleged that third parties performed all of the services, but that GMAC inflated their charges by adding a markup to the fees. The suit, proposed as a nationwide class action on behalf of any GMAC customer, was filed by a team of plaintiffs lawyers: Daniel E. Bacine, Leonard A. Barrack and Jeffrey W. Golan of Barrack Rodos & Bacine in Philadelphia; Michael C. Spencer and Susan M. Greenwood of the New York office of Milberg Weiss Bershad Hynes & Lerach; Timothy G. Blood and Helen I. Zeldes of the Milberg firm’s San Diego office; and Craig H. Johnson, Joann Shields, Lon D. Packard and Gregory N. Hoole of Packard Packard & Johnson in Salt Lake City. Defense lawyers moved for dismissal of the RESPA claim, arguing that the law — and Congress’ expression of its intent in passing the law — was clear and unambiguous. Gardner found that, in deciding whether HUD’s interpretation of the law was entitled to deference, his first task was to decide if the law is ambiguous. Section 8(b) of RESPA states: “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. Gardner found that the plaintiffs’ lawyers interpreted Section 8(b) as prohibiting the acceptance of any “unearned fee,” while the defense argued that the law requires that an unearned fee be split before liability is incurred. The defense argued that the statute is unambiguous, and that a plain reading of the law requires that in order for there to be a statutory violation, two parties must split an unearned fee. But the plaintiffs’ lawyers insisted that the statute is ambiguous and that since HUD has resolved the ambiguity with his own interpretation, its policy statement is entitled to deference under Chevron v. Natural Resources Defense Council Inc. Gardner disagreed, finding that HUD’s interpretation of the law conflicted with congressional statements about the purpose of RESPA. In its statement, Congress wrote that RESPA was passed because “significant reforms in the real estate settlement process are needed to insure that consumers throughout the nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country.” Gardner found that Congress “did not address retention of markups or unearned fees absent a kickback or referral fee arrangement in its statement of the purpose of the act.” In the suit, Gardner said, the plaintiffs’ team was seeking “to interpret Section 8(b) to establish a price-control system that prevents mortgage service providers from charging beyond cost for their services.” Gardner rejected that view, saying “to the extent that the intent of Congress can be discerned from congressional reports, debates, and statement, Congress did not intend plaintiff’s construction.” Instead, Gardner said, RESPA’s Section 8(b) was designed solely to target misconduct. “If we were to hold differently, we would exponentially expand RESPA beyond what our coordinate branches of government designed. Such an expansion is not permitted by the text of the statute or by the indicators of Congressional intent,” Gardner wrote.

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