In many real estate transactions, the seller is charged two fees for the release of the mortgage. One is charged by the seller’s lender as part of the payoff amount, and the other by the title company as a line item on the HUD-1 Settlement Statement. Similar duplicative charges are often imposed in refinancings. In other instances, a third party charge for an appraisal, recording fee, or the like is "marked up" on the Settlement Statement.
The Department of Housing and Urban Development and the major banking regulatory agencies have all taken the position that duplicative or marked up charges of this nature violate the Real Estate Settlement Procedures Act, 12 U.S.C.§2601 et seq. ("RESPA"), and implementing HUD Regulation X, 24 C.F.R. part 3500, and subject the parties imposing the charges to treble damages.
Section 8(a) of RESPA, 12 U.S.C.§2607(a), provides that "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Section 8(b) provides that "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. . . ."
RESPA does not define "kickback" or "split." To ensure that the purposes of RESPA are fully achieved, Congress authorized HUD to "prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary". 12 U.S.C. §2617(a). HUD issued the present version of Regulation X effective August 9, 1994.
The 1994 version of Regulation X, 24 C.F.R.§3500.14(c), expands upon the statute by adding the following prohibition: "A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this Part be avoided by creating an arrangement wherein the purchaser of services splits the fee."
Furthermore, in 2000, HUD issued a policy statement that flatly states it is illegal to do either of the things described at the outset of this article, either (i) to accept a fee when that party has not actually earned that fee or (ii) "mark up" a third party fee. The policy statement was adopted by the Comptroller of the Currency and the Federal Deposit Insurance Corporation, which regulate national banks and other depository institutions, respectively. May 31, 2000 OCC advisory letter, 2000 OCC CB LEXIS 28; FIL-45-2000, 2000 FDIC Interp. Ltr. LEXIS 39.
The policy statement is in question-and-answer format. On the subject of markups and duplicative fees, it contains the following example:
[Q] Whether a lender may "markup" a third party vendor’s fees for the purpose of making a profit when no additional services are provided by the lender and thereby disclose the "marked-up" fee on the HUD-1, or whether the lender is limited to charging/disclosing its actual cost in obtaining the service?
RESPONSE: A lender that purchases third party vendor services for purposes of closing a federally related mortgage loan may not, under RESPA, mark up the third party vendor fees for purposes of making a profit. HUD has consistently advised that where lenders or others charge consumers marked-up prices for services performed by third party providers without performing any additional services, such charges constitute "splits of fees" or "unearned fees" in violation of Section 8(b) of RESPA [12 U.S.C. 2607(b)].
[A]ny settlement service provider that charges a fee as a "mark-up" of a fee for a third party’s services in a covered transaction without itself rendering services or furnishing goods in exchange for that portion of the fee would violate RESPA’s prohibitions against split or unearned fees. . . .
Furthermore, even where both the third party and the party adding to the charge perform services, HUD required that they be separately broken out:
If the lender charges additional amounts for performing actual services in connection with a particular settlement service purchased from a third party (for example, processing and evaluating an applicant’s credit report purchased from a third party credit reporting company), those amounts cannot simply be added to the fee paid to the third party provider for disclosure purposes. Rather, such charges by lenders for processing or other services must be broken out from the particular third party fee and specifically identified and disclosed in the line item reserved for processing or origination costs (line 801) or, in accordance with section 3500.9(a)(4), may be inserted in blank spaces.
Of particular interest is the following example:
Is it required to indicate anywhere on the HUD-1 the actual dollar amount of the commission earned by the settlement agent (closing attorney) for issuing a title insurance policy?
Answer: Yes. The Instructions specifically state that the HUD-1 must "itemize all charges imposed upon the borrower and the seller by the lender and all sales commissions, whether to be paid at settlement or outside of settlement."
It is obvious that HUD considers both types of conduct set forth at the outset of this article to be violations of RESPA.
Normally, HUD’s regulations and policies are entitled to be followed unless they are "demonstrably irrational," since HUD is the agency charged by Congress with the authority and responsibility to interpret and administer RESPA. Mourning v. Family Publications Service, 411 U.S. 356 (1972) (Truth in Lending Act); Golan v. Ohio Savings Bank, 1999 U.S. Dist. 16452, *24 (N.D. Ill. 1999) (RESPA). Since RESPA does not define "kickback" or "split," it is not irrational for HUD to deem the payment or retention of money for which no services are performed, or which are duplicative, to be unlawful. Briggs v. Countrywide Funding Corp., 931 F.Supp. 1545 (M.D.Ala. 1996). If one starts by considering the entire pool of money which is created by a real estate settlement, the payment or retention of any portion of that money without the performance of services in return can be considered a "kickback" or "split."
