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RESPA Kickbacks: It Takes Two To Tango
A third federal court has weighed in on HUD's reading of RESPA's anti-kickback provisions. All three federal courts agree: HUD is wrong. Here's what happened.
The issue is whether an up-charge or add-on fee on a settlement service provider's fee is a kickback made illegal by RESPA. In the most recent case, Haug v. Bank of America, the plaintiffs challenged the bank's practice of charging a fixed fee for credit reports, appraisals, and document delivery where that fixed fee exceeded the service provider's actual charge to the bank. The plaintiff class was to be comprised of individuals whose actual settlement service fees were less than the amount the bank charged.
Context Is Everything
Haug v. Bank of America argues the same issue considered by the court in Echevarria v. Chicago Title and Boulware v. Crossland Mortgage Corp. To make the argument, plaintiffs take language in RESPA's anti-kickback provision and parse it apart. The short version of the court's analysis is that this is not the correct way to read a law or a regulation. Words, clauses and even entire sentences must be read in their context. The theory behind this approach is that words, clauses and sentences are grouped together for a reason. If they were meant to be read separately, they would be placed apart.
The paragraph in question 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." (Emphasis added.)
The plaintiffs in all three cases take the "no person shall accept" language and read it out of context. Without its context, the argument is that the act would make it illegal to accept a fee from anyone, not simply from another settlement service provider. Thus, the charge to and fee paid by the borrower would be illegal.
Plaintiffs argued that this "no person shall accept" language makes it illegal to accept an unearned fee and that it is not necessary to make a showing that the fee was shared with a third party - an additional settlement service provider. RESPA, they argued, is a consumer protection statute designed to provide accurate information on settlement costs and to limit high costs resulting from abusive practices.
The U.S. Eighth Circuit Court of Appeals disagreed with the "spirit of the law" arguments raised by plaintiffs and held that RESPA is an anti-kickback statute that "unambiguously requires at least two parties to share a settlement fee in order to violate the statute." The split or fee must be shared with a third party to trigger a RESPA violation.
The plain meaning of the act requires at least two parties to share a settlement fee in order to violate the statute. Congress intended to prohibit kickbacks and referral fees where no service or thing of value was provided but a referral of business was made. In an add-on fee or up-charge, there is no referral involved.
The court also noted the legislative history of RESPA supports the holding. A measure that would have provided federal agencies with authority to regulate settlement service costs was specifically rejected. What Congress enacted was a law that regulated the underlying relationships and procedures "of which the costs are a function." Looking at the legislative history of RESPA and the context of the language in question leads clearly to the court's conclusion.
These three cases now provide fairly clear guidance on the legality of add-on fees. Three federal circuit courts of appeals have consistently held that add-on fees where no third party is involved do not violate RESPA.
What these cases did not decide is whether specific add-on fees are reasonable. The cases were brought under RESPA. The plaintiffs did not raise any arguments that the practices were unfair or deceptive. Depending on the particular fact situation, a court could find that unreasonable add-on fees could be an unfair trade practice.
Right now, the most important step the lending industry can take is to not abuse consumers by adding on unreasonable fees. Making a profit is allowed; gouging consumers unfairly is not. This is an excellent time to establish that the industry does not need to be further regulated.
Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 1, 2/03
- Compare GFE disclosures with HUD-1 and HUD-1A disclosures. If there are variations, consider whether these variances are acceptable.
- If there are variances between GFEs and HUD-1s, look for explanations. Any significant changes should be documented in the loan file.
- Look at GFE's in denied application files. Consider whether these GFEs were accurate and timely.
- Compare payments to appraisers, credit bureaus, flood determination vendors, and couriers to amounts charged and disclosed to customers. If you find variations, do enough research to understand why.
- Brief mortgage product managers on the issues relating to up-charges, including RESPA and predatory lending. Reach agreement on your institution's business philosophy.
- Decide whether any add-on fees charged are reasonable.