Articles Posted in RESPA SECTION 8(b): UNEARNED FEES

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On April 13, 2012 the Consumer Financial Protection Bureau (CFPB) issued Bulletin 2012-03 titled “Service Providers”. The CFPB stated that it expects supervised banks and nonbanks to oversee their business relationships with their service providers in a manner that ensures compliance with Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm.

The term “Service Provider” is defined in Section 1002(26) of the Dodd-Frank Act as “Any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.” (12 U.S.C. Section 5481(26)). A “Service Provider” may or may not be affiliated with the person to which it provides services.”

The Consumer Financial Protection Bureau in its bulletin states that the CFPB “recognizes that the use of service providers is often an appropriate business decision for supervised banks and nonbanks. Supervised banks and nonbanks may outsource certain functions to service providers due to resource constraints, use service providers to develop and market additional products or services, or rely on expertise from service providers that would not otherwise be available without significant investment.”

The CFPB’s bulletin expresses concerns about the lack of liability by the lender to the consumer for third party behavior. “The mere fact that a supervised bank or nonbank enters into a business relationship with a service provider does not absolve the supervised bank or nonbank of responsibility of complying with Federal consumer financial law to avoid consumer harm. A “service provider” that is unfamiliar with the legal requirements applicable to the products or services being offered, or that does not make efforts to implement those requirements carefully and effectively, or that exhibits weak internal controls, can harm consumers and create potential liabilities for both the service provider and the entity with which it has a business relationship.” The Consumer Financial Protection Bureau states that “depending on the circumstances, legal responsibility may lie with the supervised bank or nonbank as well as with the supervised service provider.”

In short the CFPB now expects supervised banks and nonbanks to make sure the service providers comply with the law. The CFPB by issuance of this bulletin has effectively put the entire real estate industry on notice that if they want to do business in the future they had better make sure their internal controls are in place otherwise the supervised bank or nonbank will cease doing business with you.
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The Heather Q. Bolinger, et al v. First Multiple Listing Service, Inc., et al (Case 2:10-cv-00211-RWS) which is being litigated in the United States District Court for the Northern District of Georgia Gainesville Division survived the Defendant’s Motion to Dismiss the case on January 18, 2012.

The First Multiple Listing Service Inc. lawsuit contends the federal Real Estate Settlement Practices Act (“RESPA”) requires full disclosure of all fees and charges in real estate closings involving a federal mortgage loan. RESPA also prohibits unearned fees or kickbacks designed to encourage the referral of business by settlement service providers, such as First Multiple Listing Service (“FMLS”) and its member real estate brokers. One of the principal purposes of these RESPA provisions is to lower the cost of real estate closings to consumers by eliminating secret, disguised, and inflated charges.

The Bolinger et al. class action lawsuit alleges that:

1. Members of FMLS, which include virtually every residential real estate broker and agent in North Georgia, are required to list with FMLS all properties for sale and to pay undisclosed, unearned transaction fees to FMLS after closing and all services are rendered. Consumers either pay these fees directly or through inflated commissions.

2. Real Estate Brokers receive a kickback of all or substantially all of those fees from FMLS, and share in transaction fees paid on other closings. The suit further contends that these unearned hidden settlement fees and kickbacks are funded by real estate commissions paid by consumers. The hidden transaction settlement fee is $1.20 per thousand dollars of the selling price (i.e., .0012% of the sales price), and is doubled if the listing and selling agents work for different real estate brokers.

For example, the sale of a house for $200,000 with different listing and selling real estate agents would result in an undisclosed hidden transaction settlement fee of $480. In most transactions, the hidden settlement fee is not disclosed to the buyer or seller, either in the voluminous documents executed at closing or otherwise, and the kickbacks are never disclosed.

