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Kickbacks, Commission Splits & Loan Fees, Oh My!

Debt Collection and Real Estate Contracts & Transactions by Peter N. Brewer, Esq.

The U.S. Supreme Court Finds Mortgage Loan Fees Were Not a Violation of RESPA.

Anyone who has ever obtained a residential loan or mortgage is familiar with mysterious fees cropping up on their closing statement. For lenders, mortgage brokers and escrow officers however, those fees are commonly understood within the lending industry and are the typical manner in which the professionals in the transaction are compensated.  In 2007, the Freemans, Bennetts, and Smiths each obtained a mortgage from Quicken Loans.  At the closing of their mortgage transactions Quicken charged the Freemans and Bennetts each a “loan discount fee” and charged the Smiths a “loan origination fee” as well as a “loan processing fee[1]

Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2607(b), prohibits lenders and others from charging “unearned, undivided” fees to borrowers at the closing of a mortgage transaction.

The borrowers sued Quicken for RESPA violations, alleging that a loan discount fee could only be charged if the borrowers were going to receive a lower loan rate.  Since they did not receive a lower loan rate, then they argued the fees were “unearned” and a violation of RESPA Section 8(b) which 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 real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

Basically the borrowers were alleging that since they were charged a “loan discount” fee but did not  receive a loan discount, the mortgage broker did not perform the service so the fee was unearned, and therefore illegal.

The borrowers lost at the trial court level and the case went all the way up to the U.S. Supreme Court.  [TAMMY FORET FREEMAN, ET AL.,v. QUICKEN LOANS, INC., No. 10-1042. Decided May 24, 2012.]

As the Court of Appeals noted, there has been significant RESPA litigation over section 8(b).The disputes break into 4 classes of challenged fees and there was a split among the circuits on whether some of them were violations of RESPA:

1. Fee splitting, where two or more persons split a fee, any portion of which is unearned[2];

2. Mark-ups, where a service provider charges the borrower for services performed by a third party in excess of the cost of the services to the service provider but keeps the excess itself;

3. Undivided unearned fees, where a service provider charges the borrower a fee for which no correlative service is performed; and

4. Overcharges, where a service provider charges a borrower for services actually performed but in excess of the service’s reasonable value.

The facts of this case involved category #3, the undivided fee and unearned fee.

As both the Supreme Court and the Appellate court noted, RESPA is to prevent kickbacks, not to prevent price-gouging or to regulate reasonability of fees.  In this case, the loan fees were not being shared by anyone—it was a direct payment from the borrower’s proceeds to the broker and not shared with anyone else.  Therefore RESPA did not apply to these loan fees because they were not “split” or shared between two parties.  Further, the Appellate Court stated clearly “unearned fees are not kickbacks and RESPA does not cover them.”

The Supreme Court went on to parse the statute further, explaining how kickbacks and referral fees violate different sections of RESPA:

“Section 2607(a) prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding. . . that business incident to or a part of a real estate settlement service . . . shall be referred to any person.” §2607(a). That prohibition is at once broader than §2607(b)’s (because it applies to the transfer of any “thing of value,” rather than to the dividing of a “charge” paid by a consumer) and narrower (because it requires an “agreement or understanding” to refer business).

Thus, a settlement-service provider who agrees to exchange valuable tickets to a sporting event in return for a referral of business would violate §2607(a), but not §2607(b).

So too a provider who agrees to pay a monetary referral fee that is not tied in any respect to a charge paid by a particular consumer—for instance, a “retainer” agreement pursuant to which the provider pays a monthly lump sum in exchange for the recipient’s agreement to refer any business that comes his way. By contrast, a settlement-service provider who gives a portion of a charge to another person who has not rendered any services in return would violate §2607(b), even if an express referral arrangement does not exist or cannot be shown. “

The Supreme Court concluded that that subsection (a) prohibits kickbacks for referrals and that (b) prohibits certain unearned fees paid from a part of the charge with a customer.

Consistent with the lower court and appellate court decisions, the Supreme Court ruled that these mortgage loan fees were not split with anyone, and RESPA did not apply since these fees were not “split” or “shared” or divided in any way with a 3rd party.

Author’s Comment: The decision was unanimous, so the issue is resolved as to whether RESPA prohibits certain loan fees.  That is not to say that the fees may not be challenged by borrowers as “junk fees” or inherently unreasonable, but for now, borrowers do not have grounds to challenge the legality of loan origination or loan processing fees to a single provider under RESPA.  The ruling also turned on the fact that there was no actual sharing of the fee. The result may have been different in a broker-to-broker referral arrangement.  While California law allows a pure finder’s fee where the finder does no actual work on the transaction beyond the introduction, it is clear from RESPA that if the fee is shared, it must be earned.  Further, the California Dept of Real Estate issued a Mortgage Bulletin concluding that paying “finders fees” to friends and past customers is prohibited under RESPA.

In the post Dodd-Frank era of lending, borrowers have the option of paying for their own fees or having the lender pay those fees to the broker at the higher retail loan rate.  Perhaps this case is a sign that the brokers and their borrower clients need to have a better mutual understanding of how fees are charged and what they are for.  Just like the prior ruckus over the “yield spread premiums,” litigation over the “loan origination fee” and “loan discount fee” demonstrates a lack of understanding by consumers and consumer attorneys of what the charges are for.

If you have questions  or if you have any other questions about real estate legal issues, contact Brewer Offord & Pedersen LLP at (650) 327-2900, or on the web at

[1] Quicken contends the loan origination fee was misstated and was actually a loan discount fee.

[2] Peter Brewer wrote about commission splits and kickbacks in this article:

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