Supreme Court Rules On Loan Processing Fees
In a decision that will have a significant effect on the fees that consumers pay in real estate transactions, the U.S. Supreme Court has ruled that unearned fees charged by lenders and other service providers do not violate federal law as long as they are not split with anyone else. The court’s unanimous decision effectively re-opens the door to controversial administrative fees levied by real estate brokers, and could encourage the practice of marking up fees by mortgage lenders, escrow officers and others that had been banned by federal regulators for the last decade.
The ruling also represents a defeat for the Justice Department and Department of Housing and Urban Development –both of which had argued that charging unearned fees is illegal –and may be a shot across the bow of the new Consumer Financial Protection Bureau, which inherited the task of policing mortgage and settlement abuses from HUD. Recently the U.S. Supreme Court ruled favorably on a case involving unearned fees under the Real Estate Settlement Procedures Act (RESPA). While the ruling was about mortgage lending, it has direct implications for real estate brokerages and the transparency of settlement service fees.
In Freeman v. Quicken Loans, Inc., the Supreme Court held that there is a violation of RESPA only when a settlement service fee is shared, or split, with a third party. It all started when three married couples received mortgage loans from Quicken Loans. The couples filed three separate law suits against Quicken, contending that Quicken had charged fees for which no services were provided and therefore the fees violated RESPA. One such charge was labeled a “loan processing fee” and another charge was called a “loan discount fee.” It was alleged Quicken had not provided a discount in exchange for those fees.
The three couples relied on a 2001 policy statement issued by U.S. Housing and Urban Development, or HUD, that interpreted RESPA to prohibit the collection of unearned fees in real estate settlement services even when the charges are not shared with a third party. They argued that any of Quicken’s charges that didn’t relate directly to service provided were a violation of RESPA, regardless of whether the fees were shared with another party.
Quicken argued that it had not violated RESPA, since it did not split any fees with a third party. The couples’ lawsuits were consolidated and went to federal circuit court. This court ruled in favor of Quicken. Then the couples appealed, and the casewent to the Supreme Court.
The Supreme Court easily recognized that HUD’s own policy statement was inconsistent with the plain language of the statute. In other words, HUD was interpreting the statute to mean that a fee split with a third party doesn’t need to take place in order for a RESPA violation to have occurred when, in fact, the statute itself states that a RESPA violation involves a fee split.
In addition, prior to the Supreme Court’s ruling, federal circuit courts throughout the country differed in what they considered a RESPA violation. Some agreed with HUD’s policy statement prohibiting any unearned fees, while others required a third party fee split for a RESPA violation to occur. Fortunately, the Supreme Court resolved this difference.
What does this decision mean for real estate brokerages? Because of the unanimous Supreme Court ruling, administrative fees charged by a brokerage in addition to a percentage-based commission do not violate RESPA unless the broker splits it and pays a portion of it to a third party outside of the brokerage firm who provides no services in exchange for the fee. This most recent Supreme Court ruling brings needed clarity to RESPA’s intent