July 12, 2010Financial Crisis Group Alerts
Real Estate Closing Cost Blog
Cooper's closing and financing cost blog covering federal developments under RESPA (Real Estate Settlement Procedures Act) and California developments.
JULY 12, 2010 - OVERCHARGE NOT REQUIRED FOR CUSTOMER TO RECOVER TREBLE DAMAGES FOR IMPROPER REFERRAL FEE UNDER RESPA
Incongruous as it may seem, the Ninth Circuit has held that if there has been an improper referral, a private plaintiff, and presumably the class she represents, can be awarded three times the amount paid for title insurance even though the plaintiff cannot show that she incurred any more than she would have in any event.. Edwards v. First American Corporation, __ F 3d __ (9th Cir. 6/21/2010) holds that the Real Estate Settlement Procedures Act of 1974 ("RESPA"), 12 U.S.C. § 2607, requires that any party paying an illegal referral fee in order to provide closing services must pay three times the amount it received for the services even though the amount charged was not more than it would have been without the referral fee.
In Edwards, defendant The First American Corporation ("First American"), which owns First American Title Insurance Company, is alleged to have purchased minority interests in multiple insurance agencies in exchange for agreements to sell First American Title Insurance policies, purportedly on a non-exclusive basis. Plaintiff, who paid for title insurance as part of a house purchase, alleged that these agreements were in fact exclusive and that they amounted to an improper "fee, kickback, or thing of value" in exchange for business referrals and also an improper "portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service."
First American moved to dismiss based on lack of subject matter jurisdiction. Specifically, Defendants claimed that Plaintiff lacked both Article III standing and statutory standing under RESPA because she could not show an "injury" as required for standing. Plaintiff could not show that the cost of her title insurance had been increased because of the referral arrangement.
The trial court said that it doesn't matter and the 9th Circuit affirmed. RESPA sets the amount due from defendants as "an amount equal to three times the amount of any charge paid for such settlement service." Thus, just a charge is required, not an excessive charge.
The court pointed out that Congress purposefully set this measure of damages because although some referral arrangements, as here, would have no cash changing hands at all and not demonstrable overcharge, but RESPA was still intended to deter such provisions by providing treble damages. Statutory penalties qualify as "injury" for Article III standing even if they are not overcharges over what the cost would otherwise have been.
The Sixth Circuit, Carter v. Welles-Bowen Realty, Inc., 553 F.3d 979, 989 (6th Cir. 2009), and Third Circuit, Alston v. Countrywide Financial Corp., 585 F.3d 753, 755 (3d Cir. 2009), have made similar rulings that Congress created a private right of action without requiring an overcharge allegation.
This just moved plaintiff beyond a motion to dismiss. She still has to achieve class certification (her individual damages are about $700 trebled) and establish that the arrangements were improper under RESPA.
MARCH 9, 2010 - Ninth Circuit: RESPA Does Not Prohibit Fee Overcharges; California's Unfair Competition Law Pre-empted; Plaintiffs Go Home Empty-handed
According to a Ninth Circuit ruling today, the Real Estate Settlement Procedures Act ("RESPA") does not regulate the amount that a lender may charge for services, but only prohibits charges for which no services were rendered at all. In Martinez v. Wells Fargo Home Mortgage, Inc. et al, __ F3d __ (March 9, 2010), the Court upheld District Court Judge Ronald Whyte's ruling that RESPA Section 8(b)’s prohibition against "unearned fees" does not reach excessive fees for services that actually were performed.
The fee at issue was an $800 "underwriting fee," which the Court says is for analyzing "the risk involved in making a loan, to determine whether that risk is acceptable to the lender."
This decision differs from the interpretation advanced by the Department of Housing and Urban Development ("HUD"), which Congress authorized to administer RESPA. HUD's regulations state that "If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided."
