RESPA: Kicking Back RESPA

Thanks to the U.S. Court of Appeals, Seventh Circuit, your RESPA nightmares should be slightly less scary. The Seventh Circuit just issued an opinion in Echevarria v. Chicago Title and Trust Company. The case concerned add-on fees for settlement services. Chicago Title charged plaintiffs an additional fee of $14 for recording the plaintiffs' mortgage. Plaintiffs alleged that this fee constituted illegal fee splitting with the Cook County Recorder.

The subject of up-charging or add-on fees has recently become hot and sensitive. Many regulators have jumped to the conclusion that add-on fees are illegal kickbacks under RESPA. (We at Compliance Action have had a bit of difficulty figuring out who is kicking back to whom, but that question doesn't stop concerned regulators.) The Federal Reserve has cooly weighed in on the issue with the conclusion that, whatever else anyone might think these fees are, they are clearly finance charges under Regulation Z. An add-on fee is clearly a fee that a customer paying cash wouldn't have to pay.

In the case, the plaintiffs claimed that Chicago Title had split this fee with the Cook County Recorder by paying the recorder its fee and pocketing the overage. Chicago Title argued that to violate RESPA, the settlement service provider would have to give to or receive from a third party an unearned fee.

The language in question reads: "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?other than for services actually performed."

The defendant title company argued that to violate this prohibition, there must be an exchange of money with a third party, in this case the county recorder. Chicago Title did not exchange funds with the third party; it simply kept the additional money.

To make their case, the plaintiffs argued that the full $45 collected was the filing fee and that the defendant split this fee with the county recorder by paying the county recorder's fee and retaining a portion for itself.

In several previous cases, the court held that the settlement service provider did not split a fee with a third party because the third party had no involvement whatsoever with the unearned fees. In this case, the Cook County Recorder received its regular recording fees and did not give to or arrange for the title company to receive an unearned portion of those fees.

The Court concluded that there must be an exchange with a third party to violate RESPA. The court distinguished this fact situation from that of a previous case in which it found that one individual had acted in two capacities and thus met the third party requirement.

Plaintiffs also argued that the 1992 changes made by HUD to Regulation X had the effect of eliminating the need for the fee to be split with a third party in order to constitute an illegal kickback. The court, relying on a finding in an earlier case, Willis v. Quality Mortgage U.S.A., 5 F. Supp. 2d 1306, concluded that the regulatory paragraph in question must be read as a whole, not parsed so that some sentences stand alone. Thus, the unearned fee prohibited by the regulation must be split between two parties in order to constitute an illegal act.

HUD's stated purpose in making the 1992 revisions to Regulation X was to clarify the section. HUD did not claim to be expanding liability.

As a last ditch attempt, the plaintiffs argued that HUD's recent interpretive letters contain statements of HUD policy which support their case. The court, reading HUD's own regulation, pointed out that the regulation provides that opinion letters and information booklets do not constitute rules, regulations, or interpretations of the Secretary for purposes of RESPA.

Instead, the court reviewed the HUD interpretations that state that adding a fee to a third party fee violates Section 8 and concluded that this interpretation constitutes "expanding RESPA liability past the point authorized by Congress."

This case should not be seen as a green light for add-on fees. Rapid developments in that direction could easily generate new legislation or more official regulatory action from HUD. However, under the case, this kind of fee, while a finance charge, does not bring criminal liability upon the lender.

Perhaps the most significant aspect of this case is that it clearly holds that charging all customers an average fee (which in some cases might be more and others less than the actual fee) is not a violation of RESPA simply because sometimes the lender would end up with extra funds.

If you really like getting copies of cases, you can find Echevarria v. Chicago Title & Trust Company at: www.ca7.uscourts.gov. You might want to keep a copy in your RESPA file for the next examination.

ACTION STEPS
Review the fees identified on HUD-1s and HUD-1As. Compare the fees to the bills from the actual service providers.

If add-on fees are ever imposed, make sure they are being picked up in the finance charge and APR calculations.

Advise management that the most prudent course for fee income is to charge a single fee for settlement or loan processing.

Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 11, 9/01