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

Although at the time, the industry speculated that this lawsuit marked new ground for HUD to take companies to court for RESPA violations, in fact, HUD has done so once before. And, curiously, the problems in that first case are strikingly similar 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 referring consumers to Realogy Corp. (formerly 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 argued that its actions were not within the purview of RESPA because “natural hazard disclosure reports are not settlement services and are not part of the escrow. Natural hazard reports they are not listed as one of the service agreements in RESPA’s own statute. The statute that requires natural hazard disclosure reports requires them for reasons unrelated to escrow. To be under RESPA’s jurisdiction, product sold by Property ID would have to be a settlement service. “

However, HUD has taken the opposite view, stating in its lawsuit that “sellers, buyers, or their agents purchase and provide hazard disclosure reports as part of the purchase and settlement of real estate involving mortgage-related loans. federal government. of real estate is pending, whether the report is purchased before or during an actual or potential deal for the sale of real estate, “adding that” the vast majority of reports are paid out of escrow in the time of settlement “.

‘Obsolete and ambiguous’

All of the real estate brokers in 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 (which includes NRT), told Real Law Central, “Like most in this industry, we have operated under RESPA, outdated and ambiguous as it is, for many years. We dispute the allegations. factual and legal in the complaint, including characterizing natural hazard disclosure reports as a settlement service under RESPA. “

Likewise, Eliza Walsh, a spokesperson for Mason-McDuffie Real Estate Inc. (dba Prudential California Realty in Northern California), said: “The position of the company, based on expert legal advisers, is that the production of disclosure reports of Natural hazards are 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, are fully compliant 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 RESPA’s history, as the Sixth Circuit Court’s decision in this case prompted HUD to amend the statute in 1992.

United States v. Graham Mortgage

The story of US v. Graham Mortgage began in 1983, when HUD filed a six-count indictment in the Eastern District of Michigan charging four defendants with the misdemeanor of giving and accepting bribes in violation of § 8 (a) of RESPA, and with 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, who was involved in both traditional real estate brokerage and home buying, rehabbing and reselling in the Detroit area.

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

To recoup lost revenue from reduction of points charged to Rose Hill, GMC increased the points charged to home sellers 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 grounds that the activity alleged in the indictment did not involve the referral of a business “incident or part of a real estate settlement service” and consequently , did not violate § 8 (a) of RESPA.

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

The defendants later pleaded guilty to the conspiracy charge in exchange for the substantive charges being dismissed. Following the entry of convictions, the defendants filed a motion to arrest sentencing. In an unpublished order, the court upheld its decision that the granting of a home loan was a settlement service and denied the motion. The defendants then appealed to the Sixth Circuit Court.

Sixth Circuit is not convinced

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 properly be construed implicitly.”

HUD made a simple argument in support of its position that the language of RESPA § 3 (3) provides for treating the granting of a mortgage loan as a settlement service. The government argued that the definition of “settlement services”, on 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 a mortgage loan is the essential service for a real estate agreement, it must be ancillary to the agreement and within the scope of the definition in § 3 (3) of the RESPA.

But the Sixth Circuit concluded that “neither the plain language of the relevant section nor the structure of the RESPA offers an unequivocal reading that requires the imposition of criminal liability on the conduct alleged in the indictment.” Consequently, it went down in the legislative history of the statute.

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 United States Senate to regulate certain credit practices and settlement procedures in mortgage transactions related to the federal government. The definition of “settlement services” in the bill, as introduced, was substantially identical to that promulgated by § 3 (3) of the RESPA.

Following Senate approval, the House of Representatives, by initially passing S. 3164, amended the bill by removing all Senate provisions and replacing the provisions of HR 9989, which was a House bill generally similar to S. 3164. A However, the difference was in the language of the definition of “settlement services”. The Chamber imposed a narrower definition that did not include the realization of a mortgage loan within its scope.

But the Senate refused to agree to the House amendments and eventually adopted a broader definition of “settlement services” than the one recommended by the House. HUD argued that this decision to favor a broader definition of “settlement services” showed that Congress intended to include the granting of a home 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 RESPA purposes,” finding 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 assertions, RESPA’s language is ambiguous regarding the question of whether the granting of a mortgage loan is a settlement service and that the legislative history of the statute does not address any resolution of that problem, ‘the leniency rule orders judgment for the [appellants]. Consequently, the conviction sentences are set aside and the case is referred to the district court for final sentences. “

This decision was a blow to HUD, which was in total disagreement 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 RESPA purposes , a conciliation service includes the origination and realization of a mortgage loan. At the same time, Congress also made the RESPA apply specifically to second mortgages and refinances.

Future implications

The Graham Mortgage case differs from the property identification case in a significant way, in that in the first case, HUD attempted to seek criminal penalties for statute violations, while in the new case, HUD is only seeking a permanent injunction and a restitution. profit.

However, the central question remains the same. If the Sixth Circuit Court 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 did not clearly apply to the provision of reports as well? 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 statute parameters again? Or will the courts this time find HUD’s argument about the statute’s broad scope sufficient?

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

Real Law Central He will be watching to see what happens.