Awaiting the Court’s Decisions in Two Mortgage Scam Cases

Among the cases on the Corporate Court docket that have yet to be decided are two that deal with interpretations of the Real Estate Procedures Act of 1974 (“RESPA”), which was enacted to prevent abuses in the mortgage industry. At stake in both cases is the protection of home buyers from unscrupulous title insurance and mortgage companies. Both cases could also have broader implications for a host of consumer protection laws and other types of regulation.

In First American Financial Corp. v. Edwards, the question is whether RESPA allows individual plaintiffs to recover charges for title insurance when the selling corporation has violated a provision of the Act, regardless of whether the plaintiff was overcharged.

First American Financial is a holding corporation that owns First American Title, which provides title insurance. It also partially owns a number of other title insurance agencies that ostensibly offer a range of title insurance policies, but pursuant to an agreement with First American Financial and unknown to customers, only offer First American Title insurance. Such business referrals are illegal under RESPA and anyone charged for a settlement that violates the law may collect three times the amount of the charges.

Denise Edwards bought a house and received a settlement statement requiring her to pay for title insurance from First American Title.  She claims that the agency from which she had purchased title insurance used to work with multiple title insurance companies but entered a kickback agreement with First American Title in 1998.  She further contends that RESPA’s damages clause allows a lawsuit by private individuals regardless of whether the individual overpaid for insurance because of the kickback.

First American claims that Ms. Edwards was not actually injured because she cannot prove that she would have paid less for title insurance from another company. In fact, Ohio, where the conflict arose, requires all title insurance companies to charge the same amount, but not all states follow this practice. If corporations like First American Financial are allowed to enter kickback agreements, home buyers in other states could be forced to pay too much for their title insurance.

If the Supreme Court sides with First American Financial it could have far-reaching effects on the enforceability of other consumer laws. If consumers are forced to show actual damages to have standing to sue companies, this will eviscerate a host of consumer protection laws that use statutory damages as a disincentive to illegal conduct.

In Freeman v. Quicken Loans Inc., the question is whether homeowners can sue mortgage lenders for charging unearned fees.

This case arises from a group of lawsuits out of Louisiana in which borrowers, including Tammy Freeman, claim that Quicken Loans violated RESPA by charging them loan-discount fees on their mortgages without providing reduced interest rates in return. Quicken says that the fees charged to borrowers were both legal and earned.

The borrowers argue that the Act was intended to forbid both kickbacks and unearned fees, regardless of whether a third party was involved in the improper fee arrangement. Quicken argues that the law only prohibits lenders from receiving an unearned fee when that fee is divided with a third party and does not address unearned fees received by the lender alone. The Circuit Courts are deeply divided on this issue, with the Fourth, Fifth, Seventh and Eighth Circuits limiting the Act to third party kickbacks and the Second, Third and Eleventh Circuits believing that the Act applies to all unearned fees.

The Court’s decision in this case will determine the lawfulness of millions of dollars in fees placed on home buyers annually.  If the Court sides with Quicken, it will allow mortgage lenders to place unexplained and unearned fees on their loans.

Decisions in both cases could be released as early as this Thursday. For additional perspective on the cases, take a look at previous guest blog posts by Prof. Amanda Leiter on First American and by Kevin Russell on Freeman.

Update (5/23/12, 4:01pm): Corrected a reference to "real estate companies" to more precisely reference "title insurance and mortgage companies."