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."

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A Look Ahead: The Last Decisions of the Supreme Court's Term

Last week the Supreme Court heard the final oral argument of the term in Arizona v. United States. With little more than two months left until the term officially ends, let’s take a brief look at the cases on the Corporate Court docket in which decisions remain outstanding.

In Christopher v. SmithKline Beecham Corp., the Court will decide whether courts should defer to the Secretary of Labor’s interpretation of “outside salesman” under the Fair Labor Standards Act (“FLSA”), and whether the FLSA’s “outside sales” exemption applies to pharmaceutical sales representatives. During the oral argument on April 16, the justices seemed somewhat more inclined to side with the drug companies by holding that the sales reps fall within the “outside sales” exemption, which would mean they are not entitled to overtime pay. If the Supreme Court ultimately decides in the companies’ favor, it will not only constitute an earthquake in administrative law, it will also deny overtime to roughly 90,000 drug company employees.

In Knox v. SEIU, which was argued on January 10, the Court is considering whether unions must send a notice to workers every time they impose temporary fee increases to cover the costs of additional advocacy activities, rather than report those increases in annual notices as they already do. The Court could decide that the case is moot, as several months ago the SEIU sent all members of the class a $1 bill and a promise to pay one hundred percent of the charged fee increase. If the Court decides the case on the merits, however, and rules against the SEIU, it will erode the power of unions to fight back against new political attacks by making it harder to raise additional funds to respond.

The Court has not yet released its opinions in either of this term’s two cases arising under the Real Estate Settlement Procedures Act of 1974 (“RESPA”). Enacted to protect consumers from overpriced insurance due to abusive practices like kickbacks, RESPA outlaws payment for business referrals.

In First American Financial Corp. v. Edwards, which was argued on November 28,  the Court is considering 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. If the Court sides with First American Financial, it will weaken RESPA regulations and put consumers seeking title insurance at an economic and informational disadvantage.

In Freeman v. Quicken Loans, which was argued on February 21, the Court is considering whether RESPA prohibits unearned fees, regardless of whether a third party was involved in the improper fee arrangement. In this case, petitioners were charged loan-discount fees on their mortgages but did not receive the corresponding reduced interest rates. If the Court sides with Quicken, it will allow mortgage lenders to take hundreds or thousands of dollars from homebuyers without giving them anything in return.

And last, but certainly not least, the Court is likely to release its decisions in the remaining blockbuster cases of the term – the healthcare cases, argued on March 26-28, and Arizona v. United States, argued on April 25 -- around the end of June. More details on what is at stake in these two cases can be found at earlier guest blog posts by Professor Tim Jost (on healthcare) and Professor Angela Banks (on Arizona v. United States).

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Will the Court Strip RESPA of All Mechanisms for Consumer Enforcement?

Thoughts on Freeman v. Quicken Loans and First American Financial Corp. v. Edwards
Guest post by Kevin K. Russell

Anyone who has ever gone to a closing on a house has confronted the often bewildering set of fees charged by banks, title companies and others, in order to finalize the purchase and obtain a mortgage.  On Tuesday, February 21, the Supreme Court will consider whether the federal law that regulates these closings – the Real Estate Settlement Procedures Act (RESPA) – is violated when a company charges a fee at closing for a service it never actually performed.

The plaintiffs in the case of Freeman v. Quicken Loans allege that a lender charged them loan discount points – which are fees borrowers pay up front in order to reduce the interest rate on a home loan – without providing them any actual discount.  While the lender denies the allegation, it prevailed in the lower courts on the theory that even if it charged the consumers for a service it never provided, that does not violate RESPA.

The relevant provision of RESPA is entitled “Prohibition against kickbacks and unearned fees.”  The first subsection of the provision expressly forbids kickbacks among settlement service providers like banks, mortgage brokers, and real estate agents.  The second subsection provides in relevant part that “No person shall give and no person shall accept any portion, split, or percentage of a charge made or received for the rendering of a real estate settlement service.”  The lower courts in this case read the latter provision to prohibit unearned fees only if the fee is then shared with another provider, as in the case of a kickback.  As a result, the courts held, even if Quicken charged the Freemans an unearned fee, it did not violate the statute because it did not kickback any of the ill-gotten gains to another provider.

The Department of Housing and Urban Development (HUD), which administers RESPA, has long taken the plaintiffs’ side, reading the statute as prohibiting all unearned fees.  The Obama Administration has filed a brief in the Supreme Court reiterating that view.

Quicken and other settlement service providers have filed briefs arguing that the HUD’s position is inconsistent with the language of the statute and with Congress’s intent to deal with abusive industry practices through disclosure requirements (the statute entitles consumers to a list of charges in advance of the closing), rather than direct regulation of rates.

The case is significant in itself – there are millions of closing every year at which providers may be tempted to pad their fees with charges for services they never actually perform (as anyone who has ever been charged a “courier fee” may suspect in the days of electronic transmission of documents).

But the case takes on added significance when considered in tandem with another RESPA case the Court is considering this term, First American Financial Corp. v. Edwards.  In that case, it appears possible (based on the oral argument) that the Court may hold that plaintiffs cannot sue to challenge kickbacks under RESPA unless they can show that the kickback affected the price they were charged or the quality of the services they received.  The absence of such a showing, the bank in that case has argued, means that the plaintiff has not suffered an “injury in fact” and therefore lacks standing to enforce her statutory rights under Article III of the Constitution.  Were the Court to adopt that rule, lower courts might well find that violations of RESPA’s disclosure provisions (the ones Quicken argues are RESPA’s main protection against abuses) likewise do not cause injury and thus do not confer Article III standing.

