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Culpepper v. Irwin Mortgage Corporation

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This update was provided by Howard Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C. Culpepper Case Nears an End - July 19, 2007

The case of Culpepper v. Irwin Mortgage Corporation was one of the first of many decisions questioning the legitimacy of lender paid broker fees (aka yield spread premiums). These cases died a quiet death, for the most part, after HUD issued RESPA Statements of Policy 1999-1 and 2001-1. The class action lawsuit filed by the Culpeppers in 1996 was reviewed four times by the Court of Appeals for the Eleventh Circuit, and hopefully will end with the latest decision. The procedural history of the case, and a summary of the prior decisions, is found in Culpepper IV (you may read this on your own when you are having a hard time falling asleep). It is sufficient to note that the Culpeppers won in the prior decisions, only to see the Court reverse and overrule the principles favoring the Culpeppers in decisions rendered after HUD issued its Statements of Policy. The Culpeppers argued that the Court's subsequent decisions overruling the holding in Culpepper III could not be applied to case, since the Court of Appeals was bound to follow its prior holding, right or wrong (the "law of the case doctrine"). The Court of Appeals disagreed. First, the HUD Statements of Policy were the controlling law binding the Court, not the Court's prior decisions. Second, the approach to RESPA liability taken in Culpepper III was "clearly erroneous," such that continuing to apply it "would work manifest injustice."

The Court of Appeals then reviewed the District Court's holding that Culpepper had not shown any evidence that the yield spread premium was unreasonable compensation for the services provided by the mortgage broker. The Court of Appeals compared the compensation paid to the Culpeppers' broker with the compensation paid to brokers in other cases, and found that the yield spread premium paid to the Culpeppers' broker was less than the yield spread premium paid in other cases that were held to be acceptable by the Court. The Court of Appeals stated:

"The Borrowers do not present any evidence demonstrating that these compensation amounts were unreasonable in light of the total array of services performed. Instead, they argue that the fact that the YSP payment did not in any way reduce their up-front closing costs establishes that they were unreasonable under RESPA. This contention fails, for two reasons. First, as discussed previously, in deciding the question of reasonableness we are instructed to assess the "total compensation" the broker received, which "includes direct origination fees and other fees paid by the borrower, indirect fees, including those that are derive from the interest rate paid by the borrower, or a combination [thereof] . . . ." 66 Fed. Reg. 53055. Second, as the district court concluded, the fact that the Borrowers' up-front closing costs were not reduced is not sufficient, standing alone, to establish that the brokers' compensation was unreasonable in light of the services that they performed. This is especially so where the services they performed otherwise appear to have aided and benefited the Borrowers in closing their mortgage transactions.

"Nor are we convinced by the Borrowers' contention that the YSP was per se unreasonable because under federal regulations a broker's compensation is limited to an origination fee of 1%. See 24 C.F.R. § 203.27(a)(2)(i). Other circuits that have considered that argument have rejected it, concluding that the limitation on mortgage broker fees set forth in 24 C.F.R. § 203.27(a)(2)(i) only applies to fees "directly collected [from the mortgagor], not indirectly collected [from the lender]." See Bjustrom v. Trust One Mortgage Corp., 322 F.3d 1201, 1205 (9th Cir. 2003). Because we agree with the Ninth Circuit that 24 C.F.R. § 203.27(a)(2)(i) does not preclude a mortgage broker from collecting a YSP indirectly from a mortgage lender, we cannot accept the Borrowers' blanket contention that any compensation in excess of the 1% origination fee is per se unreasonable under RESPA. Such an approach would flout HUD's case-by-case inquiry to YSP payments.

"In summary, the Borrowers bear the burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable, see Hirsch, 328 F.3d at 1309, in light of both objective market standards and the subjective facts of their mortgage transactions. 66 Fed. Reg. 53055. This is a burden they have failed to satisfy. Because neither of the Borrowers has submitted evidence sufficient to demonstrate that the total compensation paid to their respective brokers was somehow "unreasonable" under HUD's RESPA analysis, summary judgment was appropriate for Irwin."

Finally, the Court of Appeals held that the District Court did not abuse its discretion by deciding to decertify the class action lawsuit, essentially stripping away all of the potential claims of other borrowers. The Court of Appeals, citing the HUD Statements of Policy and the majority of other decisions holding that RESPA kickback claims must be decided on a case by case basis, agreed that the case should not have been certified as a class action in the first instance. The Culpeppers may appeal the decision to the US Supreme Court; however, the prior denial of certification of Culpepper III by the Supreme Court makes it unlikely that the Supreme Court will review the decision in Culpepper IV.

Culpepper v. Irwin Mortgage Corporation RESPA Updates - Dec. 10, 2001
The U.S. 11th Circuit Court of Appeals held that whether or not payments made by a lender to a mortgage broker who handles loan applications are considered illegal fees or kickbacks prohibited by section 8 of RESPA rather than bona fide fees for services, depends on the terms and conditions under which they are paid.


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