Corporate Court Gives Thumbs Up to Mortgage Scam

Today the Supreme Court issued its decision in Freeman v. Quicken Loans (.pdf download), holding unanimously that the statute in question does not prohibit mortgage lenders from charging “unearned fees” – that is, charging fees for services never rendered. As a result of the Court’s decision in Freeman, mortgage lenders can essentially “cheat” homebuyers out of hundreds or thousands of dollars without giving them anything in return. It remains to be seen how Freeman could also impact a host of other consumer protection laws.

The case arises from a group of lawsuits out of Louisiana in which borrowers, including Tammy and Larry Freeman, claim that Quicken Loans violated the Real Estate Settlement Procedures Act (RESPA) by charging them loan-discount fees (one family paid $1,100 in fees) on their mortgages without providing reduced interest rates in return. Quicken argued that the fees charged to borrowers were both legal and earned.

The question before the Court was how to interpret RESPA, which prohibits kickbacks and other abuses in the mortgage industry. The key language in the statute reads:

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.

The Freemans argued that RESPA was intended to forbid unearned fees, regardless of whether a third party was involved in the improper fee arrangement. Quicken argued that the law only prohibits lenders from receiving an unearned fee when that fee is divided with a third party in the form of a kickback. The Fifth Circuit agreed with Quicken, ruling that there was no violation of RESPA if an unearned fee is charged by a single party and there is no third party taking a share.

The circuit courts were 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 holding that the Act applies to all unearned fees. The Department of Housing and Urban Development supported the interpretation that the statute should apply to all unearned fees, while the Solicitor General filed a brief supporting the Freeman’s petition for certiorari.

Today’s decision, written by Justice Scalia, held that in order to establish a violation of §2607(b) of RESPA, a charge for settlement services has to have been divided between two or more persons. Hence, a single provider’s retention of an unearned fee does not violate §2607(b). By looking at the terms of §2607(b), the Court determined that there have to be two distinct, sequential exchanges – a single mortgage lender cannot both make and accept the charge. Because the petitioners did not demonstrate that Quicken split the challenged charges with anyone else, the Court found that the lower court properly granted summary judgment in favor of Quicken.

Freeman is one of two RESPA cases on the Corporate Court’s 2011-2012 docket. The other case is First American Financial Corp. v. Edwards, in which the Court was asked to decide 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.

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.

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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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Upcoming case: Can consumers sue mortgage lenders for unearned fees?

On February 21, the Supreme Court will hear oral arguments in Freeman v. Quicken Loans, in which the right of consumers to sue mortgage lenders for unearned fees is at stake. The question for the Supreme Court is how to interpret the Real Estate Settlement Procedures Act (RESPA), which prohibits kickbacks and other abuses in the mortgage industry. 

The borrowers argue that RESPA 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 Fifth Circuit agreed with Quicken, ruling that there was no violation of RESPA if an unearned fee is charged by a single party and there is no third party taking a share. Circuit courts are deeply divided on this issue, with the Fourth, Fifth, Seventh and Eighth Circuits limiting RESPA 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 homebuyers annually.  If the Court sides with Quicken, it will allow mortgage lenders to place unexplained and unearned fees on their loans.

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Corporate Court grants cert. in home mortgage scam case

In another case that pits everyday Americans against large corporation, the Supreme Court has granted cert. in the mortgage loans case Freeman v. Quicken Loans Inc. The case arises from a group of lawsuits out of Louisiana in which borrowers, including Tammy and Larry Freeman, claim that Quicken Loans violated the Real Estate Settlement Procedures Act (RESPA) by charging them loan-discount fees on their mortgages without providing reduced interest rates in return.

It is common practice for people taking out a home mortgage loan to pay “points,” which are based on a percentage of the overall loan amount.  But the expectation is that the lender will reduce the borrower’s interest rate over the life of the loan.  In this case, the Freemans secured a mortgage loan from Quicken and were charged $980 for a “loan discount fee” (the points), but Quicken did not provide the Freemans and other borrowers the discounted rate they paid for.  Through such fraudulent practices, Quicken received hundreds or thousands of dollars in ill-gotten fees from each borrower.

The question for the Supreme Court is how to interpret RESPA, which prohibits kickbacks and other abuses in the mortgage industry.  Here is the key language in the statute:

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.

The Freemans argue that the Act was intended to forbid 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 in the form of a kickback.  The Fifth Circuit agreed with Quicken, ruling that there was no violation of the Act if an unearned fee is charged by a single party and there is no third party taking a share.

The Circuit Courts are divided on this issue, with the Fourth, Fifth, Seventh and Eight 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 Department of Housing and Urban Development supports the interpretation that the statute should apply to all unearned fees.  The Solicitor General has filed a brief supporting the Freeman’s petition for certiorari.

This is the second RESPA case on the Corporate Court’s docket this year.  The other case is First American Financial Corp. v. Edwards, which threatens to undermine a host of laws that protect consumers by awarding damages when corporations violate them.

If the Court sides with Quicken, it will allow mortgage lenders to cheat homebuyers out of hundreds or thousands of dollars without giving them anything in return.

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