Freeman v. Quicken Loans to Decide Whether Undivided Unearned Fees Violate RESPA

By: Phillip L. Schulman

To split an unearned fee or not to split an unearned fee in order to violate the Real Estate Settlement Procedures Act (RESPA) – that is the question. Rather, that was the question on February 21, 2012 when the Supreme Court heard oral argument in the case of Freeman v. Quicken Loans, Inc. The case is intended to settle a dispute among the federal circuit courts regarding the statutory interpretation of Section 8(b) of RESPA which prohibits giving or accepting “any portion, split, or percentage” of any charge for settlement services “other than for services actually performed.”

The issue in Freeman is whether Section 8(b) applies to an unearned fee charged by the loan originator. In this instance, Quicken Loans charged the borrower discount points which did not go to reduce the borrower’s interest rate. Freeman claims the charges are unearned and not for services actually performed. All agree that if the fees were split with a third party, the arrangement would be illegal under RESPA. In this instance, however, Quicken Loans did not split its fees with a third party. Four federal circuit courts (the 4th, 7th, 8th and the 5th Circuit in Freeman) all say that the plain language of the statute is clear: since Section 8(b) requires both the giving and accepting of a split of a settlement charge, two parties are required in order to violate the Act. On the other hand, three federal circuit courts (the 2nd, 3rd and 11th) and HUD all claim that RESPA is a consumer protection statute and Congress did not intend to allow lenders to receive unearned fees, whether divided with a third party or retained entirely by the lender.

The case presents a straight statutory construction question under RESPA. Does the Supreme Court strictly construe the language of the provision, as lenders and settlement service providers contend, or does the Court accept Petitioner’s and the government’s claims that deference should be shown to an agency’s (HUD’s) interpretation of the meaning and intent of the Act? In other words, will the Court buy Quicken Loans’ argument that if Congress had intended to hold settlement service providers in violation of the Act for charging an unearned fee, it would have clearly said so (as it has done in other instances)? Or, will the Court find that the charging of unearned fees violates the Act whether those fees are split between two parties or kept in their entirety by the lender? Those issues were on clear display at the Supreme Court today.

Justices Roberts and Scalia read “portion, split or percentage” to mean part of a whole and not 100% of a charge, suggesting some type of split between two providers was contemplated. Justice Breyer was concerned that a literal reading of the Act would make the consumer an accessory to the violation since the statute requires one to “give” (the consumer) and one to “accept” (the lender in this instance) a portion of a settlement service charge. Justice Alito asked whether this was anything more than a labeling issue. That is, couldn’t Quicken Loans have just charged a lump sum for its services and not broken out individual charges for individual services? Based on these questions, the scales seem to tip in Quicken Loans’ favor.

However, Justices Ginsburg, Sotomayor and Kagan asked why if Congress had authorized HUD to interpret RESPA, the agency’s Statement of Policy regarding Section 8(b) should not be given deference by the Court. These three Justices also pressed for an explanation as to the differences between Section 8(a)’s anti-kickback provisions and Section 8(b)’s unearned fees provisions. Others were concerned that following HUD’s interpretation would render RESPA a rate-setting statute, in conflict with the language of the Act’s legislative history.

If the Justices’ questions are any indication of the outcome, the case may well turn on the opinions of Justices Breyer and Kennedy. The Court will hand down its decision before the session ends in June. Stay tuned.


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