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A federal appeals court has affirmed that a class-action lawsuit can proceed against a mortgage lender for alleged violations of the RESPA anti-kickback provisions in a case previously summarized in The Letter of the Law. Click here to read to the earlier summary and a more thorough discussion of the facts.
The Real Estate Settlement Procedures Act of 1974 ("RESPA") was created to protect home buyers "from unnecessarily high settlement charges caused by certain abusive practices," specifically, the payment of kickbacks or referral fees. RESPA prohibits the payment of referral fees if "(1) a payment of a thing of value is (2) made pursuant to an agreement to refer settlement business and (3) a referral actually occurs." RESPA contains specific exceptions for payments for goods and services.
The Culpeppers obtained a mortgage loan from Inland Mortgage Corporation (now known as Irwin Mortgage Corporation) ("Lender") via Premiere Mortgage Company ("Mortgage Broker"), a mortgage broker. Mortgage brokers received from the Lender daily rate sheets listing the "par rate" for loans, which was the Lender's lowest interest rate before charging the borrower discount points. If a mortgage broker brought the Lender a loan with a rate above the par rate, then the Lender paid the broker a "yield spread premium." The Culpeppers received a 30-year loan at a 7.5% rate, which was above the Lender's par rate on 30-year loans, resulting in a yield spread premium of 1.675% of the loan amount, or $1,263.61. When the loan closed, the Culpeppers paid the Mortgage Broker a loan origination fee of $760.50 and the Lender made a $1,263.61 yield spread payment to the Mortgage Broker. The Culpeppers brought a lawsuit against the Lender for RESPA violations, and the courts ruled, as detailed in the summary referenced above, that the yield spread payment that the Lender made to the Mortgage Broker violated RESPA because this payment was not a payment for a service but instead a payment for referring an above par loan to the Lender. Following that determination, the trial court next certified the Culpeppers' lawsuit for class-action status, and the Lender appealed this ruling.
The United States Court of Appeals, Eleventh Circuit, affirmed the trial court's class certification ruling. The Lender argued that class certification was inappropriate due to a Department of Housing and Urban Development ("HUD") clarification statement on RESPA's liability provisions, which HUD released in response to a Congressional directive and following the court's first decision in this case. HUD proposed a two-step analysis for determining whether a yield spread payment was an illegal kickback, with the first question being "whether the goods and services were actually furnished or services were actually performed for the compensation paid." If the first question is answered "yes," then the next question is "whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed."
Using the HUD language, the Lender argued that HUD requires that the yield spread payments be evaluated on a transaction-by-transaction basis to determine if the payments were reasonable compensation for services, and so class certification would be inappropriate for this lawsuit because every transaction was unique and no facts were common to all of the class members. The court rejected this argument, ruling that both RESPA and HUD's clarification statement only required a determination that the yield spread payment compensate another for services performed, rather than simply serving as a payment for a loan referral. The court ruled that the inquiry under the first question in the HUD statement was the same as the question answered by the court the first time it heard this case, when it ruled the Lender's policies violated RESPA and so every transaction did not need to be evaluated. The court further found the plaintiffs could prevail in this class action simply by establishing that all yield spread payments were illegal referral fees, and it was not necessary to satisfy the second step of the HUD test (whether the total compensation amounted to a referral fee). Thus, the court ruled that a transaction-by-transaction analysis was not necessary and the class action could proceed.
The Lender also argued that the court's first decision in this case required that the court make a subjective determination whether a yield spread payment was intended to compensate the mortgage broker for its services, again making this inquiry inappropriate for class action status. The court rejected this argument, ruling that a jury could find that the terms and conditions under which the Lender made yield spread payments were RESPA violations and that it was not necessary to consider the Lender's state of mind whenever it made a yield spread payment. Further, there was no evidence that the Lender varied its payment terms loan-by-loan. Thus, the trial court was affirmed and the lawsuit can proceed as a class action.
Culpepper v. Irwin Mortgage Corp., 253 F.3d 1324 (11th Cir. 2001), overrulled by Heimmermann v. First Union Corp., 305 F.3d 1257 (11th Cir. 2002).