If the courts reach that conclusion, the provision at issue in Freeman takes on new prominence.  That is, if plaintiffs generally lack standing to bring kickback and disclosure claims because they have not suffered an “injury in fact” under either provision, the only claims left for consumer enforcement would be unearned fee claims like the ones the Freemans have made.  There is no question that consumers would have standing to raise unearned fee claims – they can easily show that they suffered a concrete financial injury in being charged for a service that was never performed.  But if the Court in Freeman construes RESPA as prohibiting unearned fees only in kickback situations, and holds in Edwards that consumers generally cannot sue for kickback violations, there may be little left of the statute that consumers can actually enforce.

Disclosure: The author represents petitioners in this case.

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Kevin K. Russell has been counsel in more than a dozen merits cases in the Supreme Court in the past six years. He has also filed numerous amicus briefs in the Court on behalf of groups such as the ACLU, NAACP, the National Women’s Law Center, and constitutional law scholars. Kevin currently is an instructor in the Stanford Supreme Court Litigation Clinic, as well as Harvard’s winter term Supreme Court Litigation clinic. He worked for five years in the Appellate Section of the Civil Rights Division at the U.S. Department of Justice. During that time, he represented the United States in more than thirty-five civil and criminal cases in eleven federal courts of appeals, presenting oral argument in more than two dozen of those cases.

Kevin’s areas of special interest include civil rights, immunity, and matters of jurisdiction and civil procedure.

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A Wolf in Sheep's Pajamas: First American v. Edwards

Guest Post by Professor Amanda Leiter

Unless you’ve recently bought property, you probably aren’t familiar with the Real Estate Settlement Procedures Act, or RESPA. And unless you’re familiar with RESPA, you probably haven’t paid attention to the pending U.S. Supreme Court case First American v. Edwards.

But First American deserves your attention because it’s a wolf in misleadingly sleep-inducing sheep’s pajamas.

The case, which the Court will hear on November 28, involves homebuyer Denise Edwards’ claim that First American paid kickbacks to a real estate settlement company in exchange for that company’s promise to offer only First American-brand title insurance. As a result of this backroom deal, Ms. Edwards and other homebuyers paid a fixed price for settlement and insurance, and couldn’t shop around for lower-priced insurance. If Ms. Edwards’ claims are true, then First American’s payments to the settlement company violated RESPA, and First American must pay Ms. Edwards and like homebuyers three times their settlement costs.

The question before the Court, though, is not whether First American broke the law, but whether a slippery constitutional doctrine called “standing” prevents Ms. Edwards and other homeowners from going to court in the first place.

“Standing” rules require a plaintiff to prove she suffered a concrete harm from the defendant’s unlawful conduct. In statutes like RESPA, however, Congress gave citizens the right to sue over statutory violations without proving that they suffered an economic harm.  Thus, under RESPA, a homebuyer can sue a settlement company that paid kickbacks to a title insurer even if the homebuyer can’t prove that as a result, she paid more for settlement services.

Why did Congress allow homeowners to sue over kickbacks that may not have directly injured them?  Because legislators understood two things. First, kickbacks harm all homebuyers by distorting the market for settlement products. Second, individual homebuyers would have a hard time proving those market distortions because they have little information about transactions other than their own. Thus, Congress sought to level the playing field between homebuyers and settlement companies by easing homebuyers’ access to court.

Congress has used this approach in many contexts. The National Environmental Policy Act (NEPA), for example, seeks to improve access to information about the environmental consequences of government actions, and individual citizens can sue to enforce NEPA’s terms. An individual NEPA plaintiff must prove that she has a connection to the government action at issue in her case—for example, that she likes to hike on the land that the government proposes to develop—but she does not have to prove that the NEPA violation directly harmed that land. Why did NEPA’s drafters allow citizens to sue over violations that may not have directly affected them? Again, because Congress recognized that the absence of information about environmental impacts harms the public at large, but citizens would have difficulty proving specific injuries.

There are many other examples. Banking and medical privacy laws empower individuals to sue if their personal information is unlawfully disclosed, whether or not they can prove the information has been misused. The Fair Credit Reporting Act empowers consumers to sue when a reporting agency violates measures aimed at avoiding identity theft, whether or not they can prove their identities were stolen.

In short, RESPA is one of numerous statutes that protect the public and empower individuals to enforce the resulting protections. The fate of all such statutes hangs in the balance in First American. If the Court decides that standing doctrines bar Ms. Edwards from pursuing her RESPA claims, then the same doctrines will bar nature lovers, and bank account holders, and patients, and credit card users—all of us—from enforcing the consumer and natural resource protections that Congress has enacted over the last half-century.

An Associate Professor of Law at American University's Washington College of Law, Amanda Leiter teaches environmental law, administrative law, and torts, and her research interests include administrative law and process, and domestic environmental law and policy. Before joining the AU faculty in the fall of 2011, Professor Leiter was an associate professor at Catholic University’s Columbus School of Law. Prior to that, she was a litigator at the Natural Resources Defense Council, where she developed and pursued federal appeals court challenges to EPA rules governing industrial air pollution. Professor Leiter clerked for Judge Nancy Gertner of the Federal District Court for the District of Massachusetts; for Judge David Tatel of the D.C. Circuit Court of Appeals; and for Supreme Court Justice John Paul Stevens. She is admitted to practice before the District of Columbia, the States of Colorado and Massachusetts, and the U.S. Supreme Court.

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