Real Estate Settlement Procedures Act (RESPA)

Purpose
To “effect certain changes in the settlement process for residential real estate that will result: 1) in more effective advance disclosure to home buyers and sellers of settlement costs; 2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services; 3) in a reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance; and 4) in significant reform and modernization of local recordkeeping of land title information.” 12 U.S.C. § 2601(b).

Sources of Law
• 12 U.S.C. § 2601, et seq.
• HUD Regulation X (24 C.F.R. § 3500, et seq.)

Coverage
RESPA covers all federally related mortgages, including loans (both purchase-money mortgages and others) secured by the family home. 12 U.S.C. § 2602(1); 24 C.F.R. § 3500.2.

Prohibition Against Kickbacks and Referral Fees

12 U.S.C. §2607(a); 24 C.F.R. § 3500.14(b). RESPA prohibits the giving or receiving of any fee, kickback or other thing of value for the referral of a “settlement service” (defined at 12 U.S.C. § 2602(3) and 24 C.F.R. § 3500.2).
One court has stated that, in order to state a claim alleging a violation of this section, one must demonstrate: 1) an agreement between the parties to refer settlement service business, 2) the transfer of a thing of value, and 3) the referral of settlement service business. Shah v. Chicago Title and Trust Co., 102 Ill. App. 3d 787, 789; 430 N.E.2d 342, 344 (1st Dist. 1981). “An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct.” 24 C.F.R. § 3500.14(e).

Yield-spread premiums: A yield spread premium is a fee paid by a mortgage lender to a mortgage broker for arranging a loan with an interest rate at a higher amount than the par rate. Payment of a yield spread premium is not a per se violation of this section, but may be illegal under RESPA based on a factual inquiry into the circumstances surrounding the payment. Vargas v. Universal Mortgage Corp., 2001 U.S. Dist. LEXIS 6696, 6 (N. Dist. Ill. 2001); Culpepper v. Inland Mortgage Corp., 132 F.3d 692 (11th Cir. 1998).

HUD (the agency charged with interpretative, investigative and enforcement powers under RESPA) recommends a two-step inquiry to determine whether a yield spread premium is illegal. First, one determines whether the payment of the yield spread premium was for services actually performed; if it is not, then the payment is an illegal kickback. If the payment was for services actually performed, then one looks at whether the total compensation paid to the broker reasonably related to the value of the services; if the compensation does not reasonably relate to the value of the services, the payment is a violation of this section. 64 Fed. Reg. 10080 (1999).

Recently, the Illinois Appellate Court fashioned a five-part pleading standard for alleging a YSP-based violation of RESPA, based on Shah’s three-part test and on HUD statements: "(1) the existence of an agreement between the lender and broker whereby the broker promises to refer settlement service business to the lender; (2) the transfer of a thing of value between the lender and broker based upon that agreement; (3) the referral of settlement service business by the broker to the lender (see Shah at 789), and either that (4) the broker received a YSP without providing any goods or services of the kind typically associated with a mortgage transaction or (5) if the broker did provide such goods or services, the total compensation paid to the broker was not reasonably related to the total value of the goods or services actually provided." Johnson v. Matrix Financial, 820 N.E.2d 1094, 1103-04 (Ill. App. Ct. 2004). As part of pleading (4) or (5), a borrower must plead what services were offered, the reasonable value of those services, and the fact that total broker compensation exceeded that value. Also, a borrower alleging a YSP-based violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, or a YSP-based breach of fiduciary duty, can only do so by (also) meeting the RESPA pleading standard.

Prohibition Against Unearned Fees and Fee Splitting

12 U.S.C. §2607(b); 24 C.F.R. §3500.14(c). RESPA prohibits the giving or receiving of “any portion, split or percentage of any charge made or received for the rendering of a settlement services in connection with a transaction involving a federally related mortgage loan other than for services performed.” The regulations further state that, “A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section.”

Recently, the Seventh Circuit issued a decision holding that a fee for which no service was performed does not violate section 2607(b) unless the unearned fee is shared with a third party. Echevarria v. Chicago Title & Trust Co., 256 F. 3d 623 (7th Cir. 2001). However, following the Echevarria decision, HUD issued a policy statement clarifying its interpretation of Section 2607(b) in which it stated, “HUD believes that Section 8(b) [12 U.S.C. § 2607(b)] of the statute and the legislative history make clear that no person is allowed to receive any portion of charges for settlement services, except for services actually performed.” 66 Fed. Reg. 53052, 53058.

Remedies

There is a private right of action for violation of § 2607 (Illegal referral fee or kickback and fee splitting). Statutory damages: person charged for the settlement service can recover an amount equal to “three times the amount of any charge paid for such settlement service,” plus attorney’s fees and costs. 12 U.S.C. § 2607(d).

Practice Tip: The bottom line is that any payment by the lender to the broker is illegal if it is not for the reasonable value of services actually performed. So if you see a high up-front broker’s fee plus a yield-spread premium or other broker fee paid by the lender, there’s a good chance the lender-paid is fee is “unearned gravy” and constitutes a violation.

There is a private right of action for violation of § 2605 (Servicing requirements and administration of escrow accounts). Actual damages for each failure to comply, additional damages for a pattern and practice of noncompliance, plus attorney’s fees and costs. 12 U.S.C. § 2605(f).

Statute of Limitations

• 1 year for affirmative (kickback and fee-splitting) claims. 12 U.S.C. § 2614;
• Unlimited as a defense to foreclosure in the nature of a recoupment or setoff. 735 ILCS 5/13-207. Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001).

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