The Real Estate Settlement and Procedures Act has a clear prohibition on lenders receiving kickbacks in exchange for "unearned" fees charged to borrowers. Now the United States Supreme Court is set to decide the contentious issue of whether Respa also prohibits lenders from charging borrowers fees that are defined as unearned in the first place.
On Friday the nation's highest court announced that it will hear Freeman v. Quicken Loans Inc., a U.S. Court of Appeals, 5th Circuit case alleging that Quicken Loans charged borrowers thousands of dollars in "loan discount fees" that were unearned because it failed to give borrowers loan discounts.
The case has major implications for other lenders. The Department of Housing and Urban Development and attorneys for consumer groups have long sought to use Respa — which provides for recoveries that are three times actual damages — in order to press claims involving mark-ups on loan-related services. The legality of the markups in question could affect everything from what banks charge borrowers for credit reports to fees charged for appraisals and other services.
Respa is a 1974 law that was designed to establish guidelines that mortgage lenders must adhere to when dealing with home buyers. In Freeman v. Quicken, the Supreme Court is set to hear arguments involving whether Quicken can be sued under RESPA, even in the event it did not share with a third party in the allegedly unearned fees.
The decision will likely set a precedent for whether RESPA will be applied in the future as a blanket prohibition on unearned fees or a more limited statute barring kickbacks. Federal circuit courts have split evenly on the question, as 5th Circuit judges noted in the opinion now under Supreme Court appealed.
"This issue has been percolating in the courts for decades, and I think it's good that the Supreme Court will resolve it," says Alan Kaplinsky, a defense attorney for banks who is not involved in the case.
If the Supreme Court upholds the 5th Circuit's ruling, it will turn on its head HUD's longstanding RESPA guidance. Ever since the law's passage HUD has interpreted the statute as prohibiting both kickbacks and unearned fees, rendering as irrelevant the question of how the fee was divided, if at all. Under Respa, "unearned" fees are defined as those that are paid in the absence of fairly valued service.
In an amicus brief urging the court to grant certiorari (review of the lower court's decision) in the Quicken case, the Department of Justice and the Consumer Financial Protection Bureau argued that HUD's broader interpretation is appropriate and legislatively intended. The CFPB recently inherited RESPA enforcement powers from HUD.
"The [5th Circuit's] decision is inconsistent with RESPA and with HUD's longstanding regulations," the brief stated, adding that a Senate report issued when RESPA was approved by Congress states that its purpose is to eliminate "kickbacks and unearned fees."
Advocates for a more limited interpretation have pinned their argument to the actual wording of the statute, which states that "No person shall give and no person shall accept any portion" of unearned fees, implying a transaction must occur for RESPA to apply.
"This is really a plain language type of case," says Kaplinsky. "[RESPA] contemplates that there would be a third party getting a piece of the action."
While the legal controversy over markups has existed for years, the Quicken case provides a twist to the issue because the lender is not accused of marking up the price of an actual service. Instead, it allegedly charged a fee for something — a discounted loan rate — that did not actually exist.
Quicken denies that it charged borrowers for phantom loan discounts, calling the allegation "pure fantasy" in a statement. But in addition to arguing that it's fees were earned, the company also maintains that RESPA can't apply to unsplit fees.
On strict legal grounds, the distinction may bear little importance, however.
"Even if you think what Quicken did was wrong, that does not mean it violated RESPA," Kaplinsky argued. That said, other laws might apply to the situation, he added.
