This case in point discusses RESPA’s application to fee-splitting and unearned fees, as viewed through the recent case decision, Freeman v. Quicken Loans.

Facts: A homebuyer applied to a lender for a purchase assist mortgage. During negotiations, the homebuyer agreed to pay the lender additional “loan discount fees” to buy down the interest rate on the loan from the par rate. However, at closing the homebuyer did not receive a commensurate interest rate reduction in exchange for those fees. The loan discount fees were retained in their entirety by the lender, not being split with a third-party service provider.

Claim: The homebuyer sought money compensation from the lender for improperly charging unearned “discount fees,” claiming the lender violated the Real Estate Settlement Procedures Act (RESPA) since the lender provided no service in the form of a lower interest rate to the homebuyer in exchange for the fees.

Counter claim: The lender claimed it did not violate RESPA since the buy-down charges were not split with a third party, and were thus outside the scope of RESPA.

Holding: A United States court of appeals held the homebuyer borrowing purchase-assist funds from a lender had no recourse under RESPA against the lender for the failure of consideration when paying loan discount fees to buy down the interest rate since the lender did not violate RESPA’s “no-new-service, no-second-fee” rule, which applies only to fees split with another transaction provider. [Freeman et al. v. Quicken Loans, Inc. (5th Cir. 2012) 626 F3d 799]

An examination of RESPA

The Real Estate Settlement Procedures Act (RESPA) was passed in 1974 for the purpose of protecting consumers in real estate mortgage transactions. RESPA applies to lenders and mortgage loan brokers, and all other providers of federally-related loans. In practice, it prohibits a number of corrupt and deceptive business practices.

A federally-related loan is a loan:

  • funding a consumer purpose, not a business purpose; and
  • secured by a trust deed lien on one-to-four unit residential property or manufactured housing;


  • made by a lender who annually invests or originates loans retained in the lender’s portfolio totaling over $1,000,000;
  • made by a federally insured bank or thrift;
  • eligible for purchase in the secondary mortgage market by the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae); or
  • insured by the Federal Housing Administration (FHA) or the Veterans Administration (VA). [24 Code of Federal Regulations §3500.2(b)]

RESPA in practice

Among other things, RESPA bans the practice of splitting fees (also called kickbacks or referral fees). For example, the prohibition applies to a mortgage lender who pays a real estate agent or broker a fee for referring a borrower to the lender. Since the agent in this scenario contributes no additional services beyond the mere referral, his compensation by the lender is unjustified—an unearned fee.

Historically, such sharing of unearned fees was unlawfully practiced by lenders or loan brokers who paid a fee to brokers or agents who represented buyers in a home sales transaction and referred them to the lender for mortgage financing in expectation of a fee. Such practices corrupt real estate transactions by inflating borrower costs.

These unearned fees discourage competitive pricing and efficiency between businesses, produce undisclosed broker fees and ultimately raise a buyer’s loan costs charged by the lender. Further, they provide absolutely no additional tangible benefit to the buyer in the form of additional services rendered by the referring party.

Under RESPA, a lender must provide the following information to a buyer within three days after the lender’s receipt of the buyer’s loan application:

  • a Good Faith Estimate (GFE) of all loan related charges, such as settlement costs [24 Code of Federal Regulations §3500.7; see first tuesday Form 204-5]; and
  • a copy of the Department of Housing and Urban Development (HUD) published Special Information Booklet. [24 CFR §3500.6]

Upon the close of escrow, the escrow agent must provide the buyer and the lender with a HUD1 closing statement, also known as a settlement statement, detailing the actual loan related charges incurred by the buyer. Today, lenders make certain the HUD-1 complies with RESPA before they fund. [24 CFR §3500.10(b); see first tuesday Form 402]

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February 2011 Forms

HUD interpretation

When RESPA was enacted, authority was given to HUD to supervise and further develop its application to U.S. real estate transactions. HUD was to “prescribe such rules and regulations” and “to make such interpretations” of law necessary for the implementation of RESPA. However, this authority was transferred in 2011 to the Consumer Financial Protection Bureau (CFPB). [12 United States Code §2617(a)]

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The Real Estate Settlement and Procedures Act (RESPA)

RESPA states: “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 settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

Prior to the above Freeman case, HUD had interpreted this portion of RESPA as applying to any unearned fee, regardless of whether or not that fee was divided or retained by one person. Thus, 12 U.S.C. §2607(b) became known as the “no-new-service, no-second-fee” regulation in industry circles. Because of HUD’s consistent, long-term stance on RESPA, the Freeman ruling is significant as a change in law.

