Draft newsletter article:
Court of Appeals Holds RESPA Prohibits Markups, But Not Overcharges
In Santiago v. GMAC Mortgage Group, Inc.,
http://www.ca3.uscourts.gov/opinarch/034273p.pdf , the borrower charged GMAC with violating RESPA by charging flat fees for flood certifications and tax services, and by charging a funding fee that was ten times higher than the cost of funding. The Court of Appeals held that RESPA did not prohibit overcharges - GMAC was entitled to charge any funding fee it wished. However, the Court agreed with HUD's interpretation that Section 8(b) of RESPA prohibits markups of third party fees when the mortgage lender or mortgage broker has not done any work to justify keeping the difference between the third party fee and the fee paid by the consumer. The Court rejected the arguments in several earlier cases that it takes two parties to knowing violate Section 8(a) or Section 8(b). See Haug v. Bank of America, 317 F.3d 832, 836 (8th Cir. 2003) ("Section 8(b) is an anti-kickback provision that unambiguously requires at least two parties to share a settlement fee in order to violate the statute.”), Boulware v. Crossland Mortgage Corporation, 291 F.3d 261, 266 (4th Cir. 2002) (“The use of the conjuctive ‘and’ indicates that Congress was clearly aiming at an exchange or transaction, not a unilateral act.”), and Krzalic v. Republic Title Co., 314 F.3d 875, 879 (7th Cir. 2002) (“The statutory language describes a situation in which A charges B (the borrower) a fee of some sort, collects it, and then either splits it with C or gives C a portion or percentage . . . of it.”). The Court held, however, that if GMAC provided services, then it is entitled to receive a fee, even if it is charged as a markup of a third party fee. The Court stated:
"Our conclusion that Section 8(b) allows a cause of action for unearned markups does not fully resolve the issue of whether the markups imposed by GMAC violated the law. GMAC may argue that it provided services ancillary to those provided by the third party vendor and that these services justify the additional charge. This argument might raise the issues of whether such ancillary services were nominal, whether the amount of any markup had to be reasonable in light of the additional services provided, or whether these extra services were already included in some other settlement service charge paid by the borrower. Regulation X at 24 CFR § 3500.14(c) specifically bars charges for “nominal services” and states that “duplicative fees” are unearned fees which violate the law. The parties have not fully briefed these issues, and the state of the record is inadequate for us to resolve them. These issues will have to be decided by the broader District Court on remand."
This interpretation was first accepted in Sosa v. Chase Manhattan Mortgage Corp., 348 F.3d 979, 983 (11th Cir. 2003) (see our November 2003 Newsletter at
http://www.lipsonneilson.com/Nov2003.htm#Court_of_Appeals_Puts_New_Spin_on ). It is a middle ground between HUD's interpretations of RESPA that overages are illegal (which the Courts have consistently held are clearly not supported by the law or its legislative history), and the earlier decisions stating that RESPA does not prohibit secret markups. The problem with this ruling is that HUD has not interpreted "nominal services" except in the context of issuing title insurance and providing mortgage broker services. It took years of lobbying to get HUD to issue policy statements on lender paid mortgage broker fees. Getting HUD to issue interpetive rulings on other settlement services is simply out of the question. GMAC probably overcharged its borrowers for administrative convenience - rounding up a fee to a whole dollar amount, or charging an average of historic actual costs because the actual cost for each loan is not billed to GMAC before closing. The answer to this dilemma may be the "one fee" packaging programs that are becoming more popular with consumers - package your nickel and dime fees in a discounted aggregate fee, and make up any discount in the origination fee or interest rate. Form over substance works all the time under HUD rules.