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Lenders who at closing charge home buyers marked-up fees for services provided by third parties can be sued under federal law, the 2nd U.S. Circuit Court of Appeals has ruled. The circuit, in an opinion by Judge Robert Sack, found that the Real Estate Settlement Procedures Act allows home purchasers a cause of action against lenders for marking up the cost of services provided by companies at closing, such as research on tax liens and flood certification. The court addressed the issue in Kruse v. Wells Fargo Home Mortgage Inc., 03-7665, in which Eastern District Judge I. Leo Glasser dismissed the plaintiffs’ case for settlement fees, which included, among other things, tax service, flood certification, document preparation and underwriting. Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) says 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” for a federally related mortgage loan except “for services actually performed.” Three homeowners in a putative class action charged that Wells Fargo required them to purchase settlement services — and that they were the victims of both overcharges by Wells Fargo directly and markups that Wells Fargo charged for services provided by a third party. Glasser, in dismissing the case, relied in part on the interpretation of �8(b) by the 8th, 7th and 4th circuits, which found that �8(b) does not allow a cause of action for markups and overcharges. On the appeal, the 2nd Circuit agreed with Glasser that the section does not apply to overcharges, even though the Department of Housing and Urban Development concluded in a policy statement that charging “unreasonably” high prices for some settlement services violates the statute. However, the court split from its sister circuits in finding that RESPA does apply to markups. Writing for the court, Sack said the three other circuits reasoned that the word “and” in �8(b)’s phrase “no person shall give and no person shall accept” means the statute requires “that there be both one or more persons who give and one or more persons who receive a settlement service fee other than for services actually performed for there to be a violation of the statute; so that, unless there is at least one giver and one acceptor who simultaneously violate the law, there can be no violation of section 8(b). “These courts conclude that reading section 8(b) to apply to mark-ups is thus absurd because it renders the giver of mark-ups — the consumers ostensibly protected by the statute — as well as acceptors — the financial institutions from whose sometime-predatory practices they are being protected — simultaneously guilty of violating the statute.” On the other side, Sack said, the Eleventh Circuit found that the “and” in �8(b) creates two separate prohibitions: Giving a portion of a charge is barred even if there is no culpable acceptor, and accepting a portion of a charge is prohibited whether or not there is a culpable giver. NEITHER READING ACCEPTED Sack said the 2nd Circuit disagreed with both readings. “The words of the statute do not seem to compel either reading,” even though they “derive largely from divergent, but plausible, constructions of the word ‘and,’” he said. “We thus conclude, because section 8(b) is not clear and unambiguous with respect to the coverage of mark-ups, that we must determine whether deference is due HUD’s interpretation of the statute as expressed in the Policy Statement.” Reviewing the history of the policy statement, the judge said it was “apparently the culmination of HUD’s reflections on the meaning of section 8(b) mark-ups over a period of years” — one good reason to defer to the judgment of the department. Moreover, he said, “HUD plainly possesses expertise regarding the market for federally related home mortgage loans.” In all, Sack said, the policy statement is a document of sufficient gravity to be worthy of deference,” and the plaintiffs should be allowed to state a cause of action for the markups under RESPA. “Of course, whether the plaintiffs will be able to establish that the defendants in fact charged fees for services ‘without performing any additional services’ — indeed, precisely what ‘providing additional settlement services’ means in the context of this case — are questions that the district court may be required to address in the first instance on the basis of the factual record that is developed before it,” he said. Judges Dennis Jacobs and Reena Raggi joined in the opinion. Michael C. Spencer and Susan M. Greenwood of Milberg Weiss Bershad Hynes & Shulman; and Craig H. Johnson, Lon D. Packard and Joann Shields of Packard, Packard & Johnson in Salt Lake City represented the plaintiffs. Thomas M. Hefferon and Leonard F. Lesser of Goodwin Procter represented Wells Fargo.

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