3. In addition to violating RESPA, these practices violate the Sherman Act, which is the core federal antitrust law. Notably, the “MLS Antitrust Compliance Policy” of the National Association of REALTORS® expressly prohibits basing MLS fees on a percentage of the sales price rather than the value of the services rendered [download NAR policy here]. Yet investigation for the lawsuit found not only that, as alleged, FMLS charges a per-transaction fee based on the sales price, and pays a kickback to brokers for utilizing its services, but that FMLS may be the only MLS in the country to do so. Further, the fees associated with FMLS are alleged to be higher than those charged by MLS’s elsewhere in Georgia and around the country.

Taylor English Duma LLP, a law firm with offices in Atlanta and Savannah, Pope, McGlamry, Kilpatrick, Morrison & Norwood, LLP, a Georgia law firm with offices in Atlanta and Columbus, and the New Orleans based Sterbcow Law Group LLC have filed a lawsuit on behalf of buyers and sellers of residential real estate in metro Atlanta and North Georgia against First Multiple Listing Service, Inc. (“FMLS”), its member real estate brokers, the agents who handled the transactions of the named plaintiffs, and three boards of REALTORS®, alleging a longstanding practice of FMLS and its members in charging buyers and sellers unearned hidden transaction fees in connection with residential real estate closings in violation of federal and state law. FMLS is a multiple listing service (“MLS”) that provides an electronic database for listing residential real estate for sale. It is the largest MLS in metro Atlanta and North Georgia.

For more information please visit the FMLS CLASS ACTION WEBSITE.
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H.R. 2446 known as the “RESPA Home Warranty Clarification Act of 2011” passed The Insurance, Housing, and Community Opportunity Subcommittee last week. US Congresswoman Judy Biggert sponsored the bill and is the Chairman of the subcommittee. The RESPA Home Warranty Clarification Act as currently written by Rep. Biggert seeks to clarify the scope of RESPA by exempting home warranty companies as settlement service providers and would require that consumers are given clear notice that their real estate agent could receive a referral fee for selling them a home warranty. According to Rep. Biggert, Home warranties should not be subjected to these RESPA regulations because the sale of home warranties is outside the scope of RESPA.

Rep. Biggert seeks to overturn the Department of Housing and Urban Development’s Interpretive Rule which stated that a “homeowner’s warranty is covered as a “settlement service” under HUD’s RESPA regulations at 24 CFR 3500.2 it issued on June 25, 2010.
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The Consumer Financial Protection Bureau “CFPB” announced plans today to implement an early warning enforcement action plan (“the Early Warning Notice“) which would allow those under investigation the ability to respond to the CFPB. The CFPB Bulletin 2011-04 (Enforcement) announced the first in a series of periodic bulletins the CFPB will release which are aimed at providing information about the policies and priorities of the CFBP’s Bureau of Enforcement.

“Before the Office of Enforcement recommends that the Bureau commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject’s potential violations and may offer the subject the opportunity to submit a written statement in response. The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.”

It is important to note that if the subject(s) of an investigation is asked to provide the Bureau of Enforcement a response statement and the subject prepares and submits the response statement under oath to the Bureau the response may be discoverable by third parties.

The Early Warning Notice also allows any person involved in an investigation to voluntarily submit a written statement at any point during an investigation.
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The United States Supreme Court announced that it would finally resolve the issue of whether the Real Estate Settlement Procedures Act (“RESPA”) under Section 8(B) prohibits one settlement service provider from charging consumers a fee for settlement service work the provider did not perform or whether an unearned fee must be split by two or more providers in order for the service fee to be deemed illegal.

Section 8(B) of RESPA states:

“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.” 12 U.S.C. 2607(b)

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Daniel Fisher of Forbes Magazine wrote an article today titled ” “Sleeper” Case Asks Whether Plaintiffs Can Sue Without An Injury.” Mr. Fisher’s article highlights the Edwards v. First American case and discusses the positive impact a Supreme Court’s ruling would have for corporations facing civil and class action lawsuits from consumers who might have a hard time showing actual injury in fact damages.