However the Ninth Circuit held that this interpretation is not permissible because Congress's language in 12 U.S.C. § 2607(b) ("No person shall give and no person shall accept . . . any charge made or received . . . other than for services actually performed")" cannot be read to prohibit charging fees, excessive or otherwise, when those fees are for services that were actually performed."
As further support for the Court's decision, the RESPA section involved is entitled "splitting charges" and is evidently meant to ban pure referral fees, not directly to regulate the amount of fees. The concept is that if kick-backs are prohibited, all parties will have an incentive to purchase services from the lowest cost provider.
The Court also refused to allow the plaintiffs to challenge the amount of the underwriting fee under the "unfair" prong of California’s Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code §§ 17200, et seq.. Although the National Banking Act ("NBA") does not preempt the entire field of banking, it does prohibit state laws that "obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized real estate lending powers."
A state law that generally prohibits fraudulent conduct is not preempted. However, the Court found that the prohibition on excessive charges advanced by the plaintiffs in Martinez would run afoul of two specific provisions of the regulations interpreting the NBA from the Office of the Comptroller of the Currency that establish (1) that non-interest charges and fees are "business decisions to be made by each bank, in its discretion, according to sound banking judgment and safe and sound banking principles" (12 C.F.R. § 7.4002(b)(2)) and (2) that "state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized real estate lending powers do not apply to national banks" (12 C.F.R. § 34.4(a)).
Finally, the Court also threw out a cause of action based on the "unlawful" prong of the UCL, holding that the plaintiffs had not identified any specific law. The HUD-1 Settlement Statement is required by RESPA to accurately list the charges and fees charged, not to disclose what they cost the lender, so even if Congress had intended to provide a private right of action, there was no violation here.
It has always been difficult to challenge excessive bank charges in court, largely because they are not regulated by federal law and state laws or theories that propose to do so generally are pre-empted. Apparantly RESPA is no exception to that rule.
NOVEMBER 17, 2009 - HUD ANNOUNCES POLICY OF RESTRAINT IN ENFORCEMENT - The Department of Housing and Urban Development announced on November 13, 2009 that for the first four months of 2010, it will "exercise restraint in enforcing new regulatory requirements under the Real Estate Settlement Procedures Act (RESPA)."
On January 1, 2010, several important provisions of the new RESPA regulations are scheduled to take effect. Most significantly, lenders and mortgage brokers are required to use a standard Good Faith Estimate (GFE) to disclose key loan terms and closing costs and a new HUD-1 Settlement Statement to disclose final costs and compare them with previously estimated costs.
Although the January 1, 2010 effective date comes at the end of a year long phase-in of the new regulations, there had been requests to postpone that effective date on the ground that the loan industry had not had sufficient time to prepare and that there were contradictions in the regulations. Instead, HUD announced the policy of restraint in enforcement that will look at the good faith of the mortgagee in attemptint to bring its practices into compliance.
HUD estimates that the new procedures will save the average homebuyer $700.
NOVEMBER 10, 2009 - RESPA CHANGES SET TO START ON NEW YEARS' DAY 2010 - Following a voluntary freeze early in 2009 by the incoming Obama Administration and several court challenges, new RESPA regulations will apparently take effect on January 1, 2010.
The centerpiece of the new regulations is a mandatory Good Faith Estimate disclosure form that lists key loan terms and costs. Additionally, all borrowers must receive a new HUD-1 settlement statement.
RESPA generally prohibits requiring buyers to use certain providers for settlement services such as title insurance or loans or receipt of kickbacks from such providers. The new regulations and forms - originally proposed under the Bush Administration - are designed to further that goal.
The Obama Administration, however, has withdrawn a rule that would have prevented builders from offering incentives to customers who use affiliated mortgage or title companies. This apparently resulted from litigation brought by the National Home Builders Association, which contended that use of affiliated companies saves consumers money and assures that home sales will close on time.
