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Court to mull mortgage-settlement fees

When the Court returns next week for its February sitting, its menu of statutory construction cases starts with Freeman v. Quicken Loans, Inc.   This case presents a straightforward statutory construction question under the Real Estate Settlement Procedures Act (RESPA), a statute that has largely federalized the process of closing residential mortgage loans.  Among other things, it requires a meticulously tedious disclosure about settlement charges.  Of more relevance here, it also includes some substantive regulations of settlement charges, including one provision that was designed largely to prevent 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.  All agree that the fee would be illegal if it was split with a third party (because it then would be a kickback).  The question here is whether the fee slips through RESPA’s prohibitions if the originator retains the entirety of the fee.  The most obvious question would be how it can be so clear that the fee is unearned.  The answer here is that the case is on summary judgment.  The plaintiffs were charged a loan discount fee.  They alleged that they did not receive any discount from the otherwise applicable interest rate.  The lender moved for summary judgment, arguing that RESPA is violated only if the unearned fee is split with a third party.  Both of the lower courts agreed, and the Supreme Court agreed to hear the case.

At first glance, Freeman (the borrower) appears to have far the better of the argument about the statutory language.  The statute provides that “[n]o person shall give and no person shall accept” an unearned fee.  The borrower argues that the lender accepted an unearned fee when it required the borrower to pay the fee.  The lender (Quicken) rejoins that the conjunction of “giv[ing]” and “accept[ing]” necessarily contemplates that both the giving and the accepting must be culpable.  Hence, Quicken contends, the provision applies only when fees for unearned services are split between two culpable actors.  But nothing in the statute itself seems to require culpability on the part of the giver.  In truth, the strongest argument in favor of Quicken’s reading is that most of the courts of appeals have accepted it, but I rather doubt this will go far with the Justices.

The central problem for Quicken is offering any reason why Congress would want to prohibit an unearned fee if it is split between two parties but tolerate it if the originator keeps the entire fee.  The case on that point resonates with Caraco v. Novo Nordisk, argued during the December sitting: the likelihood that the Court will accept a difficult statutory argument, however well presented, drops precipitously when it fosters a result that seems to have no rational basis.  Quicken does a workmanlike job here of presenting the classic argument that Congress is entitled to regulate incrementally and pick and choose among the types of conduct it will remedy at any particular time.  But the weakness of the statutory argument coupled with the strange policy outcome leaves Quicken in a tenuous position for next week’s oral argument.

The most interesting thing likely to come of the case is the possibility that it will advance the Court’s continuing effort to confine and explain its 2001 decision in United States v. Mead about the appropriate standard of deference to informal agency views.  This case, like so many other cases the last few years, raises that problem obliquely.  Here, the Court responded to the petition by calling for the views of the Solicitor General; the government weighed in with a recommendation that the Court grant review, contending that applicable HUD regulations support Freeman.  Quicken, however, argues with some force that the regulations are at best ambiguous, and thus provide no substantial support to Freeman’s argument.  If the Court found the statutory arguments closely balanced, it would have an opportunity to consider the extent to which it should defer to HUD’s current understanding of those regulations.

But as in so many of these cases, there is little reason to think the Court will find the statutory question so closely balanced as to warrant any inquiry into the propriety of deference.  Although the Justices might speculate about that problem at the argument, my best guess is that the result here will be a straight-on reversal of the lower court’s strangely narrow reading of RESPA.

[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, Court to mull mortgage-settlement fees, SCOTUSblog (Feb. 17, 2012, 2:53 PM),