The U.S. Supreme Court has agreed to hear a case that will decide whether the Real Estate Settlement Procedures Act (RESPA), which is directed at residential mortgage lending, prohibits a real estate settlement service provider from charging an unearned fee if the provider shares the fee with at least one other party, but not if the provider retains the entire fee.

In Tammy Foret Freeman, et al. v. Quicken Loans, Inc., No. 10-1042 (cert. granted, October 11, 2011), the U.S. Court of Appeals for the Fifth Circuit ruled that RESPA Section 8(b) does not prohibit undivided unearned fees. Section 8(b) states that no person shall give or accept “any portion, split, or percentage of” a charge for a real estate settlement service except for services actually performed. The plaintiffs in Freeman had alleged that “loan discount fees” paid to the lender were unearned because they did not result in a lower interest rate and a “loan origination fee” paid to the lender was also unearned because it was duplicative of the lender’s “loan processing fee.”

The Department of Housing and Urban Development (HUD), in its 2001 Statement of Policy, interpreted Section 8(b) to prohibit all unearned fees, regardless of whether the fees are divided between two or more parties. Finding the statutory language to be clear on its face, the Fifth Circuit refused to give Chevron deference to HUD’s interpretation. According to the Fifth Circuit, HUD’s interpretation was not even entitled to lesser Skidmore deference because the policy statement was “perfunctory and conclusory.”

Invited by the Supreme Court to provide the Obama administration’s views, the Solicitor General filed an amicus brief urging the Supreme Court to hear the case and reject the Fifth Circuit’s position as inconsistent with RESPA’s purpose to eliminate unearned fees. In addition, the Solicitor General argued that the case would provide an opportunity for the Supreme Court to resolve a conflict in the circuits over Section 8(b)’s scope. The Fourth, Seventh, and Eighth Circuits, in cases involving one settlement service provider’s mark-up of another provider’s charge, have held that Section 8(b)is violated only if the two providers share the unearned charge. The Second, Third, and Eleventh Circuits, also in cases involving mark-ups, have held that a provider engaging in mark-ups can be liable under Section 8(b) even if it retains the entire unearned fee. In another case not involving an alleged mark-up of a third party’s charge but in which the lender’s charge for its own services was alleged to be unearned, the Second Circuit also held that Section 8(b) prohibits undivided unearned fees.

Freeman is the second RESPA case that the Supreme Court has agreed to hear this term. The Court granted certiorari earlier this year in First American Financial Corporation v. Edwards, a case that will decide whether a plaintiff who cannot show any actual injury from a violation of RESPA’s anti-kickback prohibition in Section 8(a) has Article III standing to sue in federal court. As we reported in an earlier legal alert, the Supreme Court’s decision in First American could impact the continued viability of federal lawsuits brought by plaintiffs under other consumer protection statutes seeking “gotcha” statutory damages.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The Group has been actively involved in defending many RESPA cases, including cases raising the issues involved in Freeman and First American.

For more information, please contact group Practice Leaders Alan S. Kaplinsky, 215.864.8544 or, and Jeremy T. Rosenblum, 215.864.8505 or; or John L. Culhane, Jr., 215.864.8535 or; Martin C. Bryce, Jr., 215.864.8238 or; Barbara S. Mishkin, 215.864.8528 or; Mark J. Furletti, 215.864.8138 or; Christopher J. Willis, 678.420.9436 or; or Stefanie H. Jackman at 678.420.9490 or  


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