RESPA in the courts

This interpretation of the law was maintained by U.S. courts for decades. The Busby v. JRHBW Realty, Inc. (2009) holding supported HUD’s broad application of the regulation to duplicate charges by real estate brokers. In this case, no fee was shared with an inactive third party; the court simply held the brokerage’s demand for an administrative fee in addition to a percentage fee which implicitly included the services of broker administration violated RESPA’s “no-new-service, no-second-fee” regulation.

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However, a crack in the court’s support of HUD’s branding of RESPA as applying to all unearned fees appeared in Morales v. Countrywide Home Loans, Inc. (2008). In this case, a federal district court held RESPA did not apply to overcharging by a lender as long as the lender did not split any of the fees.

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Lender’s mark-up of service provider’s fees does not violate RESPA

The Freeman ruling threw HUD’s 2001 policy statement out of the window. The court addressed HUD’s stance and bluntly stated that HUD had overreached in its construal of the regulation. RESPA was not created with the intent to regulate pricing and curb overcharges. Rather, the court held the regulation exclusively applies to splitting unearned fees between multiple parties.

Of course, if the court’s narrow interpretation is given precedence over HUD’s prescription of RESPA as a blanket regulation against all unearned fees, the Freeman ruling is perfectly logical. Fighting against the court’s new stance on RESPA, the buyer in this case argued the lender still violated RESPA by charging, then “accepting” an unearned fee, the “portion” of which was 100%.

Unsurprisingly, the court found this reasoning to be strained. The reference to “making” and “accepting” a charge under the RESPA language indicates two distinct stages of the transaction, completed by two distinct entities. Additionally, “percentage” indicated a part of a whole; it did not refer to the whole itself. Thus, the facts of this case did not indicate a violation of RESPA.

Looking forward

Real estate brokers have taken for granted the protections of RESPA in real estate transactions. For many, RESPA was synonymous with fair pricing. It functioned as a shield for the buyer, preventing lenders from adding endless garbage fees unrelated to any actual service to an unprotected homebuyer’s bill. The shield of RESPA has been significantly trimmed by Freeman.

With the fear of RESPA-related litigation neutered, garbage fees in the form of duplicate charges, padded charges and artificially high interest rates may well return to real estate transactions with renewed ardor both by lenders and brokers.

More than anything, Freeman acts as a warning to buyers (and brokers, as agents of the buyer) to do their homework and make sure their buyers get what they pay for—in this case, a rate reduction in exchange for a discount fee to buy down the rate.

As a result, conscientious brokers must represent their buyers with heightened vigilance, being on the prowl for these unscrupulous fees and guarding their buyers against lenders who subtly insist on the payment of unearned fees.

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Los Angeles Times: Supreme Court decision could increase fess in real estate deals

Despite the paradigm-altering holding, the National Association of Realtors (NAR) does not seem to be particularly cut-up over the Freeman ruling. NAR’s commentary on the court holding celebrates brokerages’ reinstated ability to charge garbage fees, in addition to the standard 6% fee, giving them free-rein to profit as they did before.

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National Association of Realtors: Freeman v. Quicken Loans, Inc.: Supreme Court Rules Fee Split Required for RESPA Violation

A buyer’s broker has a fiduciary duty to his buyer-client. He must take steps to protect his client in transactions he negotiates which include financing, through counseling and providing readily available information and financial education. Transparency in financial transactions is imperative: in loan agreements and listing agreements, with the broker as the trusty advisor and gatekeeper to real estate.

While the CFPB and other government agencies remain intact as a refuge for consumers, brokers are on the front line where the losses occur. Thus, they are duty bound to champion the protection of their clients.

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When it comes to fees: charge only one and disclose it to your client

Readers beware! Lenders will again slip garbage fees into their loan agreements. So be prepared for the heat to rise in loan negotiations as lenders try to leech your clients with the payment of the unearned fees to pump up their profits, giving nothing additional in exchange. RESPA’s “no-new-service, no-second-fee” regulation may have been trimmed down to fee splitting referrals, but the GFE and HUD-1 the law requires are still kicking.

Encourage your buyers to submit loan applications to multiple lenders, then on receipt of the separate GFEs, scour them for hidden garbage fees and request they be eliminated as failing to represent a service not included in the basic loan fee the lender charges. An astute comparison between lenders’ GFEs will reveal which lender is offering the best terms and which estimates are bloated with unearned fees.

When you find unearned fees, ask the lender to justify the extraordinary additional work they did to earn them or waive them; if not, go with another lender. This backup application may very well be your buyer’s golden parachute, and at the same time keep the competition fair.

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