The following article is reprinted from Basis Points® , Vol. 3, Issue 9, Copyright © 2004, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

In a decision at odds with three other federal circuit courts, the U.S. Court of Appeals for the Second Circuit has found that a borrower states a claim under RESPA by alleging that a lender imposes a "mark-up" on third-party settlement services. The court agreed with the decisions in the Fourth, Seventh, and Eighth Circuits that RESPA does not prohibit "overcharges" by lenders, but split with these circuits when it decided that "mark-ups" are not allowed under RESPA.

The plaintiffs in Kruse v. Wells Fargo Home Mortgage, Inc. brought a putative class action alleging that certain Wells Fargo entities had either overcharged for tax services, flood certification, document preparation, and underwriting or had marked up the third-party fees for such services without providing additional services. Judge Glasser in the U.S. District Court for the Eastern District of New York had dismissed both claims.

The Second Circuit understood the borrowers' claim for "overcharges" to be that RESPA prohibited lenders from charging more than a reasonable amount for settlement services. The Second Circuit found that the prohibition in RESPA "clearly and unambiguously does not extend to overcharges." The circuit court also found that the legislative history of RESPA supported this view and, thus, refused to give deference to the contrary interpretation by the Department of Housing and Urban Development.

However, the Second Circuit agreed with the Eleventh Circuit that RESPA could be read to prohibit "mark-ups." The Second Circuit understood the borrowers' claims regarding "mark-ups" to be that the lender, "without performing any additional services... charges borrowers a mark-up of these vendors' fees and pockets the difference as a profit." The Second Circuit found RESPA to be ambiguous on whether it prohibits "mark-ups" and, thus, it deferred to HUD's determination that RESPA prohibits this practice.

The Second Circuit returned this putative class action to the district court to determine whether the defendants did, in fact, charge fees without providing additional services. The Second Circuit noted that the district court would also have to determine what precisely "providing additional settlement services" means in the context of this case. Note that the Eleventh Circuit, which also found this argument to be viable, nonetheless dismissed the borrowers' complaint in the case before it because the borrowers had not alleged that the lender did not perform any services and "could [not] credibly make such an allegation." The Second Circuit, however, did not believe that it had a sufficient basis to make such a finding.

Any subsequent decision by the district court will be interesting. If the judge finds that the lender performed any additional services, the case should end, since the Second Circuit firmly stated that RESPA does not control what a lender charges for its own services. The question will be, however, what must a lender do in order to be considered as "performing additional services" when it purchases third-party settlement services from another.

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