Supreme Court allows lenders to collect ‘unearned’ fees

June 1, 2012

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, handed down May 24, 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 (RESPA).

Quicken denied the borrowers’ allegations and argued that in any event, the settlement procedures law, first enacted in 1974 to control widespread kickbacks paid by title insurance companies to realty agents and others, does not apply to situations where there is no split of the fees involved. Quicken’s borrowers maintained that the law does apply and cited a policy statement issued by HUD prohibiting imposition of fees where no actual work or service is provided to justify them.

Disputes over real estate and lending fees have led to a lengthy series of court battles in recent years, with some federal district and appellate courts siding with industry interpretations of the law and others siding with federal regulators and consumers. The Supreme Court accepted the Quicken case in part to resolve the differences among the judicial circuits so there would be a uniform legal standard on fees nationwide. The court’s ruling does not, however, affect state laws that prohibit certain fees or practices, including unearned settlement or mortgage charges.

Although the Quicken case centered on a lender’s fees, realty brokerage charges have also come under attack using HUD’s regulatory interpretation of the law. In a major federal case decided in Birmingham, Ala., in 2009, a court ruled that a realty firm’s add-on fees violated the law. In that case, a $149 extra fee was imposed by RealtySouth, a subsidiary of HomeServices of America, one of the largest brokerages in the country. Fees charged by other realty firms have been much higher — $250 or more in some cases.

Critics within the industry, such as Frank LLosa, a lawyer and broker in Northern Virginia, called such fees “bogus” and “designed to confuse the customer and ultimately charge them more.” Defenders such as Laurie Janik, general counsel of the National Association of Realtors, said brokers “ought to be able to charge what they need to make a profit” in an environment of rising expenses and higher commission payouts to top agents.

After the RealtySouth ruling, Janik urged brokers to disclose the extra fees as integral parts of their compensation schedules: a percentage commission — say, 6 percent — plus a set fee, perhaps $500.

Janik also argued that federal law does not prohibit fees that are not split with other parties and that RESPA was never intended to be a price-control statute — two views that were at the core of the Supreme Court’s decision in the Quicken case.

Where does this leave the issue? Will lenders, settlement agents and realty companies start collecting extra fees for themselves, emboldened by the high court’s decision? Possibly. But legal experts warn that there could be pitfalls ahead for firms that tack on outrageous charges when no services are rendered.

Laurence Platt, a banking attorney with the Washington office of K&L Gates, cautions that the Consumer Financial Protection Bureau “has its own independent ability to declare practices unfair, deceptive or abusive,” and could still come after companies that, in the bureau’s view, are gouging the public.

Ken Harney’s e-mail address is kenharney@earthlink.net.

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