In late May, the real estate world was rocked when HUD filed a lawsuit in the US District Court for the Central District of California against several major real estate firms and a hazard disclosure reporting company. alleging RESPA violations in connection with their former joint venture. Business

Although at the time, the industry speculated that this lawsuit marked a new path for HUD to take companies to court for RESPA violations, in fact, HUD had done so once before. And interestingly enough, the problems in that first case bear an uncanny similarity to the core problems in the new case.

On May 24, HUD sued Property ID of Los Angeles for allegedly making improper payments based on consumer referral to Realogy Corp. (formerly known as Cendant Corp.); NRT/Coldwell Banker Residential Brokerage Corp.; Mason-McDuffie Real Estate (doing business as Prudential California Realty); and Pickford Realty Ltd. (doing business as Prudential California Realty).

In a separate lawsuit filed against HUD, Property ID has asserted that its actions did not fall within the scope of RESPA because “natural hazard disclosure reports are not settlement services and are not part of escrow. natural resources are not listed as one of the settlement agreements”. services in the RESPA statute itself. The statute requiring natural hazard disclosure reports requires them for reasons unrelated to escrow. To be under the jurisdiction of RESPA, the product sold by Property ID would have to be a settlement service.”

HUD, however, has taken the opposite view, asserting in its lawsuit that “Sellers, buyers, or their agents purchase and provide risk disclosure reports as part of the purchase and settlement of real property involving mortgage loans related to the federal government. These reports are purchased only when a transfer of real property is pending, whether the report is purchased prior to or during an actual or prospective agreement for the sale of real property,” adding that “the vast majority of reports are paid with the security deposit at the time of the agreement. “

‘Obsolete and ambiguous’

All real estate brokers targeted by the lawsuit agree with Property ID that natural hazard disclosure reports are not a settlement service under RESPA.

Mark Panus, senior vice president of corporate communications for Realogy Corp. (which includes NRT), told Real Law Central: “Like most in this industry, we have operated under RESPA, outdated and ambiguous as it is, for many years. allegations of fact and law in the lawsuit, including characterizing natural hazard disclosure reports as a settlement service under RESPA.”

Likewise, Eliza Walsh, a spokeswoman for Mason-McDuffie Real Estate Inc. (dba Prudential California Realty in Northern California), said, “The company’s position, based on expert legal counsel, is that the production of disclosure reports natural hazards is not included in the definition of ‘settlement services’ as defined by federal statute.

And Steve Rodgers, President and CEO of Prudential California Realty and Pickford Realty, said, “We rely on our internal policies and procedures, as well as all of our business dealings, to fully comply with [RESPA].”

Ironically, HUD’s first lawsuit for alleged RESPA violations also sought clarification on what constitutes a settlement service, in the 1984 case of US v. Graham Mortgage.

This case proved to be pivotal in the history of RESPA, as the Sixth Circuit Court ruling in this case prompted HUD to amend the statute in 1992.

United States v. Graham Mortgage

The history of the United States v. Graham Mortgage began in 1983, when HUD filed a six-count indictment in the Eastern District of Michigan charging four defendants with misdemeanor giving and accepting bribes in violation of § 8(a) of RESPA, and conspiracy to violate that provision.

The defendants included Graham Mortgage Corp. (GMC); Richard E. Chapin, executive vice president and director of GMC; Thomas P. Heinz, GMC vice president and branch manager; and Manford Colbert, president of Rose Hill Realty, which was in the business of both traditional real estate brokerage and the purchase, rehabilitation, and resale of homes in the Detroit area.

From September 1975 through May 1979, GMC provided the financing for Rose Hill’s purchase, rehabilitation, and resale of residences in the Detroit area. For each loan received, Rose Hill agreed to refer two mortgage loan applicants from its regular brokerage business to GMC, in addition to referring the buyer of the rehab home. In turn, GMC, by making Federal Housing Administration (FHA) or Veterans Administration (VA) mortgage loans to buyers of rehabbed residences sold by Rose Hill, charged Rose Hill fewer points than other sellers.

To recover lost revenue from the reduction in points charged to Rose Hill, GMC increased the points charged to sellers of residences referred by Rose Hill and financed by FHA or VA loans.

Prior to trial, the defendants filed a motion to dismiss the indictment on the basis that the activity alleged in the indictment did not involve business referral “incident or part of a real estate settlement service” and, in Consequently, you did not violate § 8(a) of RESPA.

The district court denied the motion. Treating the issue as a first impression, the court held that the legal language, seen in light of Congress’s goal of eliminating kickbacks and referral fees that improperly inflated the cost of settlement services, and the interpretation of the statute in regulations promulgated by HUD, prohibited the alleged activity.

The defendants subsequently pleaded guilty to the conspiracy charge in exchange for dismissal of the substantive charges. Following the entry of sentences of conviction, the defendants filed a motion for sentencing arrest. In an unpublished order, the court upheld its decision that the mortgage loan award was a settlement service and denied the motion. The defendants then appealed to the Sixth Circuit Court.

Sixth Circuit does not convince

In ruling on the case, the Sixth Circuit noted that “the critical textual question is whether this definition of ‘settlement services,’ which does not expressly include within its scope the granting of a mortgage loan, can be properly construed by implication.”

HUD presented a simple argument in support of its position that the language of § 3(3) of RESPA contemplates treating the granting of a mortgage loan as a settlement service. The government argued that the definition of “settlement services”, by its own terms, is not intended to contain an exhaustive list of settlement services, but rather denotes “any service provided in connection with a real estate settlement”.

The government concluded that because the granting of a mortgage loan is the essential service for a real estate deal, it must be incidental to the deal and fall within the scope of the definition in § 3(3) of RESPA.

But the Sixth Circuit concluded that “neither the plain language of the relevant section nor the structure of RESPA permits an unambiguous reading that would require the imposition of criminal liability for the conduct alleged in the indictment.” Consequently, he turned to the legislative history of the law.

HUD held that even if the language of the relevant statutes was ambiguous, RESPA’s legislative history supported the government’s interpretation of the statutes.

Legislative history of RESPA

In 1974, a bill (S. 3164) was introduced in the US Senate to regulate certain credit practices and settlement procedures in federally related mortgage transactions. The definition of “settlement services” in the submitted bill was substantially identical to that promulgated by § 3(3) of RESPA.

After passage by the Senate, the House of Representatives, when it initially passed S. 3164, amended the bill by removing all Senate provisions and substituting the provisions of HR 9989, which was a generally similar House bill. to S. 3164. the difference, however, was in the language of the definition of “settlement services.” The Chamber imposed a more closed definition that did not include the granting of a mortgage loan within its scope.

But the Senate refused to agree to the House amendments, eventually adopting the broader definition of “settlement services” than the House recommended. HUD argued that this decision to favor a broader definition of “settlement services” showed that Congress intended to include the provision of a mortgage loan.

But the Sixth Circuit said, “In deciding on the broader language of the Senate version, we do not believe that Congress intended to include real estate financing within the scope of settlement services for purposes of RESPA,” and found that “legislative history lacks the clarity and strength to compel the conclusion that Congress intended to treat home lending as a settlement service when it enacted RESPA.”

Therefore, the circuit court reversed the earlier ruling and concluded: “In light of our findings, RESPA’s language is ambiguous with respect to the question of whether the granting of a mortgage loan is a settlement service and that the legislative history of the statute does not. direct any resolution of that question, ‘the rule of leniency mandates judgment for the [appellants].’ Accordingly, the convictions are vacated and the case is recommended to the district court for final judgment.”

This ruling was a blow to HUD, which strongly disagreed with the Sixth Circuit’s position, and the decision forced the department to issue revisions to RESPA in 1992. Congress responded by amending RESPA to remove any doubt that, for purposes of RESPA, a settlement service includes the origination and completion of a mortgage loan. At the same time, Congress also specifically made RESPA applicable to second mortgages and refinancing.

future implications

The Graham Mortgage case differs from the Property ID case in one significant way, in that in the former case, HUD attempted to seek criminal penalties for violations of the statute, while in the new case, HUD seeks only a permanent injunction and remand. profit

However, the central question remains the same. If the Sixth Circuit Court could determine that the original definition of “settlement services” clearly did not apply to the provision of a mortgage loan in 1984, could the California court determine that it also clearly did not apply to the provision of credit reports? disclosure of natural hazards? , despite the modifications made in 1992?

And if so, will HUD and Congress have to go back to the drawing board to redefine the parameters of the statute again? Or will the courts this time find HUD’s argument regarding the broad scope of the law sufficient?

The National Association of Realtors recently observed that “if the lawsuit is fully adjudicated and not settled, businesses should finally have clearer guidance on what does and does not constitute a settlement service.”

Real Law Center I’ll be watching to see what happens.