CFPB Amicus Brief Disregarded in Important RESPA Decision
On Thursday, May 24, 2012, the Supreme Court of the United States held in Freeman v. Quicken Loans ("Freeman") that a borrower must demonstrate that a charge for settlement services was divided between two or more persons in order for the fee splitting prohibition of the federal Real Estate Settlement Procedures Act ("RESPA") to apply. This was a unanimous decision issued by the Supreme Court despite an amicus curiae brief filed by the Consumer Financial Protection Bureau (the "CFPB") urging a reversal of the Fifth Circuit's prior ruling in this case. Significantly, the High Court rejected the interpretation of Section 8(b) of RESPA issued by the Department of Housing and Urban Development ("HUD") and adopted by CFPB.
The plaintiffs in this action obtained mortgage loans from the defendant lender ("Lender"). The plaintiffs alleged they were charged fees for which no services were provided, in the form of "loan discount fees," "processing fees," and "loan origination fees." The Lender moved for summary judgment on the ground that the plaintiffs' claims were not cognizable under Section 8(b) of RESPA, 12 U.S.C. §2607(b) (hereinafter referred to as "Section 8(b)") because the allegedly unearned fees were not split with other parties. The District Court agreed and granted summary judgment in favor of the plaintiffs. A divided panel of the United States Court of Appeals for the Fifth Circuit affirmed, as did the Supreme Court on appeal.
Section 8(b) of RESPA provides in relevant part that "[n]o 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 . . . other than for services actually performed." The Supreme Court noted that the question on appeal "boil[ed] down to whether [Section 8(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."
The plaintiffs cited to the 2001 Policy Statement issued by HUD in arguing that Section 8(b) should apply to an unearned charge by a single-settlement-service provider. The Policy Statement provides, among other things, that Section 8(b) is not limited to situations where at least two persons split or share an unearned fee.
Notwithstanding, the Supreme Court held that Section 8(b) unambiguously covers only a settlement-service provider's splitting of a fee with one or more other persons. The Court reasoned that "by providing that no person 'shall give' or 'shall accept' a 'portion, split, or percentage' of a 'charge' that has been 'made or received,' 'other than for services actually performed,' Section 8(b) clearly describes two distinct exchanges." The Court further explained that there first must be a "charge" that is "made" or "received" from a consumer by a settlement-service provider. Next, that provider must "give," and another person "accept," a "portion, split, or percentage" of the charge. The Court stated that "Congress's use of different sets of verbs, with distinct tenses . . . would be pointless if . . . the two transactions could be collapsed into one," as the plaintiffs argued.
The plaintiffs attempted to "avoid collapsing the sequential relationship of the two stages," by arguing that it is the consumer who "give[s]" a "portion, split, or percentage" of the charge to the provider who "accept[s]" it. The Supreme Court disagreed with the plaintiffs' interpretation, noting that it would lead to a result where the consumers were lawbreakers under the statute for giving an unearned fee. The Court further stated that "[t]he phrase 'portion, split, or percentage' reinforces the conclusion that §2607(b) does not cover a situation in which the settlement service provider retains the entirety of a fee received from a consumer." The Court noted that while "portion" and "percentage," can be used to include the entirety of the fee, it is not the customary meaning of either word.
The plaintiffs also argued that if Section 8(b) is not construed to reach undivided unearned fees, then "it would be rendered 'largely surplusage' in light of Section 8(a)'s express prohibition of kickbacks." See 12 U.S.C. 2607(a). The Court did not agree, stating that "each subsection reaches conduct the other does not."
Finally, the plaintiffs argued that the purpose of RESPA would be served by applying the statute in the manner they proposed. The Court again disagreed, stating that "[v]ague notions of statutory purpose provide no warrant for expanding Section 8(b)'s prohibition beyond the field to which it is unambiguously limited: the splitting of fees paid for settlement services."
Notes and Observations
The Supreme Court's unanimous decision in Freeman is of critical importance to mortgage originators and others in the mortgage business. By refusing to allow the interpretation of Section 8(b) of RESPA to be expanded by administrative action, the Court signaled that it will first look to the plain language of a statute before deferring to regulatory interpretations. Since the CFPB has already announced its intention to file amicus briefs regularly, Freeman sets the stage for courts to carefully evaluate such friend-of-the-court filings and other administrative interpretations and weigh them against the plain language of the law.
Freeman is quickly gaining widespread attention among industry observers. Significantly, the Wall Street Journal hailed the decision in a June 3, 2012 article, giving the Supreme Court "three cheers for … reining in regulatory discretion that has zero foundation in law," an attack on the perceived unchecked regulatory powers of the CFPB.1 Prior to Freeman, the CFPB had already been the subject of criticism for taking positions that exceeded its statutory authority. Only time will tell where the line should be drawn with respect to the "unending battle against regulatory overreach2," and how much deference the CFPB will receive from the courts.