In a major win for the mortgage lending industry, the U.S. Supreme Court last month ruled unanimously that the prohibition under the Real Estate Settlement Procedures Act (RESPA) on splitting fees requires at least two persons to satisfy the statutory requirement of Section 8(b), 12 U.S.C. § 2607(b).

In its ruling in Freeman, et al. v. Quicken Loans, Inc., No. 10-1042, May 24, 2012, the court found the statutory language to be plain and unambiguous, and rejected the efforts of the Department of Housing and Urban Development (HUD) and of the U.S. to establish a more expansive theory of liability.

            12 U.S.C. § 2607(b) specifically provides as follows:

“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.”

For some time, and as published in its Statement of Policy 2001-1, HUD has taken the position that a single settlement service provider, acting alone, can violate this fee-splitting prohibition under RESPA simply by overcharging a borrower for settlement services, even if there is no other party with whom such provider splits or pays any part of the charge. HUD’s Statement of Policy provided that a single provider could violate Section 2607(b) under either of the following scenarios: 

  1. If it marks up the cost of services performed or goods provided by another person without furnishing additional distinct services to justify the additional charge
  2. If it charges a fee to a consumer where no, nominal or duplicative work is done, or if the fee is judged to be in excess of the reasonable value of the services provided

The courts had split on the first of the two scenarios,  but even courts that had followed HUD’s approach in which a “fee split” might involve only one party did not agree with HUD’s attempts to apply Section 2607(b) to excessive fees or overcharges.

But in Quicken Loans, Inc., the court found that Section “2607(b) unambiguously covers only a settlement service provider’s splitting of a fee with one or more other persons,” and “it cannot be understood to reach a single provider’s retention of an unearned fee.”

The claimants in Quicken Loans, Inc. were three married couples who argued that Quicken charged them fees (respectively, loan discount, processing and loan origination fees) for which no services were provided. The court indicated that the dispute between the parties boiled down to whether Section 2607(b) “prohibits the collection of an unearned charge by a single settlement service provider” or “whether it covers only transactions in which a provider shares a part of a settlement service charge with one or more other persons who did nothing to earn that part.”

Utilizing HUD’s Policy Statement to support their view, the claimants took the position that no split of the fee between persons is required to establish a violation. The claimants argued that deference should be given to HUD’s interpretation in its policy statement since it was the federal agency charged with interpreting RESPA, and adopting and implementing its regulations—a role that now falls under the purview of the Consumer Financial Protection Bureau (CFPB).

The court concluded, however, that deference to HUD’s views in its policy statement was not appropriate because HUD’s interpretation went beyond RESPA’s statutory framework to regulate the mortgage industry in a way beyond that which Congress had enacted.

Examining the actual language appearing in the RESPA at Section 2607(b), the court explained that the statute describes two distinct exchanges. First, there is a charge made to or received from a consumer by a settlement service provider. Second, that provider then gives, and another person accepts, a portion, split or percentage of the charge.

The court found that “Congress’s use of different sets of verbs, with distinct tenses, to distinguish between the consumer-provider transaction (the “charge” that is “made or received”) and the fee-sharing transaction (the “portion, split or percentage” that is “give[n]” or “accept[ed]”) would be pointless if, as petitioners contend, the two transactions could be collapsed into one.”

All in all, the court’s decision confirms that notwithstanding broad regulatory authority granted to HUD (or to the CFPB), such regulatory authority cannot exceed (or transform) the statutory authority and language relating to the law being regulated. This decision will benefit lenders not only in RESPA cases, but also in other financial services litigation where regulators have expanded requirements or liabilities which go “beyond the meaning that the statute can bear” and in any litigation in which financial service providers seek to have the plain statutory language enforced and implemented as written, rather than as a regulator might otherwise have wished or written the law. 

And, it is interesting to consider how the landscape on fair-lending enforcement might have changed if the disparate-impact appeal of Magner v. Gallagher had continued through this term to a decision by the court, rather than being withdrawn by the City of St. Paul. Recall that in Magner, the court was presented with the question of whether the Fair Housing Act permits claims to be asserted based on alleged “disparate impact” evidence even if there is no proven or even alleged discriminatory intent. Since at least 1994, when the Federal Interagency Policy Statement on Discrimination in Lending (the Fair Lending Policy Statement) was issued, federal banking regulators and HUD have taken the position that impermissible discrimination can be proven simply upon a finding, allegedly proven by statistics, that a lender’s policy or practice has a disparate impact on a protected class. The Magner case provided, for the first time, an opportunity for the court to consider whether the Fair Lending Policy Statement exceeded statutory authority in creating a recoverable claim based solely on disparate-impact evidence.

Comparable to the arguments presented in Quicken Loans, Inc., the U.S. briefed the Magner case to argue, among other things, that deference should be given to its longstanding interpretation of the law. Further, after the court had agreed to hear this case and decide this issue on its merits, HUD took the extraordinary step of proposing new regulations, during the pendency of the case, which purported to reaffirm by regulation its theory of disparate-impact discrimination. Then, the U.S. used its own newly proposed regulation as one reason for the court to rule in favor of its policy.

As in Quicken Loans, Inc., those challenging the disparate-impact theory of discrimination relied on the plain language of the statute to argue that disparate-impact claims are not permitted, citing several previous court cases to the same effect on similar language. It was noted further that the Equal Credit Opportunity Act (ECOA) utilizes substantially the same language regarding discrimination; accordingly, if the court were to rule that the Fair Housing Act did not permit disparate-impact claims, the same result should follow regarding such claims under ECOA, effectively eliminating the disparate-impact theory of liability for fair lending.

Ultimately, after the case had been fully briefed and argued to the court, the City of St. Paul (the appellant in the case) withdrew its appeal. As a result, there was no further controversy on which the court could rule, and so this issue must await another day and another case. But, the court’s willingness in Quicken Loans, Inc. to interpret RESPA liability strictly as written is encouraging to those who believe that the disparate-impact theory of discrimination similarly exceeds what is covered by the statute.

Although the federal agencies will undoubtedly continue to take the position that their view of disparate-impact discrimination is longstanding and accordingly should be given great deference, it is noteworthy that the Fair Lending Policy Statement is only 7 years older than the 2001 Policy Statement that the court rejected in Quicken Loans, Inc.