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Argument recap: Court opens can of worms in mortgage-settlement fees case

The Court returned from its winter break to hear Freeman v. Quicken Loans, Inc.,  which the parties had briefed as a direct and straightforward statutory case.  The case involves a minor provision of the Real Estate Settlement Procedures Act (RESPA) that bars kickbacks and referral fees.  All would agree that the provision targeted the common practice of mortgage originators paying a fee to a mortgage broker that referred the borrower to the originator.  The issue in Freeman is whether that provision extends to an unearned fee charged by the originator.  The borrower Freeman argues that the plain language of the statute applies whenever a fee is “give[n]” for services that are not provided, even if the originator retains the whole fee.  The lender Quicken argues that the statute applies only when the fee is shared between two parties (the classic “kickback” situation).

But when the Justices turned to the case on Tuesday, they seemed interested in talking about almost any RESPA topic other than the question on which a deep circuit split moved them to grant review.  Moments after Kevin Russell began his argument for Freeman, Justice Breyer interrupted to ask whether it made sense to think of a loan discount fee (the fee at issue in the complaint) as unearned.  Russell attempted to put the question off as one that the lower courts had not yet addressed, and Justice Breyer for the moment accepted the characterization of this as a side issue.  But the issue would not easily die, as Justice Scalia and others returned to it repeatedly throughout the argument.  At bottom, several Justices found deeply incongruous the idea that a loan discount fee could be unearned when a loan is advanced at a particular interest rate; regarding the loan discount fee as part of the interest pricing makes it difficult for them to understand an unearned loan discount fee.

A second issue that occupied even more of the Justices’ attention was the distinction between a fee charged for a service that is not provided at all (for example, a courier fee when no documents were sent) and a grossly excessive fee (such as a fee of $1000 for a service for which a typical fee would be $20).  HUD’s regulation prohibits both, but the complaint in this case alleged only the former, and the argument Russell presented extends only to the former, simpler case.  But the Justices were not easily persuaded that there is a bright line between the case of no services at all and the case of overcharging.  For example, as Russell’s time came to a close, Justice Ginsburg pressed him to explain whether the legislative history supported HUD’s broad reading.  Russell naturally answered that although HUD’s interpretation might expand the statute “immense[ly],” the question of covering simple overcharges was not necessary to the decision here.  Justice Scalia aptly rejoined that this would take deference to HUD out of the equation, requiring Russell to win the case on plain language alone.  Justice Breyer seemed particularly preoccupied that a general “price control” statute would be “a rather big novelty in American life.”

Yet another problem that concerned the Justices was how to explain under Russell’s understanding of the statute that consumers are not liable when they “give” an unearned fee to the service provider.  Russell was ready with a complex reading that seemed to make sense, but when Assistant to the Solicitor General Ann O’Connell (arguing for the government as an amicus in support of Freeman) admitted that the topic was not addressed at all in the briefs, the problem looked more serious.  Justice Breyer in particular, seemed disappointed that a question that was “pretty obvious” had gone unnoticed in the brief from the Office of the Solicitor General.  And matters got worse for Freeman when O’Connell suggested that the Court need not worry about liability of consumers because HUD could protect them as a matter of prosecutorial discretion.  The premise of Russell’s explanation for the borrower is that Congress wrote a statute that, read sensibly, does not even extend to consumers.  By suggesting that the statute might extend to consumers on its face but be narrowed by prosecutorial discretion, O’Connell dealt a seriously debilitating blow to the credibility of Russell’s explanation.  Typical of the argument, the only thing that managed to divert the Justices from this problem was Justice Breyer’s desire to return to the overcharging quagmire. Thus, O’Connell’s entire argument passed with no direct attention to the main question.

When Thomas Hefferon rose to argue for the lender Quicken, he started by trying to press his principal argument on what the parties had regarded as the main question: the idea that Congress had taken a “measured step” to prohibit one form of misconduct, and that there was nothing odd about limiting the statute to unearned fees that are split.  Having little interest in that topic, the Justices quickly returned to the more diverting questions that had consumed Russell’s argument.

After asking a few brief questions about Hefferon’s argument on the main question, Justice Sotomayor quickly took him back to the overcharge problem – whether it is workable to distinguish overcharges from unearned fees.  When the Justices pressed him on the extent to which they should defer to HUD’s policy statement (which supports Freeman’s position), Justice Breyer quickly turned discussion back to the quality of deliberation behind the original regulation.  He was most interested in the extent to which the notice of the proposed regulation adequately disclosed an intention to adopt a general pricing regulation (plainly his take on the regulation in question).  When Hefferon took the tack of ignoring Breyer’s question, and instead answering that HUD had disclosed nothing about the issue before the Court (whether the regulation extends to un-split fees), Justice Sotomayor directly contradicted Hefferon, referring to a specific statement on that topic.

Justice Breyer – not one to let somebody so easily evade his questioning – could not be deterred from his main point.  He immediately took the discussion back to his concern that commentary at the promulgation of the regulation gave no hint of the broad “price regulation” he perceives in HUD’s current view.  Eventually, Hefferon conceded that he was not sufficiently familiar with those aspects of the history to answer Justice Breyer’s questions (a fair response given the remote connection between these questions and the issues on which the Court granted review).

At the end of the argument, the Court’s disposition is almost impossible to read.  What is most remarkable about the argument is the almost cursory attention to the question on which the Court granted review: brief interchanges near the beginning of Russell’s and Hefferon’s arguments, in which a few Justices expressed weak skepticism about the parties’ respective positions.  But given the Justices’ strong interest in questions not addressed by the parties, the range of possible outcomes is now quite broad, with all of the following seeming to be realistic possibilities:

  • Dismiss the case as improvidently granted (perhaps based on the view that the fee is not clearly “unearned” and thus that the question on which the Court granted review is not clearly presented or perhaps based on the view that the case is now so messy as to justify ignoring the question presented).
  • Call for further briefs (or argument) on the question whether consumers are liable in the unsplit unearned fee case (the question for which Justice Breyer chided the government’s lack of briefing).
  • Call for further briefs (or argument) on the question whether the statute extends to simple overcharges as opposed to wholly unearned services.
  • Call for further briefs (or argument) on the propriety of deference to HUD’s overcharging regulations (for which Justice Breyer found the process so wanting).
  • Last, though of course still a possibility, decide the case on the basis of the question briefed by the parties.

Nothing in the argument suggested any reason why the Court couldn’t reach the question on which it granted review.  But I have never seen an argument (or argument transcript) in which the Court showed such a conspicuous lack of interest in the question presented.  That is not to say the Justices could not turn back in Conference to a decision on the original issue, but it is to say that nobody should be surprised after this argument at a disposition that leaves that issue wholly unsettled.

[Disclosure:  Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, represents the petitioners in the case.  The author of this post, however, is not involved in the case.]

Recommended Citation: Ronald Mann, Argument recap: Court opens can of worms in mortgage-settlement fees case, SCOTUSblog (Feb. 22, 2012, 11:52 AM),