The Supreme Court has agreed to hear a Real Estate Settlement Procedures Act case whose outcome could shield banks and other lenders from litigation under a wide range of federal and state laws.
The court will decide in the fall whether a consumer who purchased title insurance through a referral arrangement that allegedly violated RESPA's anti-kickback provisions can sue in federal court if she cannot show actual injury.
Lawyers for banks are closely watching the case, First American Financial Corp. v. Edwards. If the high court rules against the consumer, large companies including banks that fight hundreds of lawsuits filed under RESPA, as well as the Truth in Lending Act and Fair Debt Collection Practices Act may start challenging the constitutionality of awarding damages when consumers cannot prove they were harmed.
"The viability of this type of garden variety 'gotcha' litigation might be undermined if the Supreme Court rules in favor of First American," said Alan S. Kaplinsky, a partner in at Ballard Spahr LLP who represents banks and is not involved in the case.
Hundreds of cases are filed each year by borrowers alleging violations of RESPA, which prohibits "any fee, kickback or thing of value," in exchange for a business referral.
RESPA also forbids that a "portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service" be paid for services that are not actually rendered to the customer.
If a violation of the statute is proven, a court can award a plaintiff treble damages, or triple the amount, for any charge paid.
"Anybody who is involved in the real estate industry and provides settlement services under RESPA, which includes lenders, is potentially affected by this case," said Charles A. Newman, a partner at SNR Denton in St. Louis, who represents First American, the second-largest title insurer in the U.S.
The plaintiff in the case in question, Denise Edwards, bought a home in Cleveland in 2006 and paid $455.43 for title insurance.
In a lawsuit filed in 2007 in U.S. District Court in California, she claimed her title insurer, Tower City Title Agency LLC of Highland Heights, Ohio, entered into an captive insurance agreement with First American that was illegal under RESPA.
The lawsuit said that because First American paid $2 million for a 17.5% minority interest in Tower City in 1998, it received the majority of the local agent's referral business.
The suit sought class action status on behalf of all consumers who purchased title insurance through a title agency that was subject to an exclusive referral agreement with First American, and damages of up to $150 million.
The District court refused to grant the case class-action status. Edwards appealed to the Ninth Circuit Court of Appeals, which rejected a motion from First American to dismiss the appeal on the grounds that Edwards lacked standing to file suit under RESPA.
First American had argued that because Ohio law mandates that all title insurers charge the same price, the homeowner could not have been overcharged for title insuance as a result of the exclusivity agreement.
In siding with Edwards, Circuit Judge Susan Graber wrote in an eight-page opinion that "the damages provision in RESPA gives rise to a statutory cause of action whether or not an overcharge occurred."
In its appeal of that decision, First American asked the Supreme Court to review two issues: whether a consumer can recover treble damages if she did not suffer any injury; and if awarding such damages violates Article 3 of the constitution, which requires an injury in fact to bring a claim.
The Supreme Court limited its review to constititutionality issue.
"That is what makes this case enormously significant because it has implications that go well beyond RESPA," Kaplinsky said.
"If the Supreme Court reverses the Ninth Circuit, it will be a very rare case where the consumer will be able to prove actual injury under RESPA and TILA. This could be a very happy event for First American and the banking industry."