HUD has posted sixteen pages of FAQs about the new regulations, but problems remain. Not to be outdone, the American Bankers Association and other groups sent a 33-page letter to HUD officials contending that the real estate industry is not ready to implement the new regulations and pointing out questions the FAQs do not answer. Among the several issues raised are that while loan originators are required to provide buyers with a list of available providers, the FAQs term this a "referral" and appear to make the originators responsible for the services of the listed providers. The letter further charges that loan brokers' services are not adequately recognized and that the new regulations will prevent loan pre-approvals.
Although there are rumors on the Internet that the regulations will be postponed again, HUD insists that the regulations were first published in 2008, that the industry has had plenty of time to prepare and that there will be no more delays.
NOVEMBER 5, 2009 - THIRD CIRCUIT ALLOWS HOMEBUYERS TO SUE FOR KICKBACKS EVEN IF THEY DID NOT PAY MORE - When a class of Pennsylvania homebuyers sued Countrywide Mortgage for allegedly violating the Real Estate Settlement Procedures Act ("RESPA") for setting up a captive reinsurance program that amounted to a kickback scheme, the District Court in Philadelphia threw the case out because the plaintiffs did not allege that they had been overcharged. This proved to be short-lived respite, as the Third Circuit Court of Appeals has reinstated the case, finding that the statute intended to allow buyers to recover triple their expenses, even if they did not pay more than would have been the case without the improper activity Alston v. Countrywide Financial Corp., D.C. Civil. No. 07-cv-03508 (3d Cir. 2009).
Homebuyers who put less than 20% down had to purchase private mortgage insurance ("PMI") in order to obtain financing from Countrywide. The lender referred buyers to one of a list of six insurers on a rotating basis. Those insurers were required to purchase reinsurance from a Countrywide affiliate, Balboa Reinsurance Co..
The suit claimed that this reinsurance purchase was really a kickback, citing Balboa's receipt of $892 million in reinsurance premiums since 1999 without actually paying any claims. The plaintiffs claimed that this generally raised insurance rates because money was being paid that was not actually based on the taking of a risk, gave the PMI insurers no incentive to compete legitimately to attract customers through lowering the price or improving the coverage and by obfuscating any true disclosure of charges and interest.
Countrywide succesfully gained a dismissal in the trial court based on its argument that PMI rates are set by the state, and that the RESPA statute only allowed a private suit in the event of an overcharge. The District Court stated that the plaintiffs had paid "the only legal rate they could have paid for mortgage insurance in Pennsylvania."
The Third Circuit disagreed and interpreted the statute to mean that a buyer could recover for three times any charge paid for the improper settlement service, regardless of whether the wrong led to an overcharge. The court also held that the non-monetary nature of the right infringed did not prevent the plaintiffs from having the "injury-in-fact" required for standing under Article III of the U.S. Constitution.
Finally, the court rejected Countrywide's attempt to use the "filed rate doctrine" as a defense. Although it may not be possible to challenge a rate approved by the regulatory agency, here the plaintiffs were not challenging the rate -- they were challenging the kickback scheme.
This decision obviously increases RESPA plaintiffs' ability to use RESPA to challenge lenders' activities. However, it is based on the language of this particular provision. In other RESPA provisions, the language of the statute limits recovery to actual damages.
JANUARY 23, 2009 - RESPA REGULATIONS REOPENED BY OBAMA ORDER - The new RESPA "required use" regulations may not be going into effect in early April after all, not because of the multiplying litigation, but because of President Obama's order staying all Bush Administration regulations until his administration can examine them.
Although the RESPA regulation is final, a memorandum from Obama's Chief of Staff Rahm Emanuel asks that all federal regulations that have not gone into effect be delayed for 60 days and that the comments be reopened for 30 days to allow "interested parties to provide comments." If "substantial questions of law or policy" are raised, the agency is directed to notify the Director of the Office of Management of the Budget ("OMB") and "take appropriate action."
JANUARY 19, 2009 - IRONY - HUD IS ACCUSED OF RESPA VIOLATIONS BY TITLE INSURERS - Today's RESPA news is of the "people who live in glass houses" variety.
