The split in the federal Circuit Courts over the interpretation of Section 8(b) of RESPA has been resolved, and the result is that it takes two to tango for a Section 8(b) violation. In a decision made on May 24, 2012 in Freeman v. Quicken Loans, Inc., the U.S. Supreme Court held that a charge for settlement services must be divided between two or more persons to constitute a violation of Section 8(b). This is welcome news for settlement service providers, who can rest assured that their own prices, whether as part of a mark-up of a third-party fee or their own unilateral charges, cannot violate Section 8(b) of RESPA.
In a unanimous decision delivered by Justice Scalia, the U.S. Supreme Court affirmed the ruling of the Fifth Circuit Court of Appeals and held that “a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons” to establish a violation of Section 8(b) of RESPA. Section 8(b) of RESPA provides 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 in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” 12 U.S.C. § 2607(b). In considering the facts presented by Freeman and other borrowers, who alleged they were charged loan discount fees without the actual reduction of interest rates or other services performed by the lender, the Court noted “the dispute . . . boils down to whether [Section 8(b)] prohibits the collection of an unearned charge by a single settlement service provider – what we might call an undivided unearned fee – 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.”
The Court answered that question, in part, by addressing the 2001 Policy Statement issued by HUD that identified the categories of fees that HUD deemed to be violations of Section 8(b): (1) fees split or shared by two or more parties; (2) the mark-up by a single party of a third party’s fee without services performed; (3) the charging of a fee by a single party for no services performed (at issue in Freeman); and (4) the charging of a fee by a single party in excess of the reasonable value for services performed (overcharges). With regard to the last category of fees, overcharges, the Court deemed this interpretation by HUD to be “manifestly inconsistent with the statute” and RESPA’s legislative history. The Court even noted that Freeman acknowledged that Section 8(b) of RESPA does not cover overcharges. With regard to the second and third categories of fees, the Court reasoned that it was not necessary to determine whether HUD’s interpretation should be given deference. Rather, the Court stated, “In our view, [Section 8(b)] unambiguously covers only a settlement service provider’s splitting of a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.”
Furthermore, relying on a plain reading of the statutory language and certain principles of statutory construction, the Court reasoned that Section 8(b) of RESPA “clearly describes two exchanges” – the first requiring a charge to be received from a consumer by a settlement service provider and the second requiring the provider to give and another person to receive a “portion, split, or percentage” of the charge. Any other construction, which would make the consumer the party that gives the “portion, split, or percentage” of a fee, would subject the consumer to a RESPA violation, “the very class for whose benefit [Section 8(b)] was enacted.” As the questioning from certain Justices during oral argument focused on the possibility of harm to the consumer, this line of reasoning may explain how the Court reconciled the petitioner’s arguments of consumer harm from unearned fees with the statutory language of Section 8(b). The Court also reasoned that by using the words “portion, split, or percentage” together in the statute, Congress intended to “invoke the words’ common ‘core of meaning,’” which cannot involve a single party.
Ultimately, this decision is a victory for settlement service industries. Until now, providers were faced with the possibility that a mark-up of a third party’s fee or the charging of their own unilateral fees could be deemed a RESPA violation. With this decision, Section 8(b) of RESPA can no longer be used to challenge the prices charged for settlement services. A Section 8(b) violation exists only to the extent a settlement service provider collects its fee and shares a portion of that fee with another person that performs no services. That said, providers should still be cognizant of unfair and deceptive trade practice laws, including the fact that the Consumer Financial Protection Bureau could use its unfair, deceptive, or abusive authority to circumvent the Court’s holding and target settlement service providers with allegedly unfair fees.