U.S. Supreme Court: Fee Split Required for RESPA Violation

Supreme Court Rules a Thirt-Party Fee Split Required for RESPA Violation

SCOTUS: A flat fee added to a percentage-based commission does not violate RESPA unless a portion of it is split with a third-party (providing no services for the fee) outside of the brokerage firm.

Supreme Court of the United StatesIn a case involving mortgage lending but with application and much welcomed news to real estate brokerages in Ohio and across the country, the Supreme Court of the United States has determined that a violation of §2607(b) of the Real Estate Settlement Procedures Act (“RESPA”) only occurs when a split of a settlement-service fee paid by a consumer to a real estate settlement-service provider is split with a third-party.

The Court affirmed the rulings of the lower court, resolving a split among federal circuit courts of appeal. Previously, some circuits had required a fee split with a third-party in order for there to be a §2607(b) violation, while others had followed the HUD policy statement and prohibited unearned fees, even when a settlement-service fee was not split with a third-party.

The Court rejected HUD’s policy statement and ruled that a §2607(b) violation requires the payment of a portion of a settlement-service fee by the party collecting the fee to a third-party who performed no services in exchange for the fee. Looking at the plain language of §2607(b), the Court found that this section—

 “unambiguously covers a settlement-service provider’s splitting a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.”

Further, the Court stated that the language used by Congress in drafting §2607(b) describes two separate exchanges, where one party receives a settlement fee and then pays a part of the fee to a third-party. Without such payment to a third-party, the Court determined that there is no violation of §2607(b).

The Court found the Consumer’s arguments unpersuasive:

  • First, the Court declined to defer to HUD’s RESPA policy statement because HUD’s interpretation was inconsistent with the plain language of the statute.
  • The Court also rejected the argument that the consumers were the ones making the prohibited payments when they paid settlement service providers unearned fees, as Congress could not have intended to make consumers potentially criminally liable when it banned both the payment and acceptance of certain types of payments.

NAR filed an amicus curiae brief, arguing that a violation of §2607(b) occurs only when a real estate settlement service provider pays a portion of a settlement service fee to a third party who performs no services in exchange for the fee.

Freeman v. Quicken Loans, Inc., No. 10-1042 (U.S. May 24, 2012).

What the Freeman decision means for real estate brokerages

Suits alleging a violation of Section 8(b) of RESPA have been brought against real estate brokerages that charge consumers a flat fee as well as a percentage-based commission. The first such suit, decided in 2009 in the case of Busby v. JRHBW Realty, Inc. d/b/a Realty South, sent shock waves through the brokerage community. In that case the court found that a fully disclosed administrative brokerage commission paid by a buyer violated Section 8(b) of RESPA because it was not sufficiently related to any specific service performed for the buyer’s benefit and could not be justified by the entire array of services provided to the buyer. The court found that a price increase violated RESPA merely because it was imposed as a flat fee added to a percentage-based commission as opposed to the brokerage simply charging a higher percentage-based commission. Even though the ruling defied logic and was contrary to the language of the statute, other cases alleging the same violation soon followed, with equally troubling results.

However, reason has prevailed. In light of the unanimous Supreme Court ruling, such fees do not violate Section 8(b) of RESPA unless the broker who is paid the fee splits it and pays a portion of it to a third person outside of the brokerage firm who provides no services in exchange for the fee.

Note, the decision has no impact on any state laws that prohibit charging an administrative fee. Likewise, the decision does not in any way alter RESPA’s prohibition against the payment by a broker of anything of value in return for the referral of business to the brokerage.

Link to Full NAR summary.

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