U.S. Second Circuit Court Of Appeals Defers To HUD That Mark-Ups May Violate RESPA § 8(b)

September 14, 2004

In a decision that conflicts with the views of the Fourth, Seventh and Eighth Circuit Courts of Appeal, the U.S. Court of Appeals for the Second Circuit has concluded that HUD’s view, as expressed in Policy Statement 2001-1, 66 Fed. Reg. 53,052 (Oct. 18, 2001), that RESPA § 8(b) applies to mark-ups of third party charges should be given deference. Kruse v. Wells Fargo Home Mtge, Inc. (No. 03-7665, 2nd Cir. Sept. 10, 2004).

The decision, however, is less than a complete victory for HUD or those who have advocated that any mark-up of third party charges should be deemed a violation of § 8(b), which prohibits any person from receiving or accepting any portion, split or percentage of a settlement service charge other than for services rendered. The court also made clear that, contrary to the views HUD expressed in the 2001-1 Policy Statement, § 8(b) does not apply to purported “overcharges” by a settlement service provider for its own services.

The case involved a nationwide class action brought on behalf of consumers who had obtained mortgage loans from Wells Fargo dating back to 1995. The plaintiffs alleged that Wells Fargo had violated RESPA and state unjust enrichment laws by (a) overcharging them for certain services rendered by Wells Fargo (i.e., for underwriting the mortgage loans through Fannie Mae and Freddie Mac underwriting services), and (b) marking up the charges of third parties for tax services, flood certifications, and document preparation without providing additional services.

The district court, relying on the decisions of the Fourth, Seventh, and Eighth Circuits, had dismissed the complaints on the grounds that RESPA § 8(b) did not apply to overcharges or mark-ups. In the first part of its opinion, the appellate court agreed that the text of § 8(b) could not “bear” the interpretation HUD had reached in Policy Statement 2001-1 that § 8(b) prohibited unreasonable charges by a settlement service provider for its own services. Noting that in RESPA Congress had not given the courts ”so much as a hint as to how to differentiate between what is and what is not ‘unreasonable,’” the court concluded “there is nothing in the language of section 8(b) to suggest that Congress meant for us to create such a regulatory regime out of whole cloth.”

With regard to the application of §8(b) to mark-ups of third party charges, the court took a different approach. On that issue, the court found that, despite the conclusions of the three other circuits, the language of § 8(b) was ambiguous as to whether an unearned mark-up was prohibited and, in light of that ambiguity, relevant Supreme Court decisions dictated that the courts should defer to HUD’s reasonable determination filling in the gap created by such ambiguity. The Second Circuit concluded that even though Policy Statement 2001-1 was not issued after a notice-and-comment rulemaking, the Policy Statement was a document “of sufficient gravity to be worthy of deference” and reflected the agency’s intent to utilize its Congressionally-delegated authority to promulgate rules that would have the binding effect of law.

However, it is not yet clear whether Wells Fargo may have violated § 8(b) because the court remanded the case back to the district court to determine whether Wells Fargo performed services in connection with the tax services, flood certifications and document preparation charges provided by third parties.

The Bottom Line
The Second Circuit’s decision on the mark-up issue represents the second time a circuit court has concluded that RESPA §8(b) applies to mark ups. (In 2003, the Eleventh Circuit, in Sosa v. Chase Manhattan Corp., 348 F.3d 979 (11th Cir. 2003), had reached a similar conclusion.) The fact that two circuits have reached this conclusion, while three others have reached a different interpretation of 8(b), suggests that there may be some prospect that the Supreme Court will resolve the differences of views among the circuit courts on this issue. On the other hand, the Second Circuit’s decision adds to the unanimous view of all the courts that have addressed the issue that RESPA § 8(b) does not apply to a charge by a settlement services provider for its own services -- no matter how unreasonable that charge may appear to be.

While the Second Circuit remanded the case to the district court to determine whether Wells Fargo rendered any additional services in connection with the tax services, flood certifications, and document preparation, it did not address whether there would still be a § 8(b) violation if the amount of the mark-up exceeded the reasonable value of the additional services that may have been rendered by Wells Fargo.

Contact ALTA at 202-296-3671 or communications@alta.org.

North American Title Insurance Company (NATIC) is a seasoned title insurance underwriter, helping title agents to achieve their individual business goals for more than 50 years. Today, the company conducts real estate settlement services in 39 states and the District of Columbia through a network of experienced, independent agents.