Notwithstanding the HUD regulation and policy statement, the U. S. District Court for the Northern District of Illinois has taken a narrower view, although the judges are not in agreement.
In Christakos v. Intercounty Title Co., 196 F.R.D. 496 (N.D.Ill. 2000), Judge Bucklo addressed a complaint alleging the charging of a duplicative recording fee. She held that a "split" was required, but that the requirement was satisfied:
Intercounty contends that §2607(b) is not implicated because it did not "split" the $29 charge it imposed on Ms. Christakos as part of the settlement charges with anyone nor did it "kick back" any fees to parties who did nothing in return for the money received. Narrowly construed, this is true, but Intercounty misses the point. Ms. Christakos alleges that Intercounty itself is the party who received a split of the fee while doing nothing in return for its unearned $ 29. Intercounty compares this to the "windfall" it received in Durr v. Intercounty Title Co. of Illinois, 14 F.3d 1183, 1187 (7th Cir. 1993), which the Seventh Circuit found did not trigger §2607(b) because the overpayment was not shared with anyone but kept by this same defendant. However, this is not what Ms. Christakos alleges. Ms. Christakos claims that she paid $52.50 for the settlement charge to record the release, $23.50 of which went to Mellon, who actually recorded the release and thus earned the fee, and $29 of which went to Intercounty, who did nothing in return. These payments were made from the same pool of funds from the loan proceeds over which Intercounty, as settlement agent, had control and directed payments made from. Therefore, Intercounty received an unearned "portion" of a settlement fee that was unearned, in violation of §2607(b). . . . (196 F.R.D. at 502-03)
However, the court declined to accept Christakos’ position that "any unearned fee violated RESPA," feeling constrained by prior Seventh Circuit decisions:
The weight of Seventh Circuit case law requires payment to a third party to trigger §2607(b). See, e.g., Mercado v. Calumet Federal Savings & Loan Association, 763 F.2d 269, 270 (7th Cir. 1985) ("The statute requires at least two parties to share fees"); Durr v. Intercounty Title Co. of Illinois, 14 F.3d 1183, 1187 (7th Cir. 1993)(if the complaint does not allege a payment to a third person, the plaintiff has failed to state a claim under RESPA."); but see U.S. v. Gannon, 684 F.2d 433 (7th Cir. 1981). However, the difference between the cases cited by Intercounty and this case is that Ms. Christakos does allege that the fees were split with a third party, Mellon Bank. Durr, 14 F.3d at 1187 ("In this case, as in Mercado, the plaintiff failed to allege that Intercounty’s overcharge was in the nature of a ‘portion, split, or percentage of any charge’ given to a third party"). Mellon may have unwittingly "shared" this fee with Intercounty, but the charge to Ms. Christakos for recording the release of the Mellon mortgage was $52.50, of which Intercounty received $29 in return for no "services actually performed." This $52.50 was paid out of a common fund, the New America loan proceeds, as directed by Intercounty, the settlement agent. . . . (196 F.R.D. at 503 n. 4)
In Echevarria v. Chicago Title, 00 C 3949, an unreported decision, Judge Zagel took a narrower view and dismissed a complaint essentially identical to that in Christakos:
Defendants say that the RESPA claim must be dismissed because plaintiff’s do not allege that any portion of the alleged overcharge was "split" with a third party. In Durr v. Intercounty Title Co. of Illinois, 14 F.3d 1183, 1187 (7th Cir. 1994), the Seventh Circuit decided this exact issue. There, as here, a title insurer paid a portion of the total amount of plaintiff’s fee to the Recorder and retained the remaining amount. The Seventh Circuit held that RESPA "extends only over transactions where the defendant gave or received ‘any portion, split, or percentage of any charge’ to a third party." See Durr, 14 F.3d 1183 at 1187. The court concluded that the title insurer’s overcharge "was simply a windfall it kept for itself," and therefore did not violate RESPA.
Plaintiffs attempt to get around Durr’s clear holding by alleging that the Recorder is the "third party" that Durr requires; in other words, plaintiffs say that Chicago Title "split" the fee by giving the Recorder $31 and keeping $14 for itself. While this is one plausible reading of the statute, it is not the one that the Seventh Circuit has chosen to follow.
