Resolving The Split On Split Fees Under RESPA: 'Freeman v. Quicken' Loans Holds That Fee-Splitting Is Prohibited Only If The Fee Actually Is Split

The authors discuss a recent decision by the U.S. Supreme Court that resolves a circuit split as to whether Section 8(b) of the Real Estate Settlement Procedures Act prohibits undivided unearned fees—but point out that there is a related circuit split that the Court's decision did not explicitly address.

The Supreme Court of the United States recently issued a unanimous decision in Freeman v. Quicken Loans, Inc., No. 10-1042, 566 U.S. — (2012), resolving a split between the Second and Fifth Circuit Courts of Appeals as to whether Section 8(b) of the Real Estate Settlement Procedures Act ("RESPA") prohibits a settlement-service provider from charging a borrower an "unearned" fee, i.e., a fee for which the settlement-service provider in fact provides no service to the borrower. The Court held that such unearned fees are not prohibited by the statute; rather, Section 8(b) is violated only where a provider splits a portion of a settlement-service fee with one or more third parties.

Section 8(b) of RESPA states that "[n]o 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."1The plaintiffs in Freeman alleged that Quicken Loans ("Quicken") had violated this provision by charging them various "loan discount," "loan processing" or "loan origination" fees without providing any services in return for the fees. According to the plaintiffs, by charging these unearned fees, Quicken had "accepted" a "portion" or "percentage" (specifically, the entire "portion" or "percentage") of a "charge" made to the plaintiffs "other than for services actually performed," thus violating Section 8(b), even though no "portion, split, or percentage" of the charge ever was shared with a third party.

The interpretation urged by the Freeman plaintiffs was not without support. A policy statement issued by the Department of Housing and Urban Development ("HUD") in 2001 interpreted Section 8(b) to prohibit a settlement-service provider from charging such an unearned (but unshared) fee. Moreover, the Second Circuit had considered this interpretation in Cohen v. JP Morgan Chase & Co.,2and concluded that the phrase "any portion, split, or percentage" in Section 8(b) was ambiguous and could "plausibly be construed" to prohibit "all unearned fees, however structured."3Thus, the Second Circuit deferred to HUD's policy...