The American Land Title Association (ALTA), which represents title insurers and others in the real estate industry, has charged the Deparmtent of Housing and Urban Development with violating the Real Estate Settlement Procedures Act (RESPA) by designating preferred providers of title and closing services when selling HUD owned properties. ALTA contends that this violates RESPA Section 9(a), which prohibits requiring "directly or indirectly" that a buyer use a particular escrow company.
Of course, HUD is the federal agency that enforces RESPA, like with its new rules.
ALTA sent a letter to HUD on January 5, 2009 charging that HUD's use of preferred providers creates a disincentive to buyers using other title companies. Apparently, the cost of the services of a preferred provider is built into the sales contract with HUD while the cost for a different title company would be paid by the buyer. ATLA charges that HUD is making buyers "pay twice" if they use their own companies.
HUD, which basically wants to quickly dispose of the properties it has acquried as the guarantor of failed loans, says it is studying the allegations. We predict a change in procedures.
JANUARY 9, 2009 -HUD DELAYS AFFILIATED ENTITIES INCENTIVE BAN IN FACE OF LAWSUIT BY NATIONAL ASSOCIATION OF HOME BUILDERS - On December 22, 2008, the National Association of Homebuilders sued HUD seeking to block a portion of the new RESPA Regulations that prevents homebuilders from offering incentives for buyers to use affiliated entities for title or mortgages services. This is the second major lawsuit challenging the new rules. The other, by the national association of Mortgage Brokers, is discussed below.
In the face of this suit, and in advance of a court hearing that had been scheduled for January 9, 2009, HUD has delayed implementation of this provision, which was to have gone into effect on January 16, 2009, by 90 days.
The lawsuit, filed in the Eastern District of Virginia, alleges that such incentives had been allowed under a 1983 statute and under the former rule as long the buyer received full disclosure and the homebuilder did not require use of the affiliated businesses. The new rule declares such practices to be a "required use" banned by RESPA.
In addition to claiming that the new interpretation violates the statute, the homebuilders assert that similar arrangements are allowed between mortgage lenders and title companies, putting homebuilders at a disadvantage. The complaint also challenges the rulemaking process, alleging that HUD did not adequately respond to comments from several entities, including the Federal Trade Commission, that the bundling of services saved money for consumers. HUD also is accused of offering no substantive justification for its change in position and of ignoring surveys and other evidence supporting the FTC's point.
While HUD delayed implementation of the rule, it defended its position, citing, for example, a case where incentives were offered, but the interest rate was higher than the market rate. Presumably, the theory underlying any targeting of homebuilders is that the price of the home might be increased to offset the subsequent discounts.
DECEMBER 22, 2008 - NATIONAL ASSOCIATION OF MORTGAGE BROKERS SUES TO BLOCK RESPA CHARGES – The National Association of Mortgage Brokers (NAMB) has filed suit in Washington D.C. District Court seeking to block the recently announced revision of the RESPA Final Rule. In the December 19, 2008 filing, NAMB argues that the rule improperly puts mortgage brokers at a disadvantage to institutional lenders, such as banks. National Association of Mortgage Brokers v. Steve Preston, Case No. 1:08-CV-02208-JR.
The legal theories are that the RESPA Final Rule (1) exceeds the scope of the Department of Housing and Urban Development (HUD)'s power to adopt regulations, (2) is not reasonably supported by HUD's explanations and justifications, (3) was adopted without proper notice, and (4) contravenes HUD's stated purpose and policies.
Under the revised RESPA, mortgage brokers must disclose "yield spread premiums," which are paid by lenders on higher rate loans and must credit these rebates to the borrower. Effectively, this allows a borrower to pay a higher interest rate over time in exchange for lower closing costs. NAMB claims that banks charge similar fees, termed "service release premiums" that are not disclosed to or shared with borrowers. Banks recoup the closing costs when they sell the higher interest loans on the secondary market.
