Supreme Court’s Freeman v. Quicken Loans Decision

In last month’s landmark Freeman v. Quicken Loans, Inc., No. 10-1042, 566 U.S. --- (2012) opinion, a unanimous United States Supreme Court ruled that establishing a “wrongful settlement service charge under” Real Estate Settlement Procedures Act, 12 U.S.C. §2607 (“RESPA”) required demonstrating that a charge was divided between two or more persons.

Beyond holding that RESPA excludes a single provider’s alleged “unearned fee retention”, the Freeman v. Quicken Loans, Inc. opinion is being heralded as a powerful tool for limiting regulatory discretion and overreach.

Background on RESPA

Enacted in 1974, RESPA regulates “any service provided in connection with a real estate settlement” such as “title searches, . . . title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, . . . services rendered by a real estate agent or broker, the origination of a federally related mortgage loan . . . , and the handling of the processing, and closing or settlement.” 12 U.S.C. §2602(3).

Among RESPA’s consumer-protection provisions is §2607, which furthers Congress’s stated goal of “eliminat[ing] . . . kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.” §2601(b)(2).

Specifically, §2607(a) of RESPA provides:
“No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

Further, §2607(b) adds:
“No 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.”

Any person who violates §2607 is liable to consumers for attorneys fees and damages including three (3) times the prohibited settlement service charges. §2607(d)(2).

Although initially authorizing the Department of Housing and Urban Development (“HUD”) to “prescribe rule and regulations” and “make such interpretations necessary to achieve RESPA’s purpose, on July 21, 2011, Congress transferred these functions to the newly formed Bureau of Consumer Financial Protection (“CFP”).

Freeman v. Quicken Loans, Inc. Background

After obtaining mortgage loans from Quicken Loans, Inc. (“Quicken”), the Freeman v. Quicken Loans, Inc. plaintiffs claimed that despite being charged respective loan “discount”, “processing” and “origination” fees, Quicken’s failed to provide a lower interest rate violating §2607(b)’s prohibition on fees for which no services were provided.

The United States Court of Appeals for the Fifth Circuit affirmed the trial court’s RESPA claim dismissal on summary judgment holding that because the allegedly unearned fees were not split with another party, no §2607 violation occurred.

Freeman v. Quicken Loans, Inc. Opinion

In a unanimous decision, the Supreme Court affirmed the Fifth Circuit’s ruling that §2607(b) encompasses only a settlement-service provider’s splitting of a fee with other persons and excludes a single provider’s “unearned fee retention”.

Interestingly, and in direct contravention of the CFB’s “friend of the court brief”, the United States Supreme Court held that although RESPA’s general purpose is protecting consumers from “certain abusive practices,” RESPA provides no basis for expanding §2607(b)’s prohibition beyond that to which it is unambiguously limited.

Freeman v. Quicken Loans, Inc. Opinion’s Impact

Writing for the Court, Justice Antonin Scalia declared that HUD’s RESPA interpretation was “manifestly inconsistent with the statute HUD purported to construe” and the statute’s express language “clearly describes two distinct exchanges” not an exchange of fees of a company to itself.

Stated another way, all nine (9) justice came together to limit regulators from poaching legislator’s authority and gave the newly CFB its first judicial “time out”.

In many circles, the Freeman v. Quicken Loans, Inc. opinion is being heralded as a powerful tool for limiting regulatory discretion and overreach.

For example, to accuse financial institutions of discrimination under the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act, the Department of Justice has been using a “disparate impact analysis”, i.e., a statistical analysis which ignores the purported wrongdoer’s intent.

However, because neither statute’s express language supports “disparate impact analysis” use, the Freeman opinion suggests the entire Supreme Court is inclined to curb this type of overreaching.

Consumer Financial Protection Bureau’s 1st 6 Months

Six months have elapsed since the Consumer Financial Protection Bureau’s (“Bureau”) July 21, 2011 launch, during which “consumer financial protection” was consolidated from 7 federal agencies into the Bureau charged with protecting consumers and increasing financial transactions’ transparency.

Following a controversial director appointment, the Bureau implemented a federal “nonbank,” supervision program for mortgage companies, payday lenders, and private education lenders, released a “Supervision and Examination Manual” of banks, thrifts, and credit unions with assets exceeding $10 billion, and launched an interactive website and a Facebook page.

Bureau’s Creation and Powers
Created by Title X of the Consumer Financial Protection Act of 2010 (“Dodd-Frank Act”), the Bureau is an independent agency under the Federal Reserve System charged with protecting consumers and increasing financial transactions’ transparency.

The Dodd-Frank Act provides the Bureau with broad regulatory and rulemaking authority under numerous existing federal consumer protection laws along with the power to enact new regulations and take enforcement and supervisory actions regarding consumer financial products and the entities that deal in them, i.e., banks, financial institutions, mortgage companies, payday lenders, and private education lenders.

The Bureau embodies the consolidation of “consumer financial protection’s” from 7 federal agencies into 1 agency comprised of 6 divisions: Consumer Education and Engagement; Supervision, Enforcement, Fair Lending, and Equal Opportunity; Research, Markets, and Regulations; General Counsel; External Affairs; and Chief Operating Officer.

