A majority of Supreme Court justices seem convinced that RESPA is simply an anti-kickback statute -- but may rule that the 1974 law has a broader reach if they defer to HUD's interpretation concerning unearned loan fees.
The justices heard arguments in a case Tuesday in which Quicken Loans charged loan discount fees but where the borrowers claimed they did not receive a corresponding reduction in their interest rate.
The borrowers claim they were charged an unearned fee, which is prohibited under the Department of Housing and Urban Development's interpretation of the Real Estate Settlement Procedures Act.
Quicken's attorney argued that RESPA only prohibits fees split between two settlement providers.
Justice Stephen Breyer stressed that HUD's 1992 interpretation expanded RESPA to ban overcharges and collecting unearned fees. But he doesn't believe Congress intended HUD to set the prices of settlement services.
However, Justice Elena Kagan stressed that the court should defer to HUD's expertise in this area because RESPA is “ambiguous” with regard to unearned fees where the borrower pays for something they don't receive.
In such cases, the courts would determine whether a service was provided or not – not the pricing of the service. The lower courts have wrestled with this RESPA issue for a decade.
Last fall the Supreme Court decided to review a ruling in Freeman v. Quicken Loans by the Fifth Circuit Court of Appeals, which took the narrow view of the 1974 RESPA statute.
“When read in its entirety, RESPA is an anti-kickback statute, not an anti-price gouging statute,” the New Orleans appeals court said and ruled in Quicken's favor.
Quicken's attorneys had argued that RESPA does not prohibit or regulate undivided, unearned fees charged by a sole provider. The fees must be divided between two parties so it resembles a kickback or bribe.
The lawsuit filed by Quicken Loan customers claims they were charged loan discount fees of about $1,000 but the Detroit-based lender did not lower their interest rate in return.
Fifth Circuit judge Patrick Higginbotham dissented in the 2-1 decision, claiming a “core objective” of RESPA is prohibiting unearned, undivided fees. Whether an unearned fee is spit or not, “the damage done to borrowers is similar – they are led to believe they are paying for something that are not,” Higginbotham says in his dissent.
The Obama administration is siding with the borrowers in Freeman v. Quicken Loans. In a filing with the Supreme Court, U.S. Solicitor General Donald Verrilli says the ruling by the Fifth Circuit Court of Appeals is “inconsistent” with RESPA and HUD's longstanding policies with respect to unearned fees.
The Solicitor General urged the high court to reverse the Quicken Loans ruling and remand the case back to the appeals court with instructions to determine whether loan discount fees are earned or unearned fees.
Six appeals courts have split 3-3 on the RESPA unearned fee issue. But none have ruled on whether loan discount fees are earned or unearned fees.
