Kruse v. Wells Fargo Home Mortgage, Inc.: Court Defers to HUD’s RESPA Interpretation of Mark-Ups

Creating a circuit split between federal appellate courts, the Second Circuit has ruled that courts are required to defer to United States Department of Housing and Urban Development’s (“HUD”) interpretation of section 8(b) of the Real Estate Settlement Procedures Act (“RESPA”) regarding a lender’s mark-up of a third party’s fees when no additional services are provided by lender.

Wayne Kruse, Lisa McLeod, Robert Schill, and David and Barbara Legro (“Borrowers”) all obtained financing for the purchase of their various homes from Wells Fargo Home Mortgage, Inc. (“Lender”). The Borrowers brought a class action lawsuit against the Lender and affiliated entities for allegedly overcharging and marking-up the fees it charged the Borrowers and other class members in the processing of their home mortgages. Looking at decisions in similar cases by other federal appellate courts, the trial court ruled in favor of the Lender and dismissed the Borrowers’ class action lawsuit. The Borrowers appealed.

The United States Court of Appeals for the Second Circuit partially affirmed and partially reversed the trial court. Congress created RESPA to protect home buyers "from unnecessarily high settlement charges caused by certain abusive practices" by regulating the payment of kickbacks or referral fees. Section 8(b) provides "[n]o 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."

In 2002, HUD issued a statement of policy determining that both overcharges and mark-ups violate section 8(b) of RESPA. “Overcharges” are fees arising out of settlement services provided by the lender for which consumers are charged a fee greater than the lender’s actual costs. “Mark-ups” are fees arising out of settlement services provided to the lender by a third party for which consumers are charged a fee greater than what the lender paid to the third party.

The court first considered whether the Lender’s overcharges violated RESPA. The overcharges in question were the Lender’s costs for using an underwriting program to assess the credit worthiness of borrowers, which allegedly cost the Lender approximately $20/search but for which they charged consumers as much as ten times its costs. HUD had stated in its statement of policy that the fee must be reasonably related to the provider’s costs. Looking at the RESPA statutory language, the court found no support for HUD’s argument that RESPA was intended to serve as a price control statute. Indeed, the legislative history supported the opposite conclusion, as Congress had rejected including such language within the RESPA statute. Since section 8(b) and the legislative history were unambiguous in their terms that RESPA was not intended to regulate prices, the court declined to defer to HUD’s statement of policy on overcharges. Thus, the court affirmed the trial court’s ruling that overcharges did not violate section 8(b) of RESPA.

Next, the court considered whether mark-ups violated section 8(b). The mark-ups in question were for services provided by third parties for such things as document preparation, tax services, and flood certification, for which the Lender charged the Borrowers substantially more than the Lender paid for those services. The question before the court was whether the statutory text of section 8(b) was so clear and unambiguous in its terms that the court did not need to defer to HUD’s interpretation of the statutory language as it applied to mark-ups. Looking at decisions by other federal appellate courts, the court found that two different interpretations of section 8(b) had been formulated by other federal appellate courts. One interpretation required a splitting of the overcharge between two parties before a RESPA violation could occur, while another interpretation had found that mark-ups did violate section 8(b). This split in opinions led the court to conclude that section 8(b) was ambiguous in its terms. Thus, the court stated that when a statute is ambiguous, courts defer to the agency charged with interpreting the statutory language, which in this case was HUD because Congress had given HUD the authority to make such interpretations.

HUD’s policy statement sets forth that settlement providers (like the Lender) are prohibited from “mark[ing]-up the cost of another provider’s services without providing additional settlement services.” Based on the policy statement, the court ruled that the Borrowers had stated a cause of action against the Lender and so the court reinstated the Borrowers’ allegations concerning the Lender’s mark-ups. The court stated that the Borrowers still had to demonstrate that the Lender had not performed “additional settlement services” in order to succeed in its lawsuit. Thus, the court affirmed the trial court’s dismissal of the overcharge allegations but reversed and reinstated the Borrowers’ mark-up allegations.

Kruse v. Wells Fargo Home Mortgage, Inc., No. 03-7665, 2004 WL 2008943 (2d Cir. Sept. 10, 2004). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].