The Bureau regulates "consumer financial products and services" encompassing:
•extending credit and servicing loans, including mortgages;
•extending or brokering leases of personal or real property;
•providing real estate settlement services;
•engaging in deposit-taking activities;
•transmitting or exchanging funds;
•acting as a custodian of funds or any financial instrument for use by or on behalf of a customer;
•selling, providing, or issuing stored value or payment instruments;
•check cashing, check collection, or check guaranty services;
•providing payments or other financial data processing products or services;
•collecting, analyzing, maintaining, or providing consumer report information or other account information; and
•collecting debt, including foreclosing on property.

“Bureau Director” Appointed
Although it appeared that Harvard Professor Elizabeth Warren, the Bureau’s purported “architect”, would be appointed, “polarization” issues caused President Obama to nominate Richard Cordray as the Bureau’s initial director.

As Ohio’s former Attorney General, Cordray pursued claims against the consumer financial services industry including “unfair or deceptive acts or practices law” violation actions against mortgage servicers.

After 44 Republican senators indicated that they would not approve any nomination until the Dodd-Frank Act was modified to dilute the Bureau and its director’s powers, and the Senate voted down the nomination in December 2011, President Obama seated Cordray as the Bureau’s director using his executive authority.

Director Corday’s first official act was implementing a federal non-depository, or “nonbank” supervision program, defined as any company providing “consumer financial products or services but does not have a bank, thrift, or credit union charter”.

Under the new program, the Bureau will oversee nonbank business in particular markets including regulating mortgage companies, payday lenders, and private education lenders.

Additionally, the Bureau may supervise “larger participants” in the “consumer financial services industry” including debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit, and money transmitting.

Bureau issues “Supervision and Examination Manual 1.0” and Launches Web Page

In October 2011, the Bureau released version 1.0 of its Supervision and Examination Manual (“Manual”), a guide to its supervision of banks, thrifts, and credit unions with assets exceeding $10 billion and tool for examining consumer products and services providers other than depository institutions.

The Manual incorporates Federal Financial Institutions Examination Council developed procedures (including its Uniform Interagency Consumer Compliance Rating System) and provides “mortgage servicing industry” “examination procedures”.

The Bureau also launched a colorful, interactive and user friendly website (www.consumerfinance.gov) and Facebook page, which has about 13,000 “likes.”

“Attorney Client Privilege” Waiver
Although federal law provides that a federally chartered institution furnishing attorney-client privileged materials to a “Federal banking agency” during an examination does not waive the privilege, the Bureau is not a statutorily defined “Federal banking agency”. 12 U.S.C. §1828(x)(1).

Rather than skip receiving privileged materials or adding itself to the “Federal banking agency’s” definition, the Bureau concluded that it is a “Federal banking agency” arguing that because it inherited supervisory authority from the other federal banking regulators, it also inherited access to privileged materials and the attorney client privilege protection.

Unfortunately because the Bureau only inherited partial supervisory authority from the federal banking agencies, the privilege may not apply to the banks’ production and rendering the produced information vulnerable to discovery in litigation or a Freedom of Information Act request.

PA Upholds Taxing Principal and Interest Discharged in Foreclosure

Mortgage lenders have a new friend, Pennsylvania’s Department of Revenue.

In last month’s Marshall v. Commonwealth, --- A.3d ---, 2012 WL 8704 (Pa. Cmwlth. 2012) opinion, the Commonwealth Court ruled that principal and unpaid interest discharged in a property’s foreclosure is subject to Pennsylvania’s personal income tax (“PIT”).

Pennsylvania’s PIT taxes each dollar of income at 3.07% for both residents (applying to all income received in a taxable year) and nonresidents (applying only to income from sources within the Commonwealth).

The Marshall dispute stemmed from the Department requiring a nonresident and limited partnership investor to pay PIT on his share of $2.6 billion of accrued and unpaid interest that was discharged in the foreclosure of the partnership’s apartment building.

The partnership had financed $308 million of the building’s purchase price with a “nonrecourse purchase money mortgage note”, the only remedy for nonpayment of which was foreclosure.

After determining that his distributive share of the $2.6 billion of unpaid interest was $3.9 million and that the partnership used $121.6 million to offset income that would have been subject to PIT, the Department assessed plaintiff $165,000.

In upholding the assessment, the Commonwealth Court cited the CIR v. Tufts, 461 U.S. 300 (1983) holding that when a lender forecloses on property securing a nonrecourse loan, the full amount of the nonrecourse obligation is subject to federal income tax.

Beyond spanking an out-of-state tax scofflaw, the Marshall v. Commonwealth ruling imposes consequences on commercial real estate investors skipping out on loans.

Because unpaid accrued interest is now deemed a gain following the taxable event of a foreclosure, an incentive exists for commercial borrowers not to default upon mortgage loans.

Further, because the Marshall v. Commonwealth ruling reaches through a partnership and across to state lines to assess a Texas investor’s gain, shifty investments hiding behind the shell of a fishy partnership will now enjoy less protection.