The following article is reprinted from Basis Points® , Vol. 2, Issue 12, Copyright © 2003, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

In a troubling decision, the U.S. Court of Appeals for the Eleventh Circuit broke rank with the Fourth, Seventh and Eighth Circuits in concluding that a single party can violate RESPA by charging an excessive fee for a settlement service.

A borrower alleged that Chase Manhattan Mortgage Corporation violated Section 8(b) of RESPA by charging a $50 fee for messenger or courier services. Chase paid part of the fee to third-party independent contractors, but allegedly retained a portion of the $50 fee. The borrower contended that Chase's actions violated Section 8(b) because Chase accepted a portion of the charge "other than for services actually performed."

The district court held that a single party cannot violate Section 8(b) of RESPA and dismissed the claim. The U.S. Court of Appeals for Eleventh Circuit disagreed with the district court's reasoning, but upheld its decision to dismiss the complaint for a different reason.

The Eleventh Circuit disagreed with the reasoning used by the Fourth, Seventh and Eighth Circuits, which have determined that a single settlement service provider cannot violate RESPA by charging an excessive fee for a settlement service. These three circuits have determined that in order to violate RESPA, there must be a splitting of a fee between two settlement service providers. The Eleventh Circuit considered the language of RESPA Section 8(b) and found that a settlement service provider could violate that section by marking up a charge of another settlement service provider and keeping a portion of the fee charged to the borrower.

Nevertheless, the Eleventh Circuit upheld dismissal of the complaint because the complaint failed to allege that Chase had not provided any services for the portion of the fee that it retained. The appellate court noted that such an allegation would be difficult to make since it was undisputed that Chase arranged to have the items delivered to complete the closing and, through its agents, performed the deliveries. Even if Chase could not be credited with the actual delivery, the Eleventh Circuit noted that Chase benefited the borrowers by arranging for third-party contractors to perform the deliveries. Thus, the Eleventh Circuit found it impossible to say that Chase performed no services for which its retention of a portion of the fee was justified.

This decision is troublesome in part because it rejects the reasoning of the other circuits that have found that it takes two people to violate RESPA. It is also troubling because even though the court dismissed the case, a plaintiff's attorney could avoid such a dismissal in the future by simply claiming that the amount of the overcharge retained by the lender did not reflect the value of the services the lender provided. Fortunately, while such a claim might survive a motion to dismiss, it probably could not form the basis for a class action since prior decisions have indicated that deciding whether a fee is justified based on the services performed is a factually intensive inquiry not suitable for class action analysis.

In a putative class action similar to the Eleventh Circuit case but decided more than three weeks earlier, the plaintiff alleged that GMAC violated RESPA by charging excessive fees for tax service, flood certification and underwriting when it retained an allegedly unearned portion of these fees. The plaintiff's arguments with regard to the underwriting fee are interesting. The claim was that the $20 charged by Fannie Mae and Freddie Mac for the use of their automated underwriting software was the market value for such services, and, therefore, if GMAC charged any amount in excess of $20 as an underwriting fee, whether it used the Fannie Mae and Freddie Mac software or their own software, the charge was excessive. The U.S. District Court for the Eastern District of Pennsylvania reviewed the existing decisions from the Fourth, Seventh and Eighth Circuits, rejected by the recent Eleventh Circuit opinion, that have held that a single service provider cannot violate Section 8(b) of RESPA by charging an unearned fee. The district court agreed with the analysis in the opinions of the Fourth, Seventh and Eighth Circuits and dismissed the case.

For more information, look for Sosa v. Chase Manhattan Mortgage Corporation, 2003 WL 22417510 (11th Cir. (S.D. Fla.) October 24, 2003), and Santiago v. GMAC Mortgage Group, Inc., 2002 WL 32173572 (E.D. Pa. September 30, 2003).

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