In adopting the final RESPA rule, HUD claimed that the fees were not the same, because the bank fees are not paid until the loans are sold on the secondary market. NAMB claims that the fees are built into the loans and that the different treatment is counter to HUD's claimed intent of allowing a consumer to pick the best loan.
In the release announcing the new rule, HUD claimed that in tests, the new disclosure forms allowed consumers to select the best terms 90% of the time. NAMB claims the methodology was flawed, and that mortgage brokers are at a disadvantage under the new disclosure forms adopted by HUD.
The new HUD forms do not have to be used until January 1, 2010, leaving ample time for resolution of this dispute.
The new GFE will clearly disclose the term of the loan, the interest rate, whether the interest rate is fixed or variable, whether there is a pre-payment penalty, whether there is a balloon payment, and the amount of closing costs.
HUD estimates that the ability to compare potential loans "will save consumers nearly $700 at the closing table," a figure that is not really explained and is quite difficult to accept. Although "apples to apples" comparisons will be easier and although RESPA also takes steps to prevent homebuyers being herded to captive lenders to home sellers, it does not seem likely that buyers will pursue multiple loans through the GFE step and then compare them. Maybe HUD is planning a campaign to encourage buyers to do just that, but the press release is silent on that point.
The new regulations were issued following receipt of 12,000 comments to the proposed regulations issued last March. There are many changes, but the most significant is the elimination of a requirement that buyers be read a "closing script" by agents. HUD's announcement states that the closing script has been replaced by a requirement that entries on the GFE be more easily compared to entries on the new standardized final closing statement.
The new GFE and closing statement will be required starting January 1, 2010. Other highlights include:
- The new GFE form consolidates fee categories on the front page to prevent "junk fees" and assist in comparison.
- Lender payments to mortgage brokers (called "Yield Spread Premiums") must be "disclosed in a more meaningful way."
- Loan originators must provide the GFE within three days of receiving all the necessary information. They cannot wait until the borrower decides to proceed.
NOVEMBER 10, 2008 - GOVERNOR SCHWARNENEGGER SIGNS BILL ON TITLE INSURANCE REBATES – Governor Schwarzenegger has signed SB 133, which regulates the activities of Title Marketing Representatives (TMRs). The law requires TMRs to register with the Department of Insurance, allows the department to regulate TMRs and establishes TMR marketing activities that are illegal. The illegal activities are similar to those banned by RESPA for financing. These include rebates and kickbacks to those who could send a homebuyer's business to a certain title company, such as homebuilders, lenders or real estate agents. The theory is that buyers do not really shop for a title company and these inducements come out of the buyer's pocket, while giving the buyer no benefit.
SEPTEMBER 17, 2008 - RESPA CLASS ACTION ALLOWED TO GO FORWARD – A federal court in Alabama has certified a class in a RESPA case charging that a real estate company routinely charges an "Administrative Brokerage Commission ("ABC") fee" of $149 and noted the charge on the HUD-1 statement, although no specific service was performed for this charge. Initially, the District Court had found that the plaintiff had met all of the requirements for a class action except that class issues predominated over individual issues. The Eleventh Circuit reversed this ruling, noting that because the class included only those who received no services for the ABC fees, the District Court was incorrect in applying previous holdings under RESPA provisions concerning overcharging that the value of the services received by each class member would have to be considered. The Eleventh Circuit discussed and agreed with the District Court's findings on the other required class action elements: numerosity, typicality and adequate representation.
Back in the District Court, Judge Virginia Hopkins held that the Eleventh Circuit decision was the law of the case and precluded her from revisiting any of the issues, including defendant's arguments on the other class action elements. The Court also found that under the standard in the Eleventh Circuit opinion, class-wide issues predominated. Although it would be necessary to review each individual case to determine if any services were provided in return for the ABC fee, the Court held that it was not necessary to identify each class member at the class certification stage, just that plaintiff show that a class exists.