The Edwards case stems from a real estate settlement procedures act (RESPA) class action where the Edwards’ were required to purchase a title insurance policy from First American. First American’s actions allegedly violated Section 8(c)(2) of RESPA where the federal rules state that affiliated businesses can’t require that borrowers use their affiliated businesses and the civil penalty for violating this rule is treble damages on all fees paid to First American plus attorney’s fees.

The US Supreme Court is looking at standing to sue under Article 3 of the US Constitution in the Edwards case. “First American argues Edward suffered no harm and therefore has no standing to sue under Article III of the Constitution. Under Article III federal courts are limited to hearing “cases” or “controversies” and the Supreme Court has since decided that means somebody who has suffered actual harm or is in imminent danger of it.“

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Reporter Avi Salzman with Barron’s is reporting that Bank of America may file for bankruptcy protection for it’s Countrywide subsidiary if litigation costs from Countrywide threaten Bank of America. Bank of America is the parent company of Countrywide but it is a separate legal entity. If Bank of America (NYSE: BAC) decides to declare bankruptcy it would only affect the Countrywide division not the entire company.

If Bank of America does file for bankruptcy protection for Countrywide it could have a material impact on on-going litigation involving RESPA, TILA, and other legal actions across the United States involving Countrywide. The purchase by Bank of America is widely viewed as one of the worst acquisition decisions in corporate American history.

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Prospect Mortgage reached a settlement today with the U.S. Department of Housing and Urban Development (HUD) over Prospect’s use of the Series Limited Liability Company “aka Series LLC” joint venture business model. The terms of the settlement are not yet available but we will update the Respa Lawyer Blog as soon as HUD releases that information.

This is the second major settlement enforcement action in the last two days by HUD’s RESPA division which moves over to the Consumer Financial Protection Bureau on July 21, 2011. It is highly possible that other settlement actions may be announced by HUD prior to the July 21, 2011 due to stronger monetary penalties under the CFPB.

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The United States Department of Housing and Urban Development “HUD” announced a settlement with Fidelity National Financial (NYSE: FNF) in the amount of $4.5 million dollars for HUD’s contention that Fidelity violated the Real Estate Settlement Procedures Act “RESPA” when it paid real estate brokers and other settlement service providers illegal kickbacks and improper referral fees for referring business through an “Application Service Provider Agreement.” The Application Service Provider Agreement provided real estate brokers and other settlement service providers with access to Fidelity’s TransactionPoint closing software. TransactionPoint allowed real estate brokers and others to select real estate settlement service providers for a particular real estate transaction. The real estate brokerages would then enter into Sub-License Agreements with subsidiaries of Fidelity to enable Fidelity’s subsidiaries to be listed in TransactionPoint as a provider of settlement services.

The settlement said Fidelity’s subsidiaries would then in turn compensate the real estate brokerages a fee for each referral of real estate. Re-insider.com was the first to break this story and has extensive coverage on the topic for those who wish to learn more. It is important to note that HUD’s Settlement Agreement only applies to Fidelity and not to the real estate brokerages who recieved the kickbacks and illegal referrals fees so it is possible that more settlements will be announced as it pertains to those companies who recieved the kickbacks and improper referral fees.

The settlement can be viewed by clicking this link: FIDELITY SECTION 8 RESPA SETTLEMENT

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The United States Supreme Court granted First American Financial Corporation’s Writ of Certiorari it filed in the Denise P. Edwards et al. v. First American Financial Corporation, et al. RESPA class action lawsuit today (June 20, 2011). The Supreme Court will now decide whether a plaintiff has standing to sue, on behalf of a nationwide class, when a plaintiff asserts that a real estate company violated the Real Estate Settlement Procedures Act of 1974 (RESPA) without showing the RESPA violation affected the services rendered.

The Edwards lawsuit accuses First American and others of operating an illegal kickback scheme which violated Section 8 of RESPA. The Supreme Court decision will focus strictly on Question 2 presented in the Writ of Certiorari. The issue presented in Question 2 is whether the a privte purchaser of real estate has standing to sue under Article III, Sec. 2 of the United States Constitution.

The case is First American Financial v. Edwards, 10-708.
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