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.