By Steve Brown, First Vice President, National Association of REALTORS®
Late last week, the U.S. Supreme Court ruled favorably on a case involving unearned fees under 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 short, here are the key points to the cases that led to the Supreme Court ruling and the implications for real estate brokerages:
What did the Supreme Court rule?
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.
For even more details about the ruling, check out this blog post from Speaking of Real Estate.
What was the original case?
It all started when three married couples received mortgage loans from Quicken Loans. The couples filed three separate lawsuits 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.
What was the couples’ basis for their argument?
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 case went to the Supreme Court.
What else did the Supreme Court find?
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 was NAR’s role?
NAR filed a brief in the Supreme Court to emphasize the importance of this issue to the real estate brokerage industry. NAR’s brief informed the Court about several prior cases that had held brokers liable for RESPA violations for charging “administrative fees” even though those fees were not split with other parties.
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.
REALTORS have long supported the goals and aspirations of RESPA to bring fairness into the marketplace for both consumers and industry players. This most recent Supreme Court ruling brings needed clarity to RESPA’s intent.