Judge Zagel acknowledged that Durr involved an August 1992 transaction, which was prior to the effective date of the Regulation X amendment. However, he concluded that HUD could not overrule a federal Court of Appeals decision by issuing revised regulations or policy statements: "The HUD regulations and policy statements upon which the Echevarrias rely are, in this Circuit, ultra vires."
Another district court from outside the Seventh Circuit has concluded that Durr is no longer viable under the new HUD regulation and policy statement. McCulloch v. Great Western Bank, 1998 U.S.Dist. LEXIS 8226 (W.D.Wash., Feb. 10, 1998).
An appeal from the Echevarria decision is pending before the Seventh Circuit (00-4087). The author represents the appellant, as well as the plaintiff in Christakos. Interestingly, the Seventh Circuit subsequently acknowledged that the Federal Reserve Board had reversed one of its decisions interpreting the Truth in Lending Act by issuing revised regulations. Lifanda v. Elmhurst Dodge, Inc., 2001 U.S.App. LEXIS 450 (7th Cir., Jan. 12, 2001), acknowledged that the decision in McGee v. Kerr-Hickman Chrysler Plymouth, 93 F.3d 380 (7th Cir. 1996), was no longer viable after the FRB had amended Regulation Z to specify the contrary result.
Even under existing law, we believe that Echevarria read Durr too broadly. The Durr opinion primarily dealt with sanctions for alleging, inter alia, that the RESPA plaintiff is entitled to three times the entire amount paid for settlement services rather than three times the improper charge. In Mercado v. Calumet Federal S. & L. Assoc., 763 F.2d 269 (7th Cir. 1985), the Seventh Circuit discussed United States v. Gannon, 684 F.2d 433 (7th Cir. 1981)(en banc), as follows:
We held that a counter attendant at Cook County’s title registration office violated RESPA by accepting "gratuities" of two or three dollars for recording changes of title. The attendant’s acts met the common definition of a split; he took part of a payment for himself and passed on the rest. He had no right to make his services contingent on this payment, yet he did. The "gratuities" also involved multiple parties. Cook County imposed a statutory fee, which was supposed to cover all of the attendant’s services, yet the attendant collected a larger fee and kept part for himself.
. . . the case focused squarely on an arrangement under which a participant in the settlement process extracted more than a statutorily-prescribed fee, remitted the appropriate fee to the County, and kept the rest for himself.
Mercado, 763 F.2d at 271.
Furthermore, in Gannon, the Seventh Circuit noted that Congress intended that §2607(b) reach more than merely fee-splitting:
Notwithstanding the examples in the legislative history and the regulations, the overall purpose of §2607 was set forth more broadly in Senate Report No. 93-866, May 22, 1974, which reported out of committee the bill that eventually became §2607. That report succinctly stated that one of the purposes of the bill was "to eliminate the payment of . . . . unearned fees in connection with settlement services provided in federally related mortgage transaction, and for other purposes . . .," [citation], and characterizes subsection (b) as prohibiting the "acceptance of any portion of any charge for the rendering of a real estate settlement service other than for services actually performed." [citation omitted] While the title of a section of a statute should not control or vary the plain meaning of the statute itself, nevertheless the title of §2607, "Kickbacks and Unearned Fees," appears to fortify the position that the Congressional intent was for a broader application than that ascribed to it by the appellant. Congress’ aim was to stop all abusive practices that unreasonably inflate federally related settlement costs to the public. [citation omitted] Although the focus of immediate Congressional concern may have been the splitting of fees between the recipient of the charge and unrelated third parties, the arrangement we view here is no less an example of an "abusive practice" or imposition of an "unearned fee," unreasonably increasing the cost of settlement services to the banks, and ultimately to the public at large. . . . It should be noted in this regard that the Senate report stated: "To the extent that the payment is in excess of the reasonable value of the . . . service performed, the excess may be considered a kickback or referral fee proscribed by section 7 (§2607)." [citation omitted]
Id. at 437 (Emphasis added). Thus, the August 1994 revision to Regulation X simply confirms that the prohibition extends to the full extent intended by Congress.
In any event, the controversy concerning the efficacy of the HUD regulation and policy statement should be resolved in Echevarria.
Daniel A. Edelman (B.A., University of Illinois, 1973; J.D., University of Chicago, 1976) is a partner in Edelman, Combs & Latturner, which represents consumers and investors in class and individual actions.