A ruling Thursday by the U.S. Supreme Court on unearned fees is good news for Quicken Loans Inc. and for mortgage lenders in general. But the ruling was a setback for the Department of Housing and Urban Development.
The Supreme Court agreed last year to hear the case, which addressed whether Section 8(b) of the Real Estate Settlement Procedures Act applies when no third parties are compensated.
The trial court had ruled against Quicken — a decision that was upheld on appeal by the Fifth Circuit Court of Appeals. The Detroit-based lender was clearly frustrated with the lawsuit, previously noting that the law firms behind such cases are “unscrupulous operators who only exist because companies and courts allow them to continue their immoral gamesmanship.”
The Supreme Court had asked the Solicitor General to weigh in on whether it should review the lower court’s decision in the case.
In today’s unanimous decision, Justice Antonin Scalia wrote an opinion that indicated RESPA Section 8(b) prohibits a service provider from charging an unearned fee if it shares the fee with at least one other party, but not if the provider retains the entire fee, according to a client letter from Ballard Spahr LLP. Section 8(b) states that no person shall give or accept “any portion, split, or percentage of” a charge for a real estate settlement service except for services actually performed.
The plaintiffs had alleged that loan discount fees paid to the lender were unearned because they did not end up lowering the interest rate. They also claimed that the origination fee was unearned because it was duplicative of the processing fee.
In 2001, HUD issued a statement of policy that interpreted Section 8(b) to prohibit all unearned fees whether or not fees were divided up between two or more parties.
“Now the Supreme Court has refused to give deference to HUD’s interpretation, finding that the statutory language ‘unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons,'” Ballard Spahr said. “That language, the court said, ‘cannot be understood to reach a single provider’s retention of an unearned fee.'”
The court additionally rejected the borrowers’ argument that reading Section 8(b) to allow undivided unearned fees would lead to an absurd result by allowing a provider to keep the entirety of a large unearned fee while imposing liability if the provider shared even a nickel of a small charge with someone else.
Ballard Spahr said that the decision is a defeat for the Consumer Financial Protection Bureau, which filed an amicus brief urging the adoption of the borrowers’ interpretation.
“However, the possibility exists that the CFPB may seek to use its authority to prohibit unfair, deceptive, or abusive practices to achieve the outcome it sought in the Supreme Court,” the client letter stated.
Mortgage Fees Litigated
Mortgage lenders and servicers are being challenged in court on fees they charge, when the fees are applied and who is subject to the fees. One mortgage fee case will be heard by the U.S. Supreme Court.
Supreme Court Considers Unearned Fee Case
A judgment in favor Quicken Loans Inc. is being considered for review by the U.S. Supreme Court. At issue are alleged unearned fees.
Freeman v. Quicken Loans Inc.
Case No. 10-1042.