US Supreme Court justices ponder if RESPA bars non-kickback fee

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When a mortgage fee is just a fee and not a kickback to a third party, is it barred by federal law? That was the question before the justices of the U.S. Supreme Court recently.

The case of Freeman v. Quicken Loans involves a putative class action claim filed by complainants who obtained mortgage loans from Quicken in Louisiana. They claimed that they were charged “loan discount” fees but given no loan discounts, in violation of §2607(b) of the Real Estate Settlement Procedures Act.

That section states: “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 in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

Quicken moved for summary judgment arguing that the provision, which is designed to bar arrangements whereby mortgage lenders charge undisclosed referral fees and other kickbacks that increase the cost borne by consumers, only applies where the lender received a “portion, split or percentage” of fees. The company contended that the provision didn’t apply in the current case, where 100 percent of the fee went to the lender.

The district court agreed and granted summary judgment. The 5th Circuit affirmed, and the U.S. Supreme Court agreed to take up the case.

Defining ‘portion, split or percentage’

During oral arguments Feb. 21, Kevin Russell, a partner in the Washington office of Goldstein & Russell, argued on the borrower’s behalf that RESPA bars fees collected by a lender for services not performed “whether it shares that fee with another provider or keeps it all for itself.”

But Justice Stephen Breyer asked if such a reading would prevent the common practice of lenders offering borrowers points they can buy in exchange for lower interest rates or other things. “I don’t see how this is a fee for service,” Breyer said.

When Russell argued that the wording of the statute would apply if the mortgage lender accepted 100 percent of a fee instead of a smaller amount, Chief Justice John G. Roberts wondered if that was true.

“In the phrase ‘portion, split or percentage,’ I think the more natural reading of ‘percentage’ is something less than 100 percent,” Roberts said.

Russell noted that, in other statutes, “Congress has used the phrase ‘portion’ … to prohibit, for example, a public official from converting to personal use any portion of the funds entrusted to him.”

“It could mean that, but it need not mean that,” Justice Antonin Scalia said.

Ann O’Connell, assistant to the solicitor general arguing as amicus on the borrowers’ behalf, said the law doesn’t draw distinctions based on who ultimately collects the fee.

“Sometimes the statute will be violated when an unearned fee is collected from the consumer and then shared between two service providers,” O’Connell said. “But the statute is also violated when a service provider collects an unearned fee directly from the consumer and retains the entire fee for itself.”

Scalia didn’t think it was that simple.

“If there’s a genuine ambiguity, you find for the interpretation that favors the defendant,’ Scalia said. “And I think this is at the very least ambiguous.”

‘100 percent of something they didn’t do’

Thomas M. Hefferon, a partner in the Washington office of Goodwin Proctor, argued on the lender’s behalf that the provision in the statute was directed specifically at “kickbacks and referral fees.”

“Under your reading … the words ‘portion, split or percentage’ mean an amount less than the whole?” asked Justice Sonia Sotomayor.

“That’s correct,” Hefferon said.

“So what happens if a service provider gives 100 percent to the other side, as opposed to an amount less than the whole?” Sotomayor asked.

“We don’t believe that it is covered by §8(b),” though it may be prohibited by another provision, Hefferon said.

“Does that make much sense?” Sotomayor said.

Scalia seemed to lose patience with the line of questioning.

“Is this 100 percent thing [a] real problem that Congress was addressing?” Scalia asked in a question directed more at Sotomayor than Hefferon. “Do you know of any 100 percent kickbacks or 100 percent payments to somebody else for services not performed as opposed to just keeping part and giving the rest?”

Sotomayor shot back, noting that it was common practice for companies to collect fees to give to their wholly-owned subsidiaries.

Isn’t that “getting 100 percent of something they didn’t do?” Sotomayor asked.

A ruling is expected later this term.