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In a decision that could have significant impacts 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 practice of “marking up” of fees by mortgage lenders, settlement agents and others 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 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 loan discount fee, or “point,” 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.