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Supreme Court Decides RESPA Case On Unearned Fees

Written by on Monday, 04 June 2012 7:00 pm

Is it illegal under federal law for a real estate brokerage to charge its clients fees for items or activities that in fact do not constitute any service for or benefit to the client? In this age of regulation and consumer protection, I suspect that most people would say, "yes, that's illegal." It must be against the law to collect unearned fees - to charge when no service is performed - mustn't it?

Well, as it turns out, that's not illegal - at least not illegal under federal law. The Supreme Court just said so.

On May 24 of this year, the Supreme Court of the United States issued its decision in the case of Freeman et al. v. Quicken Loans, Inc. The case was a consolidation of three separate lawsuits against a lender, Quicken Loans, alleging that the lender had charged fees for which no services were provided, thus violating the Real Estate Settlement and Procedures Act (RESPA). One charge was labeled a "loan processing fee" and another a "loan discount fee", even though no separate service was performed and no discount was given.

The relevant portion of RESPA says 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 … other than for services actually performed." (12 U.S.C. §2607(b))

Quicken Loans had argued that the RESPA provision was directed against two (or more) parties splitting fees, and that what it outlawed was splitting a fee with someone who had not actually performed any service. (In common parlance, it prohibits giving kickbacks or referral fees.) Quicken Loans said that, because it had not split the fees with anyone, there was no RESPA violation.

But the plaintiffs relied on a 2001 policy statement that had been issued by the Department of Housing and Urban Development (HUD), the entity charged with interpreting and enforcing RESPA. HUD's position was that RESPA prohibited any unearned fees, not just ones that were split.

One reason the Supreme Court took this case was that there was a division among federal circuit courts of appeal regarding this issue. Some had followed the position that there had to be a fee split in order for a violation to occur; others sided with the HUD position that any unearned fee was prohibited, regardless of whether there was a split.

In the Quicken Loan case the lower courts had decided in favor of the lender. There had been no split or sharing of the fees, hence there was no RESPA violation. The Supreme Court unanimously upheld the lower court decisions. Justice Scalia wrote the opinion, which said in part, "In order to establish a violation of §2607(b), a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons."

While the particulars of this case had to do with mortgage loan transactions, the ruling has an immediate and direct effect on certain brokerage practices. Over the years, as profit margins have continued to shrink, it has become a fairly common (though far from universal) practice for brokerages to add one or more flat-rate fees to the commission charge. Such fees have been variously labeled as "administrative", "transaction coordination", or "compliance". Of course there are other names as well. They simply represent an effort to reduce overhead, and do not reflect a particular service to the client. Those fees had been called into question by the HUD ruling and certain federal court rulings. Now it is clear that such charges may be RESPA compliant.

The National Association of Realtors® (NAR) had submitted an amicus curiae brief on behalf of Quicken Loans, so it is no surprise that NAR has expressed approval of the ruling. Curiously, though, there seems to be a divided opinion among Realtors®. Judging by the blogs, there are quite a few who deride such charges as "junk fees" and find them to be deceptive and morally objectionable.

It is also to be noted that charging fees for duplicative or non-existent services may violate the laws of some states. No broker should think about adding an "administrative fee" without first consulting the company attorney.

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  About the author, Bob Hunt

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.