More on Supreme Court's Recent RESPA Decision

We posted earlier about the Supreme Court's recent ruling in Freeman v. Quicken Loans. The decision held that a plaintiff seeking to enforce the Real Estate Settlement Procedures Act's ban on unearned settlement charges must show that the charge was split between two or more people. This new Washington Post article says the Supreme Court's ruling is important. Here's an excerpt:

In a decision that could have significant effects on the fees that consumers pay in real estate transactions, the U.S. Supreme Court has ruled that “unearned” fees charged by lenders and other service providers do not violate federal law as long as they are not split with anyone else. The court’s unanimous decision effectively reopens the door to controversial “administrative” fees levied by real estate brokers, and could encourage the marking-up of fees by mortgage lenders, settlement agents and others, a practice that had been banned by federal regulators for the past decade. The ruling also represents a stinging defeat for the Obama administration’s departments of Justice and Housing and Urban Development — both of which had argued that charging unearned fees is illegal — and may be a shot across the bow of the new Consumer Financial Protection Bureau, which has inherited the task of policing mortgage and settlement abuses from HUD. The decision ... involved customers of Quicken Loans, the online mortgage company, who alleged that Quicken charged them “discount” fees but did not provide them lower interest rates on their mortgages, as is customary. Each “point” in a loan discount fee is equal to 1 percent of the mortgage amount. The failure to provide a lower rate, the plaintiffs claimed, meant that Quicken pocketed their fees without providing anything commensurate in return, which is a violation of the federal Real Estate Settlement Procedures Act.

Comments

[Richard]

The issue is not one easily dismissed as the view of a corrupt court or as a nod to the real estate and finance industries that gouging is acceptable. For example, had Quicken Loans tagged the fee as an origination fee rather than a discount fee, there would have been no issue.

Missing from the entire case appears to be the matter of CONTRACTS or the failure to deal with that basic concept. No one would argue (well, no should argue) that two or more parties have the right to enter into a contract for services. The problem, that normally arises where there is a lay consumer and a financial professional, is DISCLOSURE - DOES THE CONSUMER UNDERSTAND WHAT SHE/HE IS SIGNING?

Again, there would appear to be no issue if the borrower is told that there will be a charge of $1,500 or whatever is agreed to, for the work to get the Borrowers the loan - origination, paperwork to borrower, placing the loan with the end owner, and the list of other services that are performed etc. The Borrower would be able to comparison shop as the amount would become part of the Annual Percentage Rate ("APR") OR would show as a separate charge, allowing the Borrower to determine if this Lender is charging more in fees and has a higher APR than another Lender.

Now we have a case that seems to state that any party in the transaction can charge anything it wishes, provided the fee is not shared (and to think we teach our kids to share). BUT THAT HAS ALWAYS BEEN THE SITUATION! Historically, the cases have turned on whether the Lender complied with all of the disclosure requirements for the fees that are charged. How has that changed? The decision was unanimous because no one did anything wrong, EXCEPT NOT EXPLAINING. Sure, that is the most difficult part of the loan closing process but that's the job.

There is an adage in legal circles that "BAD FACTS MAKE BAD LAW". That's where we are here. No green light was given to any entity to just charge away without the Borrower knowing what the fees are in the closing. The current HUD-1 if completed correctly and explained by the closing agent, sets out every fee charged. Could it be improved upon? YES and it is in rewrite through HUD and the CFPB.

In the meantime, while this Quicken Loan case is being interpreted, sliced and diced, and put to the test in other cases, nothing will change. So, my advice: IF YOU DON'T UNDERSTAND EVERYTHING IN ANY CONTRACT (the mortgage and note are each contracts) DO NOT SIGN!

Richard Isacoff
isacofflaw@msn.com

[Tom Henry]

The decision was unanimous because no one did anything wrong, except not explaining. So be aware.