Freeman v. Quicken Loans, Inc.: The U.S. Supreme Court Holds That Unearned Fee Must Be Divided Between Two Parties In Order to Establish a Violation of Section 8(b) of RESPA

May 25, 2012



On May 24, 2012, the Supreme Court issued a unanimous opinion in Freeman v. Quicken Loans, Inc., holding that a plaintiff must demonstrate that a charge for settlement services was divided between two or more persons in order to establish a violation of Section 8(b) of the Real Estate Settlement Procedures Act (“RESPA”) (codified at 12 U.S.C. § 2607(b)). The Supreme Court decision resolves a circuit split regarding the interpretation of Section 8(b), which provides that: "[n]o 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." The Supreme Court decision affirmed an award of summary judgment in favor of defendant Quicken Loans, Inc. (“Quicken Loans”) in an action brought by plaintiffs who claimed they were charged unearned fees at the closing of their mortgage transaction but who did not contend the fees were split with any other party. The Supreme Court’s opinion is available here.

Background and the Circuit Split

In Freeman, plaintiffs claimed that Quicken Loans, a mortgage lender, charged them unearned fees at the closing of their mortgage transaction. Plaintiffs claimed that Quicken Loans charged them a loan discount fee without providing a corresponding interest rate reduction and/or a loan origination fee that was duplicative of a loan processing fee. They argued that because Quicken did not perform any services in return for the fees, such fees violated Section 8(b) of RESPA because they were unearned. The plaintiffs did not claim that Quicken had split the disputed fees with any other party. On summary judgment, the district court found that Quicken Loans had not violated Section 8(b) of RESPA.

The Fifth Circuit agreed. It held that Section 8(b) of RESPA does not prohibit “undivided unearned fees” assessed or collected by a sole provider, but rather that Section 8(b) prohibits unearned fees only when they were “divided between two parties such that they resemble a kickback or bribe.” Freeman, 626 F.3d 799, 802 (5th Cir. 2010). The court reasoned that the language of the statute unambiguously required a transaction between two parties. Id. at 803-04. Declaring the statutory language “clear on its face,” the Fifth Circuit refused to defer to a policy statement issued by the Department of Housing and Urban Development (“HUD”), which asserted that Section 8(b) prohibits undivided unearned fees. Id. at 805.

The Fifth Circuit’s decision conflicted with the Second Circuit’s decision in Cohen v. JP Morgan Chase & Co., 498 F.3d 111 (2d Cir. 2007). There, plaintiff alleged that defendants charged an “unearned ‘post-closing fee’ in connection with the refinancing of her home mortgage,” in violation of Section 8(b). The district court granted defendants’ motion to dismiss on the grounds that the post-closing fee was either a permitted “overcharge,” or that the fee was not prohibited because it had not been split with any third party. Id. at 113. The Second Circuit vacated the dismissal, finding that the alleged post-closing fee was an “undivided unearned fee” which could violate Section 8(b). Id. at 125-126. Unlike the Fifth circuit, the Second Circuit found the language of Section 8(b) ambiguous. Id. at 120, 123-24. The Second Circuit therefore found it appropriate to rely on the HUD statement opining that Section 8(b) applies to undivided fees.

The Supreme Court’s Opinion

The Supreme Court issued a unanimous opinion siding with Quicken Loans. Justice Scalia, writing for the Court, explained that the issue was whether Section 8(b) “prohibits the collection of an unearned charge by a single settlement-service provider—what we might call an undivided unearned fee—or whether it covers only transactions in which a provider shares a part of a settlement-service charge with one or more other persons who did nothing to earn that part.” Slip. op. at 3-4. In resolving this question, the Court held that the language of the statute “unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.” Id. at 4. In reaching its decision, the Court gave no deference to HUD’s view that Section 8(b) was not “limited to situations where at least two persons split or share an unearned fee” but instead focused its analysis on the plain language of the statute. Id. at 4.

Citing the language of the statute, the Court explained that Section 8(b) “clearly describes two distinct exchanges.” Id. at 6. There is first a charge “made” or “received” form a consumer, a “portion, split or percentage” of which is then given to another person who accepts that “portion, split or percentage” of the charge. Id. The Court explained that the statute uses “different sets of verbs, with distinct tenses, to distinguish between the consumer-provider transaction (the ‘charge’ that is ‘made or received’) and the fee-sharing transaction (the ‘portion, split, or percentage,’ that is ‘give[n]’ or ‘accept[ed]’)” which would be unnecessary if the “two transactions could be collapsed into one.” Id. at 6-7.

The Court rejected the argument that “a settlement-service provider can ‘make’ a charge (stage one) and then ‘accept’ (stage two) the portion of the charge consisting of 100 percent.” Id. at 7. The Court also rejected the argument that the consumer is the person who “give[s]” a “portion, split or percentage” of the charge to the provider who “accept[s]” it on the grounds that this interpretation would lead to the absurd result where the consumer may be liable for the transaction—an implication recognized by HUD in a 2001 policy statement in which it noted that it was “unlikely to direct any enforcement actions against consumers for the payment of unearned fees.” Id. at 7-8. Additionally, the Court rejected the argument that the use of the terms “portion” or “percentage” would be mere surplusage if the terms could not be used to bring within the statute the circumstance where the provider retains the entirety or 100 percent of the unearned fee; the Court reasoned that in the context of the statute, the terms should be given their meaning in normal usage, which in this case is means less than the entirety or the whole. Id. at 9-10. Finally, the Court rejected the argument that Section 8(b) should not be interpreted as requiring the splitting of fees because it could lead to the “absurd result of permitting a provider to charge and keep the entirety of a $1,000 unearned fee, while imposing liability if the provider shares even a nickel of a $10 charge with someone else.” Id. at 13. The Court explained that “Congress may well have concluded that existing remedies, such as state-law fraud actions, were sufficient to deal with the problem of entirely fictitious fees, whereas legislative action was required to deal with the problems posed by kickbacks and fee splitting.” Id.


In addition to having implications for claims premised on allegations of unearned fees retained by a single provider, the Freeman decision may also affect another line of authority interpreting Section 8(b). Specifically, the circuits have split as to whether Section 8(b) applies in circumstances where a settlement services provider marks up the price of service provided by a third party, such as the price of a credit report, and retains the marked-up portion for itself, not having split this “unearned” portion with a third party. The Third, Second, and Eleventh Circuits have held that such unearned portion of the fees need not be split with a third party to violate Section 8(b); the Fourth, Seventh, and Eighth Circuits have held that Section 8(b) requires a culpable third party. Compare Kruse v. Wells Fargo Home Mortgage, Inc., 383 F.3d 49 (2d Cir. 2004); Santiago v. GMAC Mortgage Group, Inc., 417 F.3d 384 (3d Cir. 2005); and Sosa v. Chase Manhattan Mortgage Corp., 348 F3d 979 (11th Cir. 2003) with Boulware v. Crossland Mortgage Corp., 291 F.3d 261 (4th Cir. 2002); Krzalic v. Republic Title Co., 314 F.3d 875 (7th Cir. 2002); and Haug v. Bank of America, 317 F.3d 832 (8th Cir. 2003). The Court’s opinion suggests that there is no violation of Section 8(b) of RESPA unless that unearned portion of the fee is also split with a third party.