New HUD Lawsuit Covers Family Ground

In late May, the world of real estate 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 industry speculation at the time 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, the problems in that first case bear an uncanny similarity to the central problems in the new case.

On May 24, HUD sued Los Angeles Property ID for allegedly making improper payments based on consumer referrals 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. Hazard Reports 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 RESPA jurisdiction, 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 liquidation of real property involving mortgage-related loans.” federal government. These reports are purchased only when a transfer of real property is pending, whether the report is purchased before or during an actual or prospective agreement for the sale of real property,” adding that “the vast majority of reports are paid with the escrow at the time of agreement.”

‘outdated and ambiguous’

All of the realtors 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 at 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 (which includes NRT), told Real Law Central: “Like most in this industry, we have operated under RESPA, outdated and ambiguous as it is, for many years. We dispute the allegations of fact and law in the lawsuit, including the characterization of 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 of 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 are confident that our internal policies and procedures, as well as all of our business transactions, 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 turned out to be pivotal in the RESPA story, as the Sixth Circuit Court’s ruling in this case prompted HUD to amend the statute in 1992.

United States v. Graham Mortgage

United States history 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 RESPA § 8(a), and conspiracy to violate that arrangement.

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 buying, rehabbing and reselling homes in the Detroit area.

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

To recover revenue lost 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.

Before trial, the defendants filed a motion to dismiss the indictment on the basis that the activity alleged in the indictment did not involve the diversion of business “incident or part of a real estate settlement service” and, in consequently, 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, viewed in light of Congress’s goal of eliminating kickbacks and referral fees that improperly inflated the cost of settlement services, and the interpretation of statute in regulations promulgated by HUD, prohibited the alleged activity.

The defendants later 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 granting of a mortgage loan 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 correctly interpreted implicitly.”

HUD presented a simple argument in support of its position that the language of RESPA § 3(3) contemplates treating the underwriting of a mortgage loan as a settlement service. The government maintained 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 rendered in connection with a real estate settlement.”

The government concluded that because the provision of a mortgage loan is the essential service to a real estate agreement, it must be incidental to the agreement 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 allow for an unequivocal reading requiring the imposition of criminal liability for the conduct alleged in the indictment.” Accordingly, he turned to the legislative history of the law.

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

RESPA Legislative History

In 1974, a bill (S. 3164) was introduced in the US Senate to regulate certain lending 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.

Following Senate passage, the House of Representatives, when it initially passed S. 3164, amended the bill by removing all Senate provisions and replacing 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 narrower definition that did not include the granting of a mortgage loan within its scope.

But the Senate refused to agree with the House amendments and ultimately adopted 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 granting of a mortgage loan.

But the Sixth Circuit said: “In settling 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 RESPA purposes.” and found that “legislative history lacks the clarity and force to compel the conclusion that Congress intended to treat the granting of a mortgage loan as a settlement service when it enacted RESPA.”

Therefore, the circuit court reversed the earlier ruling, concluding: “In light of our findings, the language of RESPA 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 issue, ‘the rule of leniency commands judgment for the [appellants].’ Accordingly, the convictions are quashed and the case is recommended to the district court for final judgments.”

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 law enforcement purposes, RESPA, a settlement service includes the origination and realization 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 sought criminal penalties for violations of the statute, while in the new case, HUD seeks only a permanent injunction and return. of profit

However, the central question remains the same. If the Court of the Sixth Circuit could find that the original definition of “settlement services” did not clearly apply to the granting of a mortgage loan in 1984, could the California court find that it also did not clearly apply to the provision of settlement 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 resolved, companies should finally have clearer guidance on what does and does not constitute a settlement service.”

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