Supreme Court Grants Certiorari Petition in Freeman v. Quicken Loans, Inc.

October 19, 2011


On Tuesday, October 11, 2011, the U.S. Supreme Court granted certiorari in the case of Freeman v. Quicken Loans, Inc., No. 10-1042, which presents the Court with an opportunity to resolve a circuit split regarding "[w]hether Section 8(b) of RESPA [the Real Estate Settlement Procedures Act, 12 U.S.C. § 2607(b)] prohibits a real estate settlement services provider from charging an unearned fee only if the fee is divided between two or more parties." 2011 U.S. LEXIS 7384 (Oct. 11, 2011). The Freeman case involves plaintiffs who contend they were charged unearned fees at the closing of their mortgage transactions in violation of Section 8(b) of RESPA. Section 8(b) provides, "[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."

Four of the Freeman plaintiffs contend that their mortgage lender, Quicken Loans, charged them a loan discount fee without providing a corresponding interest rate reduction. Two other plaintiffs contend that Quicken Loans charged them a loan origination fee that was either duplicative of a loan processing fee, and therefore unearned, or was an unlawful discount fee like the one charged to the other plaintiffs. Plaintiffs alleged that the fees violated Section 8(b) of RESPA on the grounds that the fees were unearned because Quicken Loans did not perform any services in return for the fees. The Fifth Circuit affirmed the district court's summary judgment ruling in favor of Quicken Loans, holding 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 v. Quicken Loans, Inc., 626 F.3d 799, 802 (5th Cir. 2010).

In Freeman, the Fifth Circuit explained that the language "[n]o person shall give and no person shall accept" unambiguously requires a transaction between at least two parties and that the language "any portion, split or percentage" requires that "two parties share something." 626 F.3d at 803–804. The Fifth Circuit further noted that its interpretation is consistent with RESPA's purpose, which is, among other things, "the elimination of kickbacks or referral fees" but not necessarily "overcharges or unearned fees or other forms of price abuse." Id. at 804 (citing 12 U.S.C. § 2601(b)). 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 is contrary to 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, and the Second Circuit found no clarity in RESPA's purpose. Id. at 120, 123–124. The Second Circuit therefore found it appropriate to rely on the HUD statement opining that Section 8(b) applies to undivided fees.

Depending on the Supreme Court's reasoning, its forthcoming decision in Freeman v. Quicken Loans, Inc., could also affect another line of RESPA Section 8(b) cases that also turns on whether "unearned" fees must be split with a third party in order to constitute a violation. Specifically, the circuits are split about whether Section 8(b) applies in circumstances where the settlement services provider has marked up the price of service provided by a third party, such as the price of a credit report, and retained 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 portions 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 F.3d 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).

A decision in the Freeman case is expected next year.