Written by Jim Milano, Member of Weiner Brodsky Sidman Kider PC

RESPA, Section 8, prohibits "impermissible referrals", that is, the payment of a thing of value for the referral of settlement service business when little or no activity is performed in return for such payments.   HUD issued several Statements of Policy ("SOP") to explain the activities a mortgage broker may perform to be permissibly compensated for acting as a mortgage broker. Such policy statements covered lender payments to mortgage brokers, including those payments referred to as "yield spread premiums" (or "YSPs").  

In its Statement of Policy 1999-1 ("SOP 1999-1"), HUD recognized that mortgage brokers may receive payment directly from borrowers, or such brokers might receive "back-end" payment from lenders.  Such back-end, lender-paid mortgage broker fees might come in the form of YSPs, based upon the interest rate agreed upon by the broker and borrower.  HUD recognized that such back-end payments by the lender to the broker might reduce the borrower's front-end cost for a mortgage.

In SOP 1999-1, HUD stated its position as to the legality of payments by lenders to mortgage brokers under RESPA (hereinafter referred to as "YSPs").  Therein, HUD stated that it does not consider such payments (i.e., YSPs or any other class of named payments), to be illegal per se. HUD further clarified that fees in cases or classes of transactions are illegal if they violate the prohibitions of RESPA, Section 8.

HUD stated that two questions must be asked to determine whether YSP is permissible under RESPA, Section 8.  The first question is whether the broker actually furnished goods or facilities or performed services in return for the compensation paid.  The second question is whether the payments to the broker are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.

Did the Broker Actually Provide Goods, Facilities or Services?

HUD quoted from one of its prior, informal response letters and outlined in SOP 1999-1 that the broker normally performs the following services in the origination of a loan:

(a) Taking information from the borrower and filling out the application (filling out of a mortgage loan application could be substituted by a comparable activity, such as the filling out of a borrower's worksheet);

(b) Analyzing the prospective borrower's income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;

(c) Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;

(d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;

(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);

(f) Initiating/ordering requests for mortgage and other loan verifications;

(g) Initiating/ordering appraisals;

(h) Initiating/ordering inspections or engineering reports;

(i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;

(j) Assisting the borrower in understanding and clearing credit problems;

(k) Maintaining regular contact with the borrower, realtor's and lender between application and closing to apprise them of the status of the application and gather any additional information as needed;

(l) Ordering legal documents;

(m) Determining whether the property was located in a flood zone or ordering such service; and

(n) Participating in the loan closing.

HUD also pointed out that a fee for steering a customer to a particular lender could be disguised as compensation for "counseling-type" activities. Therefore, SOP 1999-1 provides that if a mortgage broker is relying on taking the application and performing only "counseling type" services - (b), (c), (d), (j), and (k) on the list above - to justify its fee, HUD will also look to see that meaningful counseling - not steering - is provided.  In analyzing transactions, HUD said it would be satisfied that no steering occurred if it found that:

• Counseling gave the borrower the opportunity to consider products from at least three different lenders;
• The entity performing the counseling would receive the same compensation regardless of which lender's products were ultimately selected; and
• Any payment made for the "counseling-type" services is reasonably related to the services performed and not based on the amount of loan business referred to a particular lender.

However, the fact that goods or facilities have been actually furnished or that services have been actually performed by the mortgage broker does not by itself make the payment legal.   The second question in determining whether YSP is legal is whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.

Are Payments Reasonably Related to the Value of Goods, Facilities or Services Provided?

In answering this question, HUD instructed that YSP should be scrutinized to assure that it is reasonably related to the goods or facilities furnished, or services performed to determine whether it is legal under RESPA. Total compensation to a broker includes direct origination and other fees paid by the borrower, indirect fees, including those that are derived from the interest rate paid by the borrower, or a combination of some or all. HUD considers that higher interest rates alone cannot justify higher total fees to mortgage brokers. All fees will be scrutinized as part of total compensation to determine that total compensation is reasonably related to the goods or facilities actually furnished or services actually performed. HUD believes that total compensation should be carefully considered in relation to price structures and practices in similar transactions and in similar markets.   HUD reiterated its position on lender paid mortgage broker fees in Statement of Policy 2001-1 ("SOP 2001-1").

During the time of the issuance of SOP 1999-1 and SOP 2001-1 by HUD, the Culpepper case was winding its way through the federal courts.  Recently, in Culpepper v. Irwin Mortgage Corp., 2007 WL 1879710 (11th Cir. 2007) decided on July 2, 2007, the U.S. Court of Appeal for the Eleventh Circuit addressed again the borrowers' allegations that the lender violated RESPA by paying YSPs to mortgage brokers.  In its fourth review of the case, the Court applied HUD's SOPs and overturned earlier rulings in this matter.   The Culpepper case began with borrower allegations that the lender's payments of YSPs to mortgage brokers in connection with the borrower's home loan, and other borrowers similarly situated, were illegal under RESPA Section 8.  

The procedural backdrop of the Culpepper matter is cumbersome, but essential in understanding the Court's most recent ruling.   In Culpepper v. Inland Mortgage Corporation, 132 F.2d 692 (11th Cir. 1998)  (Culpepper I), the U.S. Court of Appeal for the Eleventh Circuit reversed a grant of summary judgment in favor of the lender, vacated the district court's denial of class certification, and remanded for further proceedings. In Culpepper v. Inland Mortgage Corporation 144 F.3d 717 (11th Cir. 1998) (Culpepper II), the Court denied the lender's petition for a rehearing of Culpepper I, and clarified its decision in that case.

After the Court's decision in Culpepper II, HUD issued SOP 1999-1, which provided, among other things, that YSPs are not per se illegal. In 2001, in Culpepper v. Irwin Mortgage Corporation, 253 F.3d 1324 (11th cir. 2001) (Culpepper III), the Eleventh Circuit clarified the standard for liability under RESPA and also affirmed the district court's class certification.  In Culpepper III, in reviewing the question of class certification, the Court stated that it could only determine if class certification was appropriate if it first settled on a rule of liability under RESPA Section 8.  In Culpepper III, the Court labeled the HUD's SOP 1999-1 as "ambiguous."  The Court then held that it was not enough for a lender to show that services had been performed by the mortgage broker; rather, it stated that the lender must show that the services that were performed were directly tied to the YSP payment.

In SOP 2001-1, HUD reiterated its position that YSPs are not per se illegal and also clarified the test for the legality of such payments set forth in SOP 1999-1. 

After SOP 2001-1, the defendant-lender in Culpepper filed motions for summary judgment and to decertify the class.  Prior to deciding Culpepper IV, in 2002 the Eleventh Circuit ruled in Heimmermann v. First Union Mortgage Corporation that SOP 2001-1 had explicitly rejected the foundation of Culpepper III, and the Court was bound to apply the revised two-step test that HUD had articulated in the 2001 SOP.

In Culpepper v. Irwin Mortgage Corp.  (11th Cir. 2007) (Culpepper IV), the Court reiterated that SOP 2001-1 constituted controlling authority carrying the force of law.  The Court also held that its prior holding in Culpepper III was "clearly erroneous," such that it "would work manifest injustice" if followed.  The Court echoed its earlier holdings in Heimmermann and other cases that in order to determine whether a YSP payment violates RESPA, a court must first determine whether goods or facilities were actually furnished or services were actually performed, and if so, whether the total compensation paid to the broker is reasonable in light of the goods, services or facilities actually provided or performed by the broker.  Based on this two-part test, the Court held that the lower court did not abuse its discretion in decertifying the class of plaintiffs in the case because "individual issues of fact predominate in these types of RESPA actions."  Additionally, the Court held that the defendant-lender was entitled to summary judgment because the borrowers failed to satisfy their "burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable."

The Culpepper case is the last in a line of class actions brought by plaintiffs against lenders alleging illegal payment of YSPs.  Such cases may continue to be asserted either as individual actions or under other theories of law (including federal or state disclosure laws or state laws on fee limitations or unfair and deceptive acts and practices law); however, the days of the YSP class action based on alleged RESPA violations appear to be over - finally!

Any opinions expressed in this article are those of the author and are not to be ascribed to the personal opinion or position of DocMagic, Inc., or any of its officers